Setting a value-based price

January 15, 2007 | Author: Tim Williams

The foundation of value-based pricing is the realization that salary and overhead costs are internal metrics that have little or nothing to do with the external value created for the client.

Here are some of the key areas agencies should consider in setting a value-based price:

• Start by establishing not the scope of work, but rather what Tom Finneran at the AAAA calls the "Scope of Benefit" – that is, the value or benefit the agency is expected to provide for the client.
• You can then consider the question, "If we achieved this result, what would it be worth?" The answer to that question really has nothing to do with the amount of time that goes into the work. Do you care how long it took Apple to build your iPod?
• Next, approach the assignment from the point of view of price-led costing rather than cost-led pricing. Rather that identifying your costs and then adding a profit factor, set a target price and identify what costs you can afford to invest and still earn a fair profit.

Admittedly, this approach takes some getting used to – both for buyer and seller. But the axiom that "the only thing that agencies have to sell is their time" is all wrong. What agencies have to sell is their intellectual capital – their ability to create value and wealth for their clients. So when agencies engage in performance-based compensation agreements, they're using a form of value-based pricing.

When it comes to pricing, the more agencies can tie compensation to benefits and results rather than costs and activities, the more they'll be able to reverse the trend of being evaluated by procurement agents who apply the same criteria to buying agency services as buying office supplies. Both things – agencies and office supplies – provide value. But of the two, only agencies can create it.

Some agencies that are taking the lead on this include The Gate who described their business model in this spread in the New York Times.

Other firms like Anomaly, McKinney & Silver, Ground Zero, and Crispin Porter + Bogusky have all adopted a value-based approach to compensation. The leaders of these organizations would all tell you that their approach is simply to experiment with compensation. They apply as much creativity to pricing as they do to client business.