Is your pricing strategy holding your agency back?
Based on data from more than 1,000 agencies, we know that pricing is the biggest place that agencies come unstuck on profit. On average, agencies are under-recovering by 12-23%. Doing 12-23% more work than you’ve scoped for is a catastrophe for margins.
Business begins with value creation. It is the purpose of the organisation: to create and deliver value in an efficient enough way that it will generate profit after cost.
1. A new frame of reference
Behavioural economics tells us that change starts with the language we use. Swapping one word for another can trigger a seismic shift in mindset, methodology and expectations.
The most important word that an agency can change is the word ‘hours’.
When you talk to your clients about roles and hours, you’re framing the conversation around cost – the lowest possible negotiating point. Despite recent shifts in thinking, agency mindsets are still overwhelmingly rooted in cost-plus pricing strategies – especially amongst the major networks. This loyalty is thought to be because cost-plus is easy. It’s a simple calculation of hours, roles and rates. It feels concrete and it’s easy to work out. Pricing on the other hand is a judgment.
2. Move from costing to pricing work
Understanding what a job costs your business is of course important – but it shouldn’t form the basis of your pricing strategy. Agencies need to shift their focus away from costing work to pricing the value their services deliver.
The reason cost-plus pricing is so damaging is because it limits your earning potential by tying you to the finite number of resource hours you have available. Instead, agencies should take a steer from some of the world’s leading brands and maximize profits by adopting innovative new pricing strategies.
3. Create a Pricing Council
Agencies need to turn their creativity inward, transform pricing into a core competency and start selling the value of outputs delivered instead of hours spent.
The reporting line is important. Whilst it may speed up decisions to report to client or finance leads (for example), the issue is that pricing then reflects the perspective of that function.
BCG and other consulting firms speak of a profit uptick of 3-8% for firms taking a strategic approach to pricing. At the heart of a pricing organisation is a multi-disciplinary ‘Pricing Council’. A steering group representing different perspectives such as senior executives, finance, creative, strategy, client, analytics etc. that reports directly to the CEO. The reporting line is important. Whilst it may speed up decisions to report to client or finance leads (for example), the issue is that pricing then reflects the perspective of that function i.e., sales volume vs margin. Additionally, it is imperative that pricing strategy is aligned with the agency’s business goals and is communicated at the highest level and known across the firm. It’s got to be led from the top.
4. Adopt an output-based mindset
We’re talking to agencies every day who are at various steps along the journey from selling hours towards selling value and becoming a pricing organisation. We believe the first fundamental shift is to adopt a mindset of outputs and deliverables.
It’s not such a radical step from the traditional Excel calculation of hours and roles; however, instead of looking through the lens of ‘who’ and ‘how long’, we’re helping customers to focus on the valuable outcome the client can expect to receive. Agencies shouldn’t use cost as a start point, instead they should begin with the customer. Define the valuable outcome and build out the price first. Understanding costs should be the final task, not the formative one.
It’s not such a radical step...instead of looking through the lens of ‘who’ and ‘how long’, we’re helping customers to focus on the valuable outcome the client can expect to receive.
We know the biggest roadblock for agencies is the belief that clients are in charge of pricing. We’re all familiar with the RFP templates and the requests for rate cards and staff plans. We’ve seen CFOs paralyzed by the fear that non-compliance will lose them business.
5. Take back control of the way you charge
But ask yourself – who created the cost-plus pricing model in the first place? Agencies. Agencies did that. And agencies can undo it – one scope and one client at a time. You do not need permission from your clients to change the way you charge. In fact, clients are intrigued and welcome the chance to refresh the way they work with their agency partners. According to research, disrupting the buying process can work out to be 13 times more effective than following the status quo.
On average, agencies are under-recovering by 12-23%. Doing 12-23% more work than you’ve scoped for is a catastrophe for margins.
Based on data from more than 1,000 agencies, we know that pricing is the biggest place that agencies come unstuck on profit. On average, agencies are under-recovering by 12-23%. Doing 12-23% more work than you’ve scoped for is a catastrophe for margins.
6. Connect output and value with fees
The reason this happens is because scopes of work are hours-based without any real connection to the final output and perceived value. Working this way means you’re squeezing all the profit out of your work before you’ve even started.
Better scoping based on tasks and deliverables instead of hours and roles can limit this profit leak. As well documented by McKinsey, we know a 1% increase in sales income can positively affect profits by 8-11%.
Alongside changing mindset and introducing a Pricing Council, becoming a pricing organisation requires you understand and track value creation. In other words, you need to define what it is that you are selling and track it to ensure that you are pricing optimally and realising the prices set. To do this at scale you need to create a baseline and provide your team with the right tools for the job. Spreadsheets just won’t cut it.
INSPIRED TO KNOW MORE?
- Contact us at hello@scopebetter.com to find out how we can support you in becoming a pricing organisation.
- Check out webinars and podcasts on pricing from industry expert and friend, Tim Williams at Ignition Consulting Group if you haven’t already.)
About the author: Julie Burzacott is our CMO and Ops lead. She has extensive experience in marketing services and is committed to helping agencies and clients adopt a fairer, more effective way to scope and price for work. www.scopebetter.com
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