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.
“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
Unique social capital
Unique result––creativity & innovation
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
Options Options factors to consider:
Number of deliverables
Degree of customization
Level of service or access
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