There is a lot of talk on value-based pricing in adland. Here we take a look at the definition and what it means for agencies.
Pricing is one of the most important decisions for an agency to get right. Consequently, value-based pricing is the holy grail of pricing models for agency land.
But what exactly is value-based pricing?
Wikipedia defines value-based pricing as: “a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices.”
Put simply, value-based pricing is pricing structured on the value generated for the client rather than pricing based on time and materials or cost-plus pricing.
Is this a new phenomenon?
Value-based pricing isn’t a new idea. For years, commentators have been citing performance-based pricing as the next big thing – imperative even, for agency growth. As far back as 2012, a CMO survey found that a majority of marketers were not satisfied with the processes in place to evaluate the effectiveness of their chosen agencies.
In 2018, we wrote about changing approach when it comes to pricing. That agencies who successfully work out what’s next for their pricing, compensation and profitability models will be the ones to survive turbulent times.
Ron Baker is one of the world’s leaders when it comes to pricing professional services. He has several books on value-based pricing including: ‘Pricing on Purpose’ and ‘Implementing Value Pricing’.
At the Think: Long Summit on creative longevity, where he was a guest speaker, he said “bury the timesheet and billable hour. We can’t use the time to measure the worth of talent and creativity and innovation. It’s the wrong measuring stick, yet we are so committed to this.”
How can agencies put this into practice?
The IPA (The Institute of Practitioners in Advertising) has produced The Price of Success. A paper exploring the opportunities and risks to be considered by agencies when setting and agreeing pricing for their services.
With agency fees shrinking and workloads expanding, the paper was commissioned as a tool to help agencies overcome the difficulties with the tradition cost-plus-billing model (time + materials + mark-up). It recommends that pricing strategies be based on value generated for the client rather than the resources used.
The IPA identify six key factors within an agency pricing strategy:
Client Needs: what they want and value
Activities, Services & Products: your offering
Value Attribution: what services can be valued
Risk: where agencies and clients need to be brave
Relationships: the importance of trust
Commerciality: who owns pricing
The paper is available free to members and £75 to non-members.
There is also a lot of online content on the topic. Jakob Persson writes extensively about value-based pricing on his blog. He believes agencies need to do three things:
Understand what matters to your clients
Identify the problems you’re solving for your clients and why that is valuable to them
Successfully communicate the value you provide in a way your clients cannot resist
It sounds simple enough but value-based pricing can feel like a very complex beast once you get into the nitty-gritty of it. There’s a lot more client relationship management involved, more marketing and a balance to be struck based on whether your agency staff are able to be flexible with time.
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