In the agency world, many perceive that there is a war between cost- and value-based pricing. Cost-based pricing is where you charge a markup on your firm’s time and costs when determining your prices -- this is also called “cost plus” pricing. Value-based pricing comes from the viewpoint that you should receive a percentage of value that you deliver to a client.
I believe that when you look below the surface, this distinction disappears.
The underlying foundation for pricing in a capitalist system is risk-adjusted value pricing. This is what drives capital market valuations, and it’s no different when applied to interactions between marketing agencies and their clients.
I’m not saying firms don’t price their services on what it costs them to produce the work. Those that do yet aren’t overflowing with clients are probably doing one or more of the following:
Work of substandard or inconsistent quality
Work that doesn’t lift significant burdens for clients
Work that clients don’t understand or appreciate
Risk-adjusted value pricing says that you will be able to charge for the perceived value of the services you provide minus an adjustment for risk.
The firm that can reduce perceived risks and uncertainties for the client can charge on value for the work it provides. The only reason many firms use a cost-based system is they’re trying to find out how little they can charge and still stay in business. That’s a good number to know, and it's good when you’re getting your feet wet. However, the goal of a smart business strategy is to be paid the maximum for the service you provide, not the minimum. Of course, you won’t get a straight answer from your clients or market by asking directly, and unless the firm is very large, it doesn’t have enough separate transactions to test price and get a reliable statistical result to measure changes in revenue. So what can you do?
The critical first step is to identify risks from the client’s perspective. Here are a few questions clients ask in relation to risk with some approaches to minimize or eliminate them:
Could I get the same service for less elsewhere?
You need to differentiate the way you provide solutions: Package your products and services in a way that solves an entire client problem -- not just one part of it. Don’t offer partial solutions to clients. Either take the whole problem or stay out of it. (This is the primary advantage of an agency over a lone freelancer.) Also, don’t itemize your invoices. You are selling solutions, not parts. Parts are commodities and have costs. Solutions have value.
If you’re in a market where a client has lots of alternatives, quickly move past the “what” with the client. Focus on the things that make your firm different from the rest and the right fit for the client. This means that you need to know something about the competition. A firm that doesn’t know what is going on in their own backyard probably isn’t too observant. That may be a deal breaker.
What if the work isn’t done right?
Use your portfolio, referrals, case studies, and testimonials to build trust on your ability to deliver significant solutions for clients.
Can this firm pull it off on time and on budget?
It depends what you sell. My firm provides customer research to clients in a first phase agreement. Don’t give away your process too much. Use references and thought leadership in your space to build confidence.
Also, You can put time stipulations into your agreement. (Just be careful with this if significant client collaboration is essential to your work.)
Will working with this firm tie up a lot of my time?
Define the terms of the engagement. I can’t stress this enough. If you and the client don’t both understand what’s expected of each other, you’re on your back foot from the start.
Develop a communication plan, lists of required client information, required meetings, and approvals, and agree to this prior to kickoff. (Clients who aren’t serious about this stuff likely won’t be sophisticated enough for a successful long-term engagement.)
Will I get tied up in this project and not have anything of value until we’re finished?
Use money-back guarantees and phased engagements to allow the client to stay in the driver’s seat. You need to make sure that each phase of your agreement offers something of tangible value.
Remember, all of these are ways that you can reduce the risk of working with your firm. This approach makes the decision clear for the client and allows them to confidently write a check closer to the true value of what you provide.
In his book The E-Myth Revisited, Michael Gerber says that a business must do two things to be successful: 1) Make a promise that the client wants to hear. 2) Become the best in the world at keeping that promise every time.
Make sure that the client appreciates quality in your field. If you sold aged Kobe beef and the client sees your product next to an old hamburger and calls it all “meat,” you might need to connect him with another firm. But if the business is really important, you can try to instill an appreciation for quality work with the client. Here are two questions for that, that I like to use.
How important is it to you that this is done right?
How could you see this project going wrong?
Take the client’s replies, and use that to show the gap between quality work and a “shoestring” job.
Lastly, have a plan and some standards for what you do and don't do. If your firm promises game-changing PR or unforgettable brands, you have to design a business process that can take clients and client stories and make them something great. Refine what you do so you can nail it every time. And the work you can’t nail, walk away from. If you’re not turning clients away, you’re doing something wrong. Let’s be honest: Some clients don’t have a story, and some products aren’t worth peddling. If you design the pitch for a loser product, mock up brochures for a meaningless event, or take on work you’re not sure how to do well, your work must be priced accordingly.
Remember that confidence is valuable. Deliver that to your client.
Originally published Oct 27, 2015 9:00:00 AM, updated July 28 2017