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The "Creating Value" series from Ignition Consulting Group explores how advertising agencies and other professional services firms can innovate in pricing and compensation.

The "Creating Value" series from Ignition Consulting Group explores how advertising agencies and other professional services firms can innovate in pricing and compensation.

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  • 1. Issue 7: 3Q 2008 creatingVALUE What is Your Value Proposition? 3rd Quarter 2008 Issue 7
  • 2.   Issue 7: 3Q 2008 1 2 u Section 1 What is Your Value Proposition? Testing Your Value Proposition Getting to Relevance and Differentiation u Section 2 Performing a Value Audit Outward Signs of Success Inward Signs of Success The Value Pyramid u Section 3 Replacing Cost-Based Tools with Value-Based Tools New Tools for a New Paradigm Value Report Value Case Histories u Section 4 The Importance and Role of the Pricing Council Essential Responsibilities of the Pricing Council Essential Qualities of Pricing Council Members Creating Value is a quarterly exploration of the ways marketing communications firms are transforming themselves to become more valuable and competitive in the new multi-channel, media-neutral marketing environment. In This Issue Published by Ignition Consulting Group, Inc. Copyright 2008, all rights reserved. By subscription only at www.ignitiongroup.com/creatingvalue creatingVALUE
  • 3. creatingVALUE Differentiating the Agency Brand   Issue 7: 3Q 2008 A strong value proposition means a strongly focused team, a strongly appealing business model, and ultimately a strong margin. More than one observant business consultant has observed,“No margin, no mission.” The starting point for discussions of lofty concepts like mission and vision is value. A business exists to create value outside of itself. Indeed, creating value is the only reason for a commercial enterprise to exist in the first place. A phrase like“value proposition”always begs the question, “What is value?” Here’s a collection of definitions to consider: Market-perceived quality adjusted for the relative price of your product.  The total satisfaction the client receives from the product.  The benefits the client receives relative to the price paid.  The maximum price the client will pay.  Dollars that fall to your client’s bottom line.  While value can be economic, rational, emotional, or even social, we believe that ultimately, real value shows up on your client’s bottom line.  Bradley Gale  Thomas Nagle and Reed Holden  Gerald Smith  Robert Dolan and Hermann Simon  Reed Holden and Mark Burton,“Pricing with Confidence” u u u u u If you’re like a lot of business executives, you may be concerned that you haven’t adequately defined your “mission”or“vision.” These often feel like buzzwords, and that offsite planning sessions that seek to define them often end in a bland statements that reflect more compromise that courage. A well-defined mission or vision can be of immense value to an organization, but the real question agency executives should be asking is“What is our value proposition.” On the surface, this may feel like a soft concept as well until you examine what it really means. Quite simply, a“value proposition”is an articulation of the value you create for your clients. Ultimately, this is the most important question a business enterprise can answer. What isYourValue Proposition?
  • 4. creatingVALUE   Issue 7: 3Q 2008 Testing your value proposition In truth, you have a value proposition whether you know it or not, and every value proposition will fall somewhere in these three areas: Points of Parity are those that are generic to the category. A marketing communications firm is expected to deliver excellent client service, quality work, etc. In our work with agencies over the years, we have identified what could be considered the“top 10” Points of Parity. No doubt most of these will look very familiar: Full service Integrated Wide range of experience Media neutral Creative Strategic Marketing partner Attention of senior people Results Fun culture 1] 2] 3] 4] 5] 6] 7] 8] 9] 10] How do you go about defining your value proposition? Start by clearing your mind of shop- worn concepts like“quality,”“leadership,”and “delighting customers.” It’s not that they’re not important; they’ve just lost their meaning. This kind of hyperbolic language also does nothing to distinguish your offering from others. And it does little to get you to the real question of value. When agencies develop creative briefs for their clients’brands, the section labeled“consumer promise”is really the value proposition of that brand. In fact, all of the following terms are really synonyms for what we at Ignition prefer to call the Value Proposition: What is Your Value Proposition?
  • 5. creatingVALUE   Issue 7: 3Q 2008 They want to be all things to all people. They want to appeal to every type of client by offering every type of service. Getting to relevance and differentiation Points of Relevance and Points of Difference can be defined by applying both analytical and creative thinking to questions like: What business categories or industry segments do we know best? What kinds of clients have we been successful in attracting in the past? Which communications channels do we know best? Which consumer touch points do we know best? What distribution and delivery channels do we know best? Which internal and external brand stakeholders do we know best? What kinds of audiences or market segments do we know best? What types of brands do we know best? What differentiating methods and approaches do we use? What kind of special knowledge and expertise do we possess? This is much the same journey you take when developing and defining an agency positioning, because a positioning is ultimately a value proposition.           When agencies lean on points such as these as their value proposition, they are contributing to the vast“sea of sameness” described by most agency search consultants. Jones Lundin Beals co-founder Bob Lundin observes that“The common failing among agencies seeking new business is their inability or unwillingness to name what they stand for.” Points of Relevance are a step in the right direction. Simply asking the “relevance”question means you are narrowing your target from“everybody”to“somebody.” Rather than a generic listing of generic benefits, it is a specific listing of specific benefits based on relevance to a particular type of category or brand. Points of Difference are the highest order, and point the way the defining and articulating your value proposition. They are obviously also the most difficult to define, because they involve the most sacrifice. By articulating a Point of Difference, you are saying not only what you are, but what you are not. Not surprisingly, most value propositions fall squarely into the “Points of Parity”for one of two reasons: The leaders of the firm haven’t devoted the time and attention required to understand how their firm creates value. They simply assume that trying hard and“being your best”are the keys to success. But just as“hope is not a strategy,”“trying hard”is not a strategy, either. The firm has in fact attempted to articulate its value proposition, but still hasn’t moved beyond“Points of Parity,” because doing so requires too much sacrifice. 1] 2] What is Your Value Proposition?
  • 6. creatingVALUE   Issue 7: 3Q 2008 THE ENVIRONMENT. Important trends in consumer behavior, values and lifestyles, economy, technology, etc. What’s different about a Value Audit is that it goes beyond these basic areas of understanding to also include an understanding what constitutes value for the brand; the brand’s drivers of success. Outward signs of success The outward signs of a brand’s success are the first place to start. These measures usually take the form of sales and revenues generated. But just because something gets measured most doesn’t mean it matters most. One of the jobs of the value-centric agency is to help its clients understand that sales is not the most important metric of success. There are a lot of ways agencies (and the CMOs with whom they work) create value that may not show up in sales figures. (For a detailed discussion of this concept, please refer to Issue 5 of Creating Value.) Several useful books have been written in recent years on the topic of marketing metrics, adding to a growing body of literature that seeks to identify how brands can measure success. A Value Audit should include a thorough investigation of these metrics as they relate to your client’s brand. Delivering value to your clients means starting with a clear understanding of the value drivers for that particular brand and category. This can be accomplished through what Ignition calls a Value Audit. Good agencies are already in the habit of performing a“marketing audit,”“communications audit,”or“brand audit”when beginning a major new client relationship. This is simply a different – and better – way of approaching this work. It clearly sends the signal to your clients that your efforts are oriented around value, and that you intend to base not just your work (and your compensation) on the value you create for your clients. An effective Value Audit includes all of the essential questions and areas of exploration you would normally include in an upfront fact- finding effort, such as: THE MARKET. Description, size, structure, geography, trends. THE BRAND. Characteristics, points of difference, etc. THE COMPETITION. Direct vs. indirect, points of difference, sales and share trends, spending, etc. THE PROSPECT. Market segments, demographics, psychographics, category and brand attitudes and usage.     Performing aValue Audit
  • 7. creatingVALUE 10 11 Issue 7: 3Q 2008 Indicator Description Customer profit Profit earned from serving a customer over a specified time period. Number of new customers Total number of new customers in a given period. No. of products per customer Average number of company’s products purchased by same customer. Active customers Number of customers who purchased brand within a given time period. Revenue per customer Total sales divided by total customers. Customer retention rate Total customers in current period as percent of customers in previous period. Customer acquisition cost Total acquisition spending divided by number of new customers acquired. Customer retention cost Total retention spending divided by number of customers retained. Customer lifetime value Present value of the future cash flow attributed to the customer relationship. Share of wallet Percent of customer’s total income spent on purchases of a specific brand. Share of customer Share of total business the customer does in the category. Inward signs of success While important, the above measures are what would be considered“lagging indicators,”because they are historical measurements of what has already happened. An even more important dimension of a Value Audit is to identify and agree on the brand’s “leading indicators”of success. In other words, what measures actually predict (rather than just track) the success of a brand? (See Creating Value Issue 4 for an approach to identifying leading indicators.) Indicator Description Sales volume Total sales volume for a period. Volume growth Change in total sales volume for a given period. Organic revenue growth Growth from existing capacity (people, markets, assets, etc.). Incremental sales The lift in sales resulting from a promotion (price promotion or other). Same store sales growth Change in total sales for an individual store in a given period. Cost per sale Costs invested as ratio of total sales. Revenue per unit sold Revenue generated divided by number of units sold. Revenue market share Sales revenue as a percent of total sales in the category. Unit market share Unit sales as a percent of total unit sales in the category. Brand penetration Buyers of brand as percent of total population. Net profit Sales revenue less total costs. Incremental profit Profit generated over baseline profit. Return on sales Net profit as a percentage of total sales revenue. Unit margin Unit price less the unit cost. Value/volume ratio Estimated share of profits in category compared to share of category volume. Average price per unit Total revenue divided by total sales. Stock price Average stock price for a given period. Price/earnings ratio Price of stock as ratio of company’s earnings. Shareholder value Perceived long-term value of brand, usually in form of price/earnings ratio. Brand equity Total value of company minus tangible assets. Return on marketing investment Incremental revenue attributable to marketing in a given period. Store traffic Total number of store visits in a given period. Close rate Percent of brand sales as a percent of inquiries. Average transaction value Total revenue per earned per purchase as an average. Positive press coverage Degree to which news of company is positive. Cost per lead Marketing program costs divided by number of inquiries. Cost per click Brand messaging cost divided by number of clicks. Trial rate First-time users as percent of target population Leads converted to sales Percent of inquiries that become purchases. Length of sales cycle Time between inquiry and sale. Performing a Value Audit
  • 8. creatingVALUE 12 13 Issue 7: 3Q 2008 Signs of Poor Pricing See how many of these characteristics describe your new business or executive team when it comes to agency compensation: We regularly trade more business for lower fees. We concede on fees without making any changes to our offer- ing. We give work, thinking, or services away for free to get the busi- ness. We compare our pricing directly with competitors and offer to beat it. We generally have the attitude that every dollar is a good dollar. u u u u u The Value Pyramid Taken together, leading and lagging indicators form the beginning of what we called the Value Pyramid. At the apex of the Value Pyramid are the lagging indicators. Ultimately, these indicators tell us whether value has, or has not, been created. One level down are the leading indicators; factors such as brand awareness, favorability ratings, search engine rankings, web page visits, etc. They are predictive. If they show a positive change, they create the value that eventually shows up as a lagging indicator. The base of the pyramid contains what we call the influencers of value, and are applied to both the agency and the client. They are the behaviors that produce positive changes in the leading indicators of value. The brand stakeholders on the marketer’s team rank and decide the most important influencers based upon the objectives of the relationship. The agency side does the same for the marketer. These influencers are graded over a pre-defined period of time and compared to the goals established at the beginning of the relationship. The scores will influence agency compensation. Examples of Agency Value Influencers Examples of Client Value Influencers Working with client in collaborative way Providing time to allow agency to do its best work Assigningagency’stoppeopletoworkon business Identifying desired outcomes Developing fresh, unexpected creative ideas Giving timely and constructive feedback Providing relevant insight about brand’s customers Facilitating good communication Developingclear,well-supportedstrategies Providingaccesstoinformationandpeople Executingprogramsthatgeneratebrand buzz Having well-organized approval system Providing expert online marketing solu- tions Minimizing revisions and rework Developing big multi-channel ideas Involving senior decision makers Providingnon-traditionalmarketingsolu- tions Breaking down internal silos Integrating agency teams and functions Providing clear, complete direction to agency Providingproactiveideasthattranscend advertising Understandingbrand’skeysuccessdrivers Adopting systems that result in smooth workflow Creating environment of mutual respect Taken together, these Value Indicators (lagging and leading) and Value Influencers can and should form the basis of a value-based agency-client relationship. The main purpose of the Value Audit is to do the important work of identifying these critical factors of success in all of these multiple dimensions. Performing a Value Audit
  • 9. creatingVALUE 14 15 Issue 7: 3Q 2008 Shouldn’t agency CEOs be asking for reports that measure and demonstrate effectiveness, not just efficiency? Shouldn’t we be able to show our people (and our client) the value we create, not just the costs we incur. As Ignition associate Ron Baker points out, in the current system we know the costs of everything and the value of nothing. New tools for a new paradigm Here are some new tools forward-looking agencies can create to bring about the change we need. Value Plan Instead of a“marketing plan”or“communications plan,”we could instead create a Value Plan. Instead of just outlining work and activities, a Value Plan instead emphasizes outcomes and desired results. Far too many marketing plans are just statements of work, failing to clearly articulate the expected outcomes. Value Brief Every major campaign or assignment should be preceded with what we call a Value Brief; an articulation of the outcomes that the campaign is intended to achieve. The main objective of the Value Brief is to answer two questions: What is this campaign/assignment expected to contribute to the key lagging indicators of the brand? What is this campaign/assignment expected to contribute to the key leading indicators of the brand? 1] 2] Replacing Cost-BasedTools with Value-BasedTools Question: What do all of these agency reports have in common? Employee time by job Employee time by date Employee time by client Employee time by department Cancelled time by client Cancelled time by employee Held time and work in progress Income by client Income forecast by client Job profitability Client profitability Employee profitability (utilization) Answer: They are all measures of costs and efficiency. But clients don’t buy costs. They don’t even buy efficiency. They buy value and effectiveness. So where are the reports that tell us how we’re doing on that front? They generally don’t exist. But you can create them.            
  • 10. creatingVALUE 16 17 Issue 7: 3Q 2008 The shortest section, of course, is usually“results,”and it will normally lack the kind of specificity that gives it credibility. Imagine instead a“Value Case History”that demonstrates in real terms how the agency not only helped achieve key outcomes, but also participated upfront in identifying key metrics of success. So instead of talking about results last – almost as an afterthought – a Value Case History instead begins by talking about expected results. It talks about how the agency engaged with the client upfront to identify metrics of success. It places emphasis on outcomes achieved, not just insights generated, strategies created, and work produced. Imagine the impact that a set of Value Case Histories could have in new business situations, not to mention how it would differentiate you from your competition. The right kind of client for value-based agreements Value Report The traditional“conference report”is now out of fashion, and in its place is sometimes found a monthly“activities report”recapping all the work the agency did on various jobs and projects. In its worst form, this report also includes a recap of hours – sometimes by person and by job – as if hours worked represents value delivered. (This might be true in the world of manual labor, but it bears no relationship in the world of knowledge work). We recommend instead a periodic Value Report, chronicling the progress the agency has made in achieving desired outcomes. In its most sophisticated form, a Value Report can be displayed online in real time. Such a report could include a digital dashboard of key indicators – both leading and lagging. A compelling visual way to display progress made on key initiatives is a“heat map,”which initiatives are going well and which are not. Value Case Histories Form a mental image of most agency“case histories”and you’ll no doubt imagine a series of paragraphs labeled something like: The Challenge The Strategy The Work The Results
  • 11. creatingVALUE 18 19 Issue 7: 3Q 2008 Essential Responsibilities of the Pricing Council Ensuring that the agency prices on purpose, according to the value received by the client, not the costs incurred by the agency. Making pricing for value a core competency within the agency. Establishing all company pricing and compensation policies. Overseeing all pricing and compensation agreements for major client assignments and relationships. Constructing and experimenting with various forms of value- based compensation agreements with clients. Working with other agency team members to develop, test and track key performance indicators that form the basis of value- based agreements. Assuring that the agency is engaged in continuous learning around the topic of pricing and value and teaching every team member the importance of pricing for value. Sharing pricing and compensation success stories throughout the firm. Dealing with price objections from clients and client organizations. Because the number of pricing objections is finite, the Pricing Council should have answers for all of them. u u u u u u u u u As in any company, pricing exists at the crossroads of almost every agency discipline, such as client service, creative, media, production, business development, and of course, finance. Yet these various functions sometimes have conflicting objectives and priorities. Client service tends to focus on keeping clients happy, creative is focused on good work, media is focused on maximizing the effectiveness of client budgets, business development seeks new clients, while finance counts the costs and calculates the income. In most agencies, pricing is an afterthought, taking a back seat to these other functions that normally can secure executive attention and clout. This is why pricing must exist as its own discipline, or at least have the attention of a group of people we call the Pricing Council. The role of the Pricing Council is to change the culture in the agency from focusing on activity, efforts, and inputs—which is what cost accounting and activity-based costing measures—to one of results, output and value, the same things clients care about. While the traditional agency finance department is focused on internal measures driven by costs, the Pricing Council function is focused on external measures driven by value. The Importance and Role of the Pricing Council
  • 12. creatingVALUE 20 21 Issue 7: 3Q 2008 Becoming members of professional pricing organizations, attending seminars, and networking with other pricing professionals in order to develop intellectual capital and adopt best practices. Essential qualities of Pricing Council members ATTITUDE AND HIGH SELF ESTEEM. Given the numerous objections to the concept of pricing based on value instead of cost, members of the Pricing Council must bring the right attitude to the job. This begins with the understanding that you will never get paid more than you think you are worth. They believe that the agency’s products and services are worth every penny they charge. They are more concerned with developing a value proposition based on value, not price. The Pricing Council must help agency associates view pricing as an opportunity for the agency to create and capture value. INTERNAL CREDIBILITY. In addition to a positive attitude and high self-esteem, Pricing Council members must be able to command respect and creditability across multiple functions within the agency. This means the Pricing Council must know and understand enough about each of the main functions in the agency to be able to talk intelligently about them and describe their value to current and prospective clients. INNOVATION AND EXPERIMENTATION. Pricing Council members have to champion the cause of value creation. In that light, they have to be willing to constantly experiment with new forms of pricing and compensation. They will tend to view the agency’s client roster as a stock portfolio, with compensation agreements that pose various forms of risk – and reward – for the agency. uPlaying the role of“bad cop”when it comes to pricing. While it’s the client’s job to push down prices, it is the agency’s job to push back, and that is done most effectively by focusing on value, not capitulating on price. The Pricing Council needs to ensure that agency associates are as hard on maintaining prices as clients are on lowering them. Assuring that the agency is focused on the establishment of profitable client relationships, not merely taking on new clients to fuel non-profitable revenue growth. Keeping the agency focused on value and wealth creation for clients—the main purpose of any business. Helping the agency work smarter, not harder, since pricing is the single largest driver of profitability in any company. Performing the 80/20 analysis, grading clients, and determining which clients should be“outplaced”due to lack of profitability. (This permits the agency to then focus on providing more value- added services to better clients who are less price sensitive and more valuable to the agency.) Conducting postmortem analyses at the end of major client assignments and relationships in order to assess what was learned, how adequate was the compensation, what was the value created, and how could the agency have priced it better. (This process is designed to build an intellectual capital base of skills that will turn pricing into a core competency.) Establishing and leading a pricing council, a small multi- disciplinary group of senior executives whose job it is to help evaluate agency pricing and compensation and establish pricing policies. u u u u u u The Importance and Role of the Pricing Council
  • 13. creatingVALUE Differentiating the Agency Brand 22 23 Issue 7: 3Q 2008 An effective Pricing Council is never satisfied with the status quo because they will constantly be on the search for new ways of getting paid for value, all the while eliminating procedures and processes that do not add value to the client. A Value Trailblazer: Can an agency prosper without timesheets? Can you insist on a value-based compensation approach and still attract new clients? Read how Atlanta-based Fletcher Martin describes their new approach to business at www.fletchermartin.com: How do we handle the traditional pitch process? How we handle the traditional pitch process is we don’t -- Because, traditionally, the pitch process is flawed. Agencies are invited to compete with fake ads for a company it doesn’t know nearly enough about. And they are expected to do it for free. And then when the misguided ads get bought and fail to bring results, another agency is on the chopping block. So we don’t do that. We like our heads where they are. Instead, we believe in working with our clients throughout business planning, through tactical implementation and measurement. Strategic business planning is at the core of every relationship we have with our clients, and this process has proved very beneficial to our clients and ourselves. The days of paying the same regardless of success or failure are over. We need this section in here because, like everything else we do, it’s completely different from how it’s currently being done by others. We believe the value of our work should be determined by the results we deliver. So, in true collaboration, our financial success is tied to the success of our clients. Our compensation is a two-stage process But, you know, we’re not completely nuts. So we have to be very picky about who and how we work with our clients. Stage One: Trusted Advisor We feel compelled to charge for the evaluation of your business and the subsequent recommendations we make. We do this because it would be stupid not to. But we also do it because we find companies listen better and are more inclined to act when they pay for our advice. For an initial fee, we deliver an in-depth analysis of your market and your place in it, along with an executable marketing plan tailored to your needs. The fee is based on the size of your company, your achievable differentiation, and your ability and desire to make changes beyond your marketing communications. Upon completion of Stage One, you are free to execute the plan with anyone you want for any compensation package you can negotiate. Should you choose to execute your plan with us – and you should since we are very good at it – we then move on to Stage Two. Stage Two: Brand Investor The value of our work is determined by the results we deliver. Not the amount of hours we charge or our ability to spend your money. If you are ready, we will sit down and come up with a back-end deal based on performance. The strategy developed will uncover the best metrics to gauge success based on the goals we establish. You’re going to love this part. We believe so strongly you will achieve demonstrably better results with us compared to your previous agency that we are prepared to risk our entire compensation on it. If you achieve a little, you pay a little. If you achieve a lot, you pay a lot. If you achieve nothing, you pay nothing. We’re holding ourselves accountable for our recommendations. The Importance and Role of the Pricing Council
  • 14. creatingVALUE 24 Issue 7: 3Q 2008 Creating Value is edited for senior professionals in the marketing communications business. All content is copyrighted by Ignition Consulting Group, Inc. and may not be reproduced or retransmitted without express permission. Creating Value is available by paid subscription only, and is distributed as a downloadable PDF. To subscribe, visit www.ignitiongroup.com/creatingvalue. Creating Value is published by Ignition Consulting Group, Inc., a consultancy devoted to helping marketing organizations create and capture more value. For more information about Ignition, visit www.ignitiongroup.com, e-mail info@ignitiongroup.com, or call 801.582.7297.