I’m not entirely sure how I came to find myself solving pricing for businesses. Perhaps because I recognized a problem, and I couldn’t let it go. Problem solving is after all, one of my superpowers both in life and business and I couldn’t resist the challenge.
Pricing was something that just seemed so obviously wrong.
Selling time rewards inefficiency
I want to talk about what’s wrong with pricing in professional services businesses – principally marketing, media and creative agencies. Historically, they’ve always sold people, roles and time. Work is priced from scratch every time and it’s a difficult, finger-in-the-air process. It’s rarely right first time, and it’s inflexible and hard to adapt if something changes once you’ve priced it – meaning you must start again.
Finally, and most importantly it rewards inefficiency and by that, I mean the more I sell, the more money I make. This suggests that the longer it takes to complete a job, the more valuable that job is – which is simply not true.
Agencies have been doing this forever and it started when they could no longer make money from commissions by selling creative output alongside media. Their solution was to sell the hours it took to complete the work because it was the ‘least taxing’ (some might say ‘lazy’) way to solve the problem.
The case for selling ‘things’
When we look at pricing intelligently, I believe strongly that it’s better to sell things, outputs and deliverables instead of marked-up time and materials. Let me tell you why and let’s also open up the options.
Deliverables can be flexible. They can be swapped and changed. They can be set with clear definitions, KPI’s and timings and they reward efficiency. If I produce them better, smarter and with additional value I will get paid more for them even if they take less time to complete.
Is value-based pricing the Holy Grail?
A third option alongside selling time or selling deliverables would be selling value. For agencies, this is the Holy Grail – to be paid in line with the true potential ROI value of their work. Or is it?
I was asked this question by the 4A’s – is there a system or way to charge for value in agencies? I immediately started to chuckle. Right now, agencies are still selling cost+ and FTEs. The industry hasn’t even moved to a deliverable-based remuneration model yet, with the exception of a very few and the lip service of a few more. If we aren’t even charging for things, how could we leapfrog straight to getting paid for the value we deliver? Indeed, how.
Is evolution not revolution the key?
In my view, it’s about moving to a different story and navigating a new journey.
Before you can make the jump straight from selling time to selling value, you must go through the process of selling deliverables first. You cannot and should not even entertain the notion of selling value until you can disconnect your cost+ pricing model.
However, it’s worth exploring the discussion. After all, I was asked this very question by our reputable industry peers at the 4A’s, so it deserves at least devil’s advocate.
If we’re going to attach value to the work we do, what’s the metric we need to use?
What metric should we use?
For many of what agencies do, tracking value is virtually impossible. Yes, work that leads to a direct increase in sales can clearly be measured and valued. Mostly though, it’s hard to connect your work to a tangible, quantifiable result for the client – so how can you attach an accurate value?
For example, let’s say an agency is tasked with completing a competitive review for their client. There is undoubtedly value for the client in this piece of work.
However, it’s not likely to lead to a direct and quantifiable sales increase. The value/pricing discussion stalls here over something that is a key deliverable.
A client can’t request a competitive review and withhold payment until sales increase.
The value that an agency delivers isn’t just in sales.
It’s in creativity, originality, integration. Not only that, every client, brand and market will realize different gains from your work. When you look at it like this, you need to create a much more sophisticated value framework based on the individual value KPIs for each client and circumstance.
There needs to be a base measurement before value is added and an understanding of the risk/reward relationship. Value metrics need to take into account the connection between greater investment equaling greater return.
How scalable is a value-based framework?
And finally, if this isn’t challenging enough, another scenario: Your agency is working for a brand which is already the market leader. There’s very little room to grow market share – it’s about protecting it. In maintaining that position, the value you can deliver would be connected to loyalty, awareness and advocacy. Let’s now imagine you’re also working with a challenger brand in the same market. Their priorities are all about growing market share.
Their value metric is very different. All of a sudden, your simple (or not so simple) framework doesn’t fit all purposes. Different needs require different value metrics. It’s a whole other level of complexity, right?
For agencies to have a chance of creating a framework that takes into account the complex value metrics for each of their clients, they first need to shift to a pricing model that at least supports outputs or deliverables to start with. Pricing needs to evolve through this phase and only when we start focusing on outputs can we begin to entertain the idea and complexity of charging for value.
Like it or not, we need to embrace deliverables. Evolution will be productized.