Assembly-line production and manufacturing automation spurred the consumer age as the industrial revolution unfolded, making it possible to mass-produce complex products. But not every “product” can be built on an assembly line. Ideas do not roll out of a factory like Model Ts. Yet our clients’ procurement people try to negotiate every assignment based on producing more and more for less and less. This is not sustainable, as it mostly produces less and less effective ideas. Procurement drives businesses away from game-changing ideas, and toward getting “less effective work done by less talented (and less expensive) people.”
Tim Williams of Ignition Consulting Group, an advocate and educator on pricing and positioning for the advertising industry, argues that the culprit in the procurement mindset is treating marketing as a purchase, when it’s really an investment.
“Marketing is by nature variable and adaptable,” says Williams. “Attempting to define it by simply listing desired inputs (hours or time of staff) is an incredibly incomplete and ineffective way to buy the talent and capabilities of marketing professionals.” Williams promotes the entirely reasonable idea that agencies should be setting their own prices, not letting procurement people dictate pricing to their agencies.
Regain Control of Agency Pricing
How do we break the procurement barrier and move clients back to understanding marketing as an ongoing investment?
Build accountability (measurement) into every proposal. Always include a reasonable objective, a way to measure results, and perhaps a risk/reward element that allows the agency to be rewarded for exceeding goals.
Use research to guide idea creation, and to confirm results. Research gives clients assurances that the strategy is well-reasoned. It boosts creative effectiveness by improving targeting and strategy. And post-run research helps verify results.
Focus on selling value (what is it worth) vs. cost. How will the client gain if the agency’s work is successful? How much is that worth to the client? How much is your expertise and marketing skill worth? Your people are knowledge workers, not factory employees. Price accordingly.
Charge more for solutions (your ideas) than for implementation. Many agencies have stepped away from execution to focus solely on strategy and planning. The value is in the ideas, not in the fulfillment.
Use customer-based pricing. Value is determined by the utility to the customer, not the cost to the seller. How much is a customer willing to pay? How much more will they be willing to pay for add-on services? Package your price options in tiers to guide customers to the value-plus-options they feel comfortable with as their budget. The more options they add, the higher the total price. This requires understanding the customer’s perceptions of the value of a solution.
Alternative Pricing Approaches
There are a host of ways to be compensated that dispense with the idea of cost-plus billing, the industrial age model of calculating cost of time and materials and adding a markup on top to earn a desired profit margin. Here are just a few compensation options:
- Dynamic pricing
- Fixed price options
Agencies can find a multitude of pricing strategies that do not involve a cost-plus model. Remember that too many different pricing models can make accounting’s job a nightmare. Look for just a few that work well for your particular client mix and your agency. Keep the models as simple as possible to ensure clients are clear on how you arrived at the price, payment terms, and all related compensation issues. ALWAYS get a signed agreement that includes an agreed-upon pricing model, whether for a project or a longer-term agency-client relationship.