Baker -- 4P Value Pricing
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  • This links back to our feeling of self-worth, our self-confidence.
  • No one wants to hear about the labour pains they just want to see the baby; they just want to see the returns. Justify price by giving reasons like cost of labour increases, but the client doesn’t care as long as value is there. Price is only an issue in the absence of value. In our clients’ case, that value is provided to their clients in between transactions.
  • It wasn’t until physicians became convinced of germ theory that they started finding ways to create sterile environments. First, they had to change their paradigm about what caused infections (until Joseph Lister came along in the 1870s, infections were thought to be caused by stale air); then they couldn’t help but change their practices (washing their hands, cleaning their instruments).
  • If you focus more on the outputs, your client will focus less on the inputs
  • Chiat/Day’s recently appointment of Neal Grossman as Chief Compensation Officer is designed to remedy this.
  • And a few progressive midsize firms like Canadian agency Quarry Communications have formalized responsibilities for compensation in a Value Council, composed of key members of the management team.
  • *I love the idea of a client compensation portfolio.* In a financial portfolio, you would never consider just one kind of investment.*Likewise, agencies have an opportunity to create a portfolio of different compensation agreements by approaching each new prospect as an opportunity to try something new and better.
  • *Because of the psychology of anchoring, the more you ask for the more you get.*This has been demonstrated in almost 50 years of experiments by behavioral psychologist, many of which are featured in the new book, Priceless.
  • *Have you ever noticed how at stores like Prada, the item featured in the main window is usually carries an extravagant price. *Among pricing professionals, this is called an anchor.*The anchor is foAnchoring Have you ever noticed how at stores like Prada, the item featured in the main window is usually carries an extravagant price. Among pricing professionals, this is called an anchor.The anchor is for sale, but it’s OK if no one buys it.Ron has a clip about The Economist by Dan Ariely to supportRelates to options and how we make choices r sale, but it’s OK if no one buys it.

Baker -- 4P Value Pricing Baker -- 4P Value Pricing Presentation Transcript

  • Profit Starts with Pricing on Purpose
    Ron Baker, Founder
    VeraSage Institute
  • “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
    - Warren Buffet
  • Innovate for growth.
    Price for Profit.
  • The default purpose of marketing is not to increase sales.
    It’s to increase profits.
  • Profit is a marketer’s ultimate objective.
    Profit is driven mostly by price.
    Price is driven mostly by brand perception.
    Brand perception is driven mostly by what agencies do for their clients.
    The value of agencies
  • Harvard Business Review
    “If Brands Are Built Over Years, Why Are They Managed Over Quarters?”
    By Leonard Lodish and Carl Mela
    “Even campaigns that don’t do much
    to boost sales can increase margins
    by differentiating brands and thus allowing companies to raise prices.”
  • What are your customers really buying?
    What are you really selling?
  • “The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.”
    - Peter Drucker
  • The wrong practices: Time tracking software
    Paradigms drive practices
    The wrong theory: Time worked equals value created
  • The Subjective Theory of Value
    A Tale of Two Theories
    The Labor Theory of Value
  • Value
    created
    Value
    captured
    Value creation and capture
    Customer’s Gain
    Price
    Costs
  • Service Cost Price Value Customer
    Customer Value Price Cost Service
    Value-Based Pricing
    Cost-Plus Pricing
  • Seven Steps to Implementing Value Pricing
  • Implementing Value Pricing
    1. Conversation with customer
    Not:
    “What do you need?”
    But rather:
    “What are you trying to accomplish?”
  • Implementing Value Pricing
    1. Conversation with customer
    Listen > Talk
    Opening: “Mr. Customer, we will only undertake this engagement if we can agree, to our mutual satisfaction, that the value we are creating is greater than the price we are charging you. Is that acceptable?”
  • Implementing Value Pricing
    2. Form a Value Council and appoint a CVO
    Role of the Value Council
    Ensuring that the agency prices on purpose.
    Constructing and experimenting with various value-based compensation agreements.
    Assuring continuous learning and teaching every team member the importance of pricing for value.
    Dealing with price objections from clients.
  • Implementing Value Pricing
    2. Form a Value Council and appoint a CVO
    Role of the Value Council (continued)
    Keeping the agency focused on tracking client results instead of agency inputs.
    Establishing client selection/deselection criteria.
    Conducting “after action reviews” at the end of major assignments.
  • AAAA PRICING PRACTICES SURVEY
    CVO
    CFO
    =
    Pricing
    Costing
  • How often do agencies track the following?
  • Chief Compensation Officer
    Neal Grossman
  • “We have as many compensation approaches as we do clients.”
    Jeff Hicks, CEO
  • “All of our compensation agreements are experiments in value.”
    Carl Johnson, Partner
  • “We don’t believe we’re in the business of selling time.”
    John Minty
    Chief Value Officer
  • Value Council
    Ken Whyte, Glen Drummond, Bob Wilbur, Mandy Moote, Tony Mohr
  • “At innovation consultancy Fahrenheit 212, we put up to two-thirds of our potential revenue at risk, subject to achieving agreed commercial milestones on a project.”
  • Implementing Value Pricing
    3. Determine the optimal pricing method (fixed, results, usage)
    Not:
    “What do you need?”
    But rather:
    “What are you trying to accomplish?”
  • 34 Sources of Client Value
  • Intangible Value
    • Specialist expertise/knowledge
    • Unique social capital
    • Brand/reputation
    • Unique result––creativity & innovation
    • Reducing risk
    • Excellent experience
    • Relationship
    • What else?
  • Equity
    Outcome-based agreements
    Royalties
    Risk reserves
    Ownership of intellectual property
    Licensing
    Usage fees
    Fixed value price
  • Implementing Value Pricing
    4. Develop Options
  • Rational vs. Irrational
  • Behavioral Economics
  • Anchoring
  • Options
    Options factors to consider:
    • Timing
    • Scope
    • Number of deliverables
    • Degree of customization
    • Level of service or access
    • Data archiving
    • Payment terms
  • Implementing Value Pricing
    5. Effectively present your pricing
    Presenting your pricing
    Present your most expensive option first; this is your “anchor price.”
    After stating your price(s), shut up.
    Use the word “price” instead of “fee.”
    Use the word “agreement” instead of “contract.”
    Use the word “fair,” as in “Is this a fair price to you?”
    Remember to negotiate value, not price.
    Place a timeline on proposals; no price should last forever.
  • Implementing Value Pricing
    6. Engage in superior scope management
  • Implementing Value Pricing
    6. Engage in superior scope management
    Elements of an effective scope document
    Scope statement
    Objectives
    Constraints
    Project structure
    Role definition
    Assumptions
    Deliverables
    Functional requirements
    Project change control
    Approval process
  • Implementing Value Pricing
    7. Conduct an “After-Action Review”
    After-Action Review Questions
    • How could we have enhanced our client’s perception of value?
    • What were the business results and performance against key metrics?
    • Did we have the right team on this assignment?
    • How high were the costs to serve?
    • Did we stay within time and budget parameters?
    • Could we have captured more value through higher price?
    • If we were doing this type of assignment again how would we do it?
    • What are the implications for the way we design and deliver our services?
    • What could we do better next time?
  • Cycle of Change
    HOPE
    CONFIDENTCOMPETENCE
    PERFORMANCE
    Insight
    TIME
  • Pricing is an art and a skill, requiring…
    Patience
    Wisdom
  • Thank You!
    Versage website/blog
    www.verasage.com
    Ron@verasage.com
    Twitter @ronaldbaker
    Phone 707.769.0965