Value-based Pricing: How to Raise Your Price Ceiling for Marketing Expertise

Value-based Pricing

In the halcyon days of the advertising business, when the economy was stable and we had yet to be swallowed up in the global competitive frenzy, agencies actually had the luxury of charging reasonable markups on services, and could count on traditional media commissions to build agency profits. Clients, meanwhile, actually had fat marketing budgets and seldom parsed a bill except to see that you were close to estimate. Pardon us while we wax nostalgic…

Okay, done. Welcome to the modern era of agency pricing, in which agencies are far too likely to accept the dictates of penny-pinching clients regarding what they are willing to pay.

“This is what we need to accomplish by this date… so get busy,” they say aggressively. “And by the way, we won’t spend one penny over X dollars. When can you have it ready?”

Quite frankly, if you are allowing clients to dictate agency pricing (never mind the schedule and scope), you need to rethink your positioning and start looking for clients who are interested in the value you can provide, not just how much a job “costs.”

Time and Materials, or Value?

Too many agencies set prices by calculating their out-of-pocket costs and trying to add a little profit on top. Basically, when your time-and-materials cost is your ceiling, clients perceive any add-on as “padding.” Markups, once a mainstay of agency profits, are barely tolerated by today’s clients. This is why agencies need to have a sound strategy for setting prices based on value, not just on hours spent and materials used.

Here’s the best tip we can offer about pricing: Your costs for producing a project—what you need to be paid to break even—should be the floor of your price. You add your X or “value” factor on top to get the estimated price you present to the client. But how do you calculate that “X” value?

The X Factor

What are you worth? Does your agency claim a particular position or specialty that puts you in demand? What is it your agency can do that makes your work “X” amount of dollars more valuable than your break-even costs? That perception of authority and expertise is worth something to paying clients.

The ability to add this “X” factor to agency pricing depends on how good you are at self-promotion and building a reputation for expertise. You can’t expect clients to blithely accept your claim of expert status; you must demonstrate it. Make sure you publish advice and insights on the agency blog or in a regular e-zine. Join industry communities to discuss important challenges and developments. Share relevant content with trade publications/sites. Attend industry events and get to know the key players and influencers. Most important, publish success stories via online case studies and press releases.

The more trustworthy your claims of expertise become, the less your clients will question your value pricing. Make your value clear.

Strategy, Not Execution

Do you have a seat at the planning table? Unless your agency gets to sit in on planning and strategy meetings, advise on strategy or at least be allowed to read the client’s plan, you probably will not be allowed to charge based on value. Your clients still see you as a vendor, not a strategic partner. Vendors have to settle for wages and fees. That’s why we keep preaching the gospel of becoming a strategic marketing partner, not just a business that churns out ads.

Always focus on strategy when talking price. What can you bring to the table that will help the client achieve their goals? Talk about your depth of industry experience. Be prepared to intelligently discuss competitive situations, the larger industry landscape and potential opportunities. Share your ideas for tactics and creative not as a gung-ho art director, but as a businessperson with eyes on the very business objectives the client holds dear.

What Is It Worth to the Client?

The next time a client comes to you with a project, start your pricing discussion by asking smart questions. What is the client looking to achieve? Define the objectives in clear and measurable terms. If the goal is to create an uptick in site traffic, how much of an uptick? What is that increase in traffic worth to them? What is a reasonable percentage to spend against achieving that increase? Eight percent? Ten percent? That’s your price, not what it “costs.” Agency pricing shouldn’t really be about hours, but about investment to achieve a defined return on objective (ROO). Guide clients to clarify their goals, then you’ll know how to determine your value price.

Your “X” factor may change over time (ideally, increasing), but right now, you can retake control of pricing by understanding how to talk pricing. Be prepared to firmly put your foot down if the client tries to tell you what they will pay. Train account service people not to unquestioningly accept client price demands, and how to do that without creating client friction. Work with your accounting staff and production manager on how to add the “X” factor into estimates, and ensure invoices are correctly prepared. And work hard to be the valuable partner your clients need… and will willingly reward.  


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