Are you ready to get some experience with value-based compensation? The first step, of course, is to be clear about what you’re really selling: the value you create, not the hours you work. A value-based approach to pricing can take an almost endless variety of forms, but to get started here are three basic forms to consider.
1. Straight Fee
The simplest form of a value price is simply a straight fixed price based on the mutually-agreed value of an assignment. This is different from a traditional estimate of hours multiplied by the hourly rate, because the value associated with the price isn’t correlated directly with time.
One of the best examples of a professional firm using a straight fixed price associated with value is the public affairs firm that brings tremendous value to an assignment by virtue of its contacts and relationships in government. Sometimes a single phone call can create the desired value for the client. It’s really irrelevant that the firm only invested a few hours in the assignment. What’s relevant – and valuable – is that the client’s objective was accomplished.
2. Usage Fee
More and more, the best solution to a marketing problem is not a conventional advertising campaign, but rather some other form of branded content. Yet structurally agencies still operate as producers and distributors of “ads,” even going so far as to stipulate that their work is “work for hire” that is wholly-owned by the client.
Compare this to the creative service partners agencies work with: actors, voice talent, models, musicians, and photographers. A photograph is owned by the photographer and licensed to the firm or client. The more a photograph gets used, the higher the price to the marketer. The less it gets used, the lower the price. This correlates directly to the value of the image to the client.
For example, a photographer typically charges a flat fee to take a photograph, but this never comes close to the income the photographer needs to make the assignment profitable. The photographer’s “session fee” is subsidized by the licensing fees for the use of the image. A similar approach could be used by agencies where the development of branded content is priced significantly lower than in the traditional “work for hire” model; the firm then makes its real money on the usage.
With the usage fee, the more effective the branded content, the more it gets used, the more the agency earns. This approach actually solves the problem many marketers have with hourly-rate system where a bad idea costs the same as a bad idea. Not so when you charge like photographers do. (See American Society of Media Photographers for a look at how the usage concept works.)
3. Results Fee
Unlike the “straight fee” which is a fixed price, a “results fee” is a variable price. In the results fee approach, the firm ties its compensation directly to specific indicators. Progressive consulting firms pursue this approach. Over 30% of Accenture’s contracts include some type of performance measures.
When identifying KPI’s — Key Predictive Indicators — keep in mind that the health of a company is not measured exclusively by one metric any more than the health of the human body is measured exclusively by heart rate. Choosing the right metrics is critical, of course (the subject of a much longer discussion), but keep in mind they can all be weighted based on the agency’s ability to influence them.
For example, agencies are famous for arguing that they don’t have enough control over sales to tie their compensation to it. Fair enough. Make sales just one metric of several, and assign it a low weighting. Assign a higher weighting to things where you have more direct control and influence, which might include such measurements as brand awareness, brand likability, website page views, etc.
Beyond these three basic approaches, marketing firms can exercise remarkable creativity in developing compensation approaches based on value created vs. hours worked. All it takes is your willingness to start experimenting with a better way to get paid.