Posts Tagged ‘Value Pricing’

By Tim Williams

Besides doing good quality work, there are a number of things agencies can do to justify charging a premium price for what they do. Economists and professional pricers teach these principles in other industries; there’s no reason we can’t apply them to the advertising business.

Fixed price vs. variable price. A fixed-rate mortgage always costs more than a variable-rate one. That’s because there’s value in knowing exactly what you’re going to pay for a service or outcome.

Service guarantee. Offering a 100% guarantee that your client will be pleased with your services is worth a premium price. It’s also a powerful reflection of your confidence and self-respect.

Pre-authorized pricing. Tell your clients that they never have to pay an invoice they didn’t authorize in advance. This does two things: 1) It forces you to price all of your work in advance (vs. letting the costs just run through the system), and; 2) It provides your client a guarantee of no surprises. Doesn’t that make working with your agency worth a little more than the agency down the street?

Customized payment terms. For some clients, cash flow is sometimes more important than the price itself. Be firm on your price, but flexible and creative on the payment terms. This overlooked strategy can make working with your firm more attractive.

Take on some risk. Ultimately, clients are in the business of reducing risk. It’s classic economics that a reduced risk is worth a higher price. A homeowners insurance policy with a low deductible is priced higher than a policy with high deductible. By offering to assume some of the risk by tying your compensation to results, your work is worth substantially more.

Of course the foundation of value-based pricing is to sell outcomes, not hours. You’ll never be able to charge more for what you do by simply adding up timesheets and sending the client a bill. In fact, experience in other professional firms shows that the more you use a formula (like an hourly rate) to price your services, the lower your fees are likely to be.

By employing some of the same creativity you apply to your clients’ business to your own business, you can start to break out of the commodity pricing trap. Just remember, you are what you charge for.

By Tim Williams

Most advertising professionals are earnestly looking for the right answers to what they should be doing to make their agencies more relevant and valuable to clients.

But most good answers are the result of asking good questions. Here are three of the most important:

The Wrong Question: How can we get paid for all of the time we’re spending on our client’s business?

The Right Question: How can we get paid for the value we are adding to our client’s business?

The system most agencies use to price their services – hours, costs, full time equivalents, etc. – are all focused on internal operations and have nothing to do with the external value created for the client. We are chasing the wrong rabbit.

The Wrong Question: How can we become more efficient in the way we service our client’s business?

The Right Question: How can we be more effective on our client’s business?

Advertising agencies don’t exist to be efficient; they exist to create wealth for their clients. A compulsion to increase efficiency (doing things right) reduces the firm’s effectiveness at doing the right things. The relentless pursuit of efficiency hinders agencies from focusing on the things that truly matter – proactive ideas that build the success of the client’s brand.

The Wrong Question: What do we need to start doing to be more successful?

The Right Question: What do we need to stop doing to be more successful?

Most agencies don’t need to add to their list of capabilities and category experience – they need to subtract. They need to decide what they are not. Increasingly, clients are looking for “best of breed” partners, not “full-service marketing communications firms.”

Unless we ask the right questions, we’ll always get the wrong answer. The point for advertising agencies isn’t to get better; it’s to get different.

By Tim Williams

It surprises most agency professionals to learn that many clients are intensely interested in exploring a value-based compensation arrangement with their agencies.  A recent position paper from the Association of National Advertisers (ANA) states it clearly:  “Traditional metrics used in today’s cost-plus compensation agreements (usually based on time) have no relationship with the external value created for the client in today’s intellectual capital economy.  Therefore, pricing should instead be based on results and value created.”

In our recent work with the ANA, Ignition has discovered that marketing, finance, and even procurement officials from client companies are actively engaged in internal discussions around value-based compensation.  Our view is that if the agency community isn’t more proactive in this area, clients will be the driving force behind a change in compensation practices.

Selling outcomes instead of hours

From a client’s perspective, the chief frustration with the traditional cost-based compensation system is that they’re not sure what they’re really buying.  Are they buying the agency’s time?  Dedicated staff? A set amount of work?  In the end, they don’t really want to buy any of these things; they want to buy results.

In a cost-based compensation arrangement, the client pays for efforts rather than results.  Agencies log and charge hours regardless of the outcomes the hours produce.  In a value-based arrangement, agencies and clients identify specific metrics of success and structure agency compensation around outputs instead of inputs.

Shared interests, shared risks and rewards

Value-based compensation works primarily for one major reason:  it aligns the interests of the agency and the client.  Both parties are working to achieve the same things.  They both have similar financial incentives.  Structured properly, value-based compensation agreements can also give both parties similar risks and rewards.

Imagine how this could change the dynamics of an agency-client relationship.  Suddenly, the concept of  “partnership” takes on real meaning.  Clients start to view “risky” agency recommendations differently, because they know the agency has skin in the game.  A new level of trust and mutual respect emerges, because both parties have a stake in the outcome.

Not just better margins, but a better way to run your agency

Over the years, your agency has undoubtedly become expert in costing.  Now it’s time to become just as good at pricing.  In fact, pricing should be elevated to the same level of importance as other core functions of the agency.  In manufacturing firms, pricing is a separate department staffed by professionals who know how to get the most value from their products.  The same can be done in agencies, either by appointing a Chief Pricing Officer or by forming a Pricing Committee whose job it is to assess the value of assignments and relationship and price them accordingly.

Value-based pricing is unquestionably where the marketing world is headed.  The question is, who will get there first: you or your clients?

By 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.