It’s up to sellers (agencies) to change pricing strategies, not buyers (clients)
July 15, 2008 | Author: Ron Baker
The history of commerce teaches us that almost every single innovative pricing change has been done by sellers, not buyers. This is because most pricing strategies are often changes in business models — that is, how companies monetize the value they create.
Yet, across the professional knowledge sector we hear endlessly how firms and their clients are going to have to jointly get rid of the billable hour. This is nonsense.
Intellectual capital isn't sold by the hour
Professional firms will have to eliminate the billable hour by changing their business model, from one of "we sell time," to "we sell intellectual capital." Companies that sell intellectual capital don't price by the hour.
Netflix founder and CEO Reed Hastings tells this story about the inspiration behind a change in a pricing paradigm:
"I had a big late fee for Apollo 13. It was six weeks late, and I owed the video store $40. I had misplaced the movie. I started thinking, 'How come movie rentals don't work like a health club, where whether you use it a lot or a little you get the same charge?'"
Hence, a new business model, and pricing strategy, was born with Netflix. Customers didn't demand it, suggest it, or even agree with it in advance. They had nothing to do with it, except to vote with their dollars their approval.
A form of value pricing called "yield management" – a pricing innovation developed approximately 20 years ago – is gradually being adopted by banks, hotels, apartment managers, retailers, live entertainment (such as sports teams, symphony orchestras, ballets, etc.), car rental companies. And yes, even some progressive advertising agencies have adopted value pricing and ditched their timesheets.
Your clients don't control your pricing strategies
You are in control of your pricing strategies, not your clients. Clients don't have anything to do with it, except to validate it by voting with their checkbooks. Clients don't run your business, nor do they spend their waking hours dreaming about how you should monetize the value you create. It's amazing to hear professionals repeat how the client has to be involved in developing an alternative to the billable hour. The truth is that most clients dislike the billable hour, but they aren't going to have an alternative until more firms step up and proactively offer a different pricing paradigm.
Knowing exactly what your clients are paying you for is the essential first step. Does anyone really think marketers pay agencies for time?
