Value pricing – create your own framework
A lot of work goes into creating successful Intellectual Property intangible brand assets and marketing campaigns. Unfortunately, many of the millions of ideas and thousands of hours invested each year, are not sold for a price which reflects the value delivered.
In fact, many agencies say that the hourly rate pricing method which they use, is not the right model; and their clients often agree, as they try to reduce hours and push rates down.
However, there are a few really important, easy to use techniques, that can make a difference to the way you commercialise your Intellectual Property and services.
Let’s take a look:
Start with your WHY
Why do you want to create a business growth strategy which sets you apart?
If you follow Stephen Covey’s habit No.2 from his 7 habits of highly effective people – begin with the end in mind.
If you dedicate as much time to business growth and pricing strategy as you do analysing your costs each month, you will deliver substantial rewards.
My questions to you:
What’s your philosophy?
What’s your reputation?
Are you innovative?
What do you believe?
Are you unique?
Sea of Sameness
Or are you a commodity – where clients have an infinite supply of agencies which, in their eyes, you all deliver the same services.
Which raises the hourly rate dilemma faced by the industry:
If you do the job quicker – should it be cheaper?
If you do the job slowly – should it be more expensive?
Are your clients shopping for the best price?
Are you always reacting, responding to client price pressures?
Are you same, but different?
Competition is for losers
Peter Thiel, co-founder and CEO of PayPal says: You’re lying to yourself. Competition is for losers. You should be aiming to create a monopoly.
And he should know, he and his partners (including Elon Musk) sold PayPal to eBay for $1.5b in 2002.
You need to shape your own future: stop being average.
Blue ocean strategy
You may be familiar with Chan Kim and Renée Mauborgne books – Blue Ocean Strategy and Blue Ocean Shift? Where a saturated market – is one where you are battling for market share = is a competitive red ocean.
Blue waters are: untapped market potential – increased profitability ‘market creating’ strategy, new category which you can dominate, for 10-15 years, before rivals copy you.
Chan Kim and Renée say: This is value innovation territory, where you create differentiation, with unique premium pricing.
So, let me ask you:
What is your Business strategy?
What currency does your agency use?
If you think you are in competition, which is all about lower prices and margins, then read on …..
To create a revenue model based on the value of outputs, rather than your people’s time – you need to move away from the norm. You need to be different from the sea of sameness, and move into blue oceans,
Although cost is important, it is not the only factor in determining the ultimate selling price.
The classic model is based on Wages + Overheads = cost rate then we add Profit to set an hourly sell rate.
We then usually benchmark with the industry, to see if we are ‘normal’. Whilst this makes sense, especially as this is how we pay our people. Hourly rates are conflict of interest – the agency and client focused on different outcomes.
The client’s success or failure has nothing to do with the time it takes you.
Furthermore, if the client is highly successful and generates more Sales/Revenue/Profit – you still get the same amount of money.
If the client doesn’t generate higher Sales/Revenue/Profit – you still get the same amount of money.
No matter how significant, or not, the change or shift in the client’s position – you still get the same amount of money.
It makes no sense to charge the client more because it took longer.
No fee is too high for success, and almost any fee is too high for failure.
A value-based compensation model does not necessarily mean the agency will be paid more.
- It enhances the level of agency accountability.
- It adds to an agency’s incentive to achieve on the client’s behalf.
The most effective value-based arrangements occur when the goals are crystal clear and marketing’s impact on the goals is easily measurable.
- Accountable – enhances the level of agency accountability
- Incentives – Agency incentivised to achieve on the client’s behalf
- Risky – agency will not necessarily be paid more
Results based on client business goals:
- Soft – agency functional areas: account services, creative and media
- Medium – marketing and advertising metrics: awareness measures, consumer measures, brand equity, effectiveness awards.
- Hard – business and financial objectives: sales, traffic, profit, market share, volume growth.
This model focuses on the incremental value delivered to client.
Let’s say you raise their Sales/Revenue/Profit from $1m to $5m
For a 10% fee of the $4m increase
If they only achieve a $3m increase, your 10% fee is less.
However, if the client achieves $10m increase, your fee is more.
This pricing mode is completely synchronised.
The client doesn’t care if you deliver these results in less or more time, they are only interested in the outcome; and so are you
Focus on the value delivered.
To succeed using this model, the agency mindset shifts to: how fast, how efficient, how innovative can we be to deliver these results.
Basically: deliver as much as possible, as fast as is possible, and both parties are rewarded.
WIN WIN WIN
When implementing value-based pricing, a valuation model will help you to arrive at the right price – by defining value and evaluating results.
The intent is that this is a dynamic process, requiring ongoing focus and iteration of design, and testing as you constantly evolve your value proposition.
There are a variety of business performance and creative effectiveness frameworks which you can reference – which I have summarised in a concise booklet entitled: Revenue Models Value and Time Inputs and Impact.
Call to action
If you continue to spend at least equal the amount of time as you do when managing your costs each month – you are certain to improve.
If your agency is unique, perhaps consider creating your own valuation framework.
Which brings me back to the sea of sameness.
To which Seth Godin says: Mass market: average services for average people. Aim to be the smallest, to the most relevant audience.
Ron J Baker from the VeraSage Institute says: the problem with the hourly rate is that it’s focused on internal cost, not external value. It also allows you to be compared, like a commodity; it encourages you to take longer, rather than focusing on the outcome; and does not encourage entrepreneurial spirit – we sell time versus we sell extraordinary value.
“Time is not value.”
“Value is a feeling, not a number.”
And as I wrap up, let me leave you with a few last thoughts:
People who say it cannot be done should not interrupt those who are doing it.
Doubts and fears shouldn’t limit your earnings potential. Focus on ‘serving’ your client and communicating the value you add.
Read the Revenue Models booklet, define value, measure it, by building a revenue model that captures benefits to your clients.