The first step in improving agency compensation is to commit to making pricing a core competence of your firm. In addition to a senior executive in charge of costs (Chief Financial Officer), assign a senior executive in charge of value (Chief Value Officer). In this way, you’ll be matching client’s professional buyers with the agency’s professional sellers.
In presenting and negotiating compensation, here are some of the key principles employed by pricing professionals:
1. STAY FOCUSED ON THE TRUTH THAT CLIENTS ARE NOT BUYING YOUR COSTS; THEY’RE BUYING YOUR VALUE.
The first and most important principle of compensation discussions is to negotiate the price (value) not your costs. Your costs are not your value, and your costs should not represent your price. Instead of jumping right to Scope of Work, invite your prospect to back up and first discuss Scope of Value — expected outcomes.
2. USE THE LANGUAGE OF UTILITY AND VALUE IN PLACE OF THE LANGUAGE OF COSTS.
Conduct compensation dialogues in a way that focuses on benefits, outcomes, utility, value, and outputs rather than features, hours, inputs, activities, and efforts.
3. DON’T SELL A SERVICE, SELL AN OUTCOME.
Resist describing the activities involved in an assignment, and instead describe the outcomes. Pricing professionals know that an outcome (website visits) is always perceived as more valuable than a service (hours spent creating a website).
4. APPROACH EVERY COMPENSATION DIALOG WITH THIS QUESTION: HOW CAN WE ALIGN OUR ECONOMIC INCENTIVES?
Make it clear you don’t view compensation as a zero-sum game, where one party can only gain at the other’s expense. Instead of fighting with your client for a bigger slice of the pie, find ways to grow the pie.
5. NEGOTIATE PRICE WHEN YOU HAVE THE MOST LEVERAGE.
Agencies consistently make the mistake of beginning a new assignment or relationships before quoting a price to the client. The time to price an assignment is before you start on it, when the agency has the most leverage and the perceived value to the client.
6. SIGNAL EARLY IN THE PROCESS THAT YOU’RE WILLING TO WALK AWAY.
You’ll never have any leverage in a negotiation if the client believes that you’ll do anything to get the business. It’s counterintuitive, but wanting them less makes them want you more.
7. INSIST ON TRANSPARENCY OF EXPECTATIONS IN PLACE OF TRANSPARENCY OF COSTS.
Show how it’s in the client’s best interest to discuss expected outcomes instead of expected costs. Costs are the seller’s concern, not the buyer’s. (Do you know what it cost to build your mobile phone?) No doubt clients and agencies alike are trained to think otherwise — thanks to the pernicious concept of an hourly rate — but it’s up to the seller to change the dialogue.
8. MATCH THEIR PROCESS WITH YOUR PROCESS.
Major marketers – especially those with procurement departments – usually have a detailed agency selection process. Early in your discussions, introduce the fact that you also have a process: Scope of Value before Scope of Work. In other words, you want to know not just the expected deliverables, but the expected outcomes.
9. USE THE PRINCIPLE OF ANCHORING TO GET A BETTER PRICE.
The first figure named in a negotiation has the effect of shifting the other side’s expectations of what it will have to pay. In a very real sense, the more you ask for, the more you get. Above all stop practicing reserve-anchoring, which results from raising the possibility of discounted rates which actually lowers price expectations.
10. SEPARATE IDEATION FROM EXECUTION.
Because ideation usually has more value to the client than execution, these two activities should be priced and billed separately. Agencies who do this well quote a firm price for developing the concept, with a specified number of “rounds” or revisions. Once the concept is approved, the execution is priced, again with a set number of allowed revisions.
11. PACKAGE YOUR SERVICES AND SOLUTIONS IN A WAY THAT MAKES THEM DIFFICULT TO COMPARE.
The buyer’s job is to level the playing field. The seller’s job is to make your service offering incomparable. (Consider what it’s like to try to compare wireless providers. Each uses such different pricing structures that it’s almost impossible to conduct a side-by-side comparison).
12. OFFER UNCOMMON SERVICES AT UNCOMMON PRICES.
There is margin in mystery. By offering services or expertise not found at other agencies, you can command premium pricing. Make your margins on high-value strategy, concept, and communications planning work — things that clients can’t do for themselves. Stop trying to earn profits on the increasingly commoditized production side of the business.
13. IN NEW BUSINESS, EXTEND YOUR CREATIVE THINKING TO INCLUDE COMPENSATION.
There are countless ways to construct compensation agreements. Falling back to cost-plus is not only ineffective; it’s incredibly unimaginative for a creative services firm.
14. NEVER LOWER PRICE WITHOUT ALSO REDUCING VALUE; IT DESTROYS YOUR PRICING INTEGRITY.
If you reduce your price, you must also strip out value. Remember that buyers always seek to reduce price, but not necessarily value. If you’re tempted to discount in response to competitive agencies, remember that the only winner in a price war is the buyer.
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It’s time for agencies to join the pricing revolution. Most of your clients are already quite sophisticated when it comes to buying and selling. Now agencies must study and learn the same principles of pricing, pricing psychology, and negotiation.
The effort you invest will pay immediate and long-term returns, because nothing will improve your profits more than improving your ability to set and get a fair price for your work.