Creating Value - Issue 9
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Creating Value - Issue 9

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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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Creating Value - Issue 9 Creating Value - Issue 9 Presentation Transcript

  • Issue 9: 1Q 2009 creatingVALUE No Right Way to Do the Wrong Thing 1st Quarter 2009 Issue 9
  •   Issue 9: 1Q 2009 1 2 u Page 2 No Right Way to Do the Wrong Thing u Page 6 Margin in Mystery u Page 12 Basic Value Pricing Options u Page 19 20 Questions to Ask When Pricing u Page 21 Becoming a Value Merchant 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 2009, all rights reserved. By subscription only at www.ignitiongroup.com/creatingvalue creatingVALUE
  • creatingVALUE Differentiating the Agency Brand   Issue 9: 1Q 2009 At the conference, you have your choice of three leading-edge breakout session: Breakout #1:The Best Places to Cut Breakout #2: How Much Blood is Enough? Breakout #3: Latest Improvements in the Lancet By attending these sessions, conferring with other doctors, and reading the latest papers you would get better and better at doing the wrong thing. You would be consistently improving your practices, only you would be practicing in what amounts to the wrong paradigm. Brand doctors are like medical doctors There’s no better analogy for the situation professional service firms find themselves in when it comes to compensation. Agency executives are constantly looking for better time-keeping software, better ways to collect timesheets, betters ways to produce billable- time reports, and better ways to analyze the data. They are improving their practices, but it’s based on the wrong paradigm. Back in Renaissance-era Florence, imagine that at the end of the conference a bold speaker takes the floor and presents an extremely convincing argument that bloodletting is in fact a completely ineffective practice; in fact it makes the patient sicker instead of healthier. Let’s say that you come away from that speech convinced that bloodletting is in fact a faulty (or even malicious) paradigm. Could you then return to your practice and continue cutting people’s arms? Well, could you? This is why it’s essential to focus on changing your paradigm instead of focusing so much on just the practices; because if The year is 1537. You’re a physician for King Henry VIII and you’re attending an annual conference of royal physicians in Florence, Italy. The theme of the conference? No surprise to those attending, the entire conference is devoted to the leading medical practice of the day: bloodletting. After all, every knowledgeable doctor since 1,000 B.C. has prescribed bloodletting as the main treatment for virtually every serious disease. No RightWay to Do the WrongThing
  • creatingVALUE   Issue 9: 1Q 2009 you change your paradigm you can’t help but change your practices. In fact, a change of paradigm unleashes a torrent of new thinking about practices. The best approaches to value-based compensation for agencies haven’t been invented yet; they’re waiting for you to invent them. The gulf between knowing and doing If you really want to get paid what your agency is worth, you must first leave that state of denial in which so many agencies find themselves. Sigmund Freud described denial as“knowing- but-not-knowing”-- a state of rational apprehension that does not result in appropriate action.”i Steven Covey describes this phenomenon in an even more powerful way: “To know and not do is really not to know.” Medicine provides some other potent examples of how“knowing” doesn’t necessarily result in“acting”: u Even though by 1628 it was understood that the heart pumped blood through the arteries, the use of tourniquets in amputations didn’t happen until roughly a century later. u The microscope was invented by 1677, yet as late as 1820 it had no place in medical research, believed to be nothing more than a toy. u Germ theory was developed by 1700, yet didn’t take hold until promoted by Joseph Lister in 1865. Prior to that, infections were thought to be caused by stale air and water. In his fascinating study of this topic, historian David Woolton posits that these delays in adoption weren’t practical or even theoretical but rather cultural.ii The cultural and institutional legacies surrounding the medical profession were (and still are) huge hurdles in adopting the right practices aligned with the right theory. The same is true for the advertising profession. Professions and institutions have a life of their own, and it’s not enough to say,“I buy the theory.” You must overcome the inertia and adopt a new set of practices. No Right Way to Do the Wrong Thing
  • creatingVALUE   Issue 9: 1Q 2009 Margin in Mystery Hard to say, isn’t it? Yet this is a typical line-up of agency services as listed on hundreds of agency websites. In their quest to capture more value, marketing communications firms must take a hard look at their value proposition. Is it strong enough to differentiate the firm and therefore improve your pricing power? Fear of being different It’s more than a little ironic that most branding firms tend to look and sound alike. If you look deeply enough, it’s the anthropologists – not business professionals – who have the answer. The underlying explanation is the“copying” mechanism that has allowed humans to survive and evolve for the past few millions years. The work of social observers like Mark Earls demonstrates the simple truth that humans are social creatures, and that as such rely on copying to learn and survive in society. In fact, says Earls,“Copying is our species’number one learning and adaptive strategy.”iii Thus products and product features are mostly copied rather than invented. Copying is perceived as less risky, and risk is what most humans strenuously seek to avoid. There is, of course, an important difference between real risk and perceived risk. The truth is, in marketing the real risk is simply copying what other brands do. Agencies are understandably frustrated that prospective clients line them up on spreadsheets and compare rates and fees as though they were buying a commodity product that is all of equal value. But that’s largely because the agencies are presenting an undifferentiated product offering. If you were a marketer, which of these two firms would be most likely to command a higher price? Services and Capabilities The Alpha Agency The Beta Agency Brand planning Advertising development Media planning and placement Interactive marketing Sales promotions Public relations Design        Strategic planning Advertising and promotions Connection planning Media placement Digital solutions Channel-neutral ideas Design-driven solutions       
  • creatingVALUE   Issue 9: 1Q 2009 Copying leads to undifferentiated agency brands, commoditization of the entire industry, and erosion of pricing power. Every agency principal will admit to knowing this, but simply mirroring what other firms do is both a strategic and tactical mistake. Your job as the leader of a professional knowledge firm is to unlevel the playing field; to make it difficult to compare your firm with others. This is best done by developing and offering products and services that clients simply can’t get elsewhere. Many agencies attempt to answer this challenge by saying that their work is better that other agencies, and that’s what makes them different. But unless you’re one of the very few agencies that produces truly remarkable work (and you can count these agencies on two hands), you’re going to have a hard time getting higher fees for your work than the agency down the street. Commanding a better price Looking at this question from the opposite perspective, what are the areas where clients are most price sensitive? Most agency executives would say its things like revisions, production and execution of simple projects,“account service,”etc. – in other words, the things that clients believe they could do themselves if they wanted to devote the time and resources. What are the areas where clients are the least price sensitive? Services and capabilities that clients can’t do on their own, or could only do at great expense and disruption to their business model. This would include such things as brand identity, brand architecture, cross-channel communications planning, and marketing analytics. Taken one step further, the products and services that can command the absolute highest price are those that the client could never duplicate, no matter how much time and money they threw at it. Here we enter the realm of proprietary approaches, methodologies, and other forms of intellectual capital that are truly unique to the firm. Margin in Mystery
  • creatingVALUE 10 11 Issue 9: 1Q 2009 The impressive ethnographic studies produced by Context, the cultural anthropology unit of Baltimore’s Carton Donofrio including topics like “The Mobiles: Social Evolution in a Wireless Society”. The moral here is that there is margin in mystery. By offering services and strategic assets that other agency’s can’t duplicate, you put your firm in a position to command not only more money, but more respect.  Good examples of agency IP include: Interbrand’s proprietary brand valuation formula which serves as the basis of their“100 Leading Brands”report published each year in Business Week. Young & Rubicam’s Brand Asset Evaluator which follows a trademarked process developed in concert with the academic community. The“Lifecycle Management”process developed by pharma expert Juice that leads pharmaceutical brands through successful pre-launch, launch, and post-launch. The culinary services of food service marketing specialist Marlin that includes such things as“menu gap analysis”and even“culinary concepts.” The“Brand Activism” approach of Phoenix- based Riester. With an impressive roster of “brands with a purpose beyond commercialism,” Riester employs a service line-up that includes public affairs prowess that few agencies can offer.      u “In times of change, learners inherit the Earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.” - Longshoreman philosopher Eric Hoffer Margin in Mystery
  • creatingVALUE 12 13 Issue 9: 1Q 2009 As we’ve written several times before, value pricing does not necessary mean outcome-based pricing. A value price can be as simple as a quoted fee based on perceived value instead of hours. Here are three major ways to think about pricing for value. 1. Straight Fee The simplest form of a value price is simply a straight fixed price based on the mutually-agreed value of an assignment. This is different from a traditional estimate of hours multiplied by the hourly rate, because the value associated with the price isn’t correlated directly with time. One of the best examples of a professional firm using a straight fixed price associated with value is the public affairs firm that brings tremendous value to an assignment by virtue of its contacts and relationships in government. Sometimes a single phone call can create the desired value for the client. It’s really irrelevant that the firm only invested a few hours in the assignment. What’s relevant – and valuable – is that the client’s objective was accomplished. Pricing in stages When it comes to the type of work done by most advertising agencies, the execution of an idea can only really be determined – and priced – after the concept is developed. Agencies routinely make the mistake of providing an“estimate”for an assignment without first having an approved concept. This would be like a homebuilder estimating the price of a home without first having an approved blueprint. A two-stage fee is the only effective way to price a piece of creative communications. Stage one is for the concept, stage two for the execution of the concept. In neither case does the price have to be based on time. In fact, we believe the concept should be priced significantly higher than the execution, even though the execution might require more time and resources. This is because the perceived value of the concept is higher, and the production work is often viewed by marketers (rightly or wrongly) as commoditized. Consider making 80% to 100% of your profit on the concept, and 0% to 20% on the execution. We know of one agency that makes all of its profit in the high perceived value areas of strategy and concept development. Execution and production is priced at cost. BasicValue Pricing Options
  • creatingVALUE 14 15 Issue 9: 1Q 2009 2. Usage Fee Are agencies in the advertising business or the branded content business? More and more, the best solution to a marketing problem is not a conventional ad, but rather some other form of branded content. Yet structurally agencies still operate as producers and distributors of“ads,”even going so far as to stipulate that their work is“work for hire”that is wholly-owned by the client. Compare this to the creative service partners agencies work with: actors, voice talent, models, musicians, and photographers. A photograph is owned by the photographer and licensed to the agency or client. The more a photograph gets used, the higher the price to the marketer. The less it gets used, the lower the price. This correlated directly to the value of the image to the client. It’s like the difference between renting and buying. You would never visit Miami and buy a car to provide transportation for the week. If the usage model works for movies, books, photographs, and musical compositions, why can’t it work for the branded content created by agencies? It can, and such an approach is much more aligned with value than counting the hours it took to produce something. How it works in practice A photographer typically charges a flat fee to take a photograph, but this never comes close to the income the photographer needs to make the assignment profitable. The photographer’s “session fee”is subsidized by the licensing fees for the use of the image. A similar approach could be used by agencies where the development of branded content is priced significantly lower than the traditional“work for hire”model; the agency then makes its real money on the usage. How does the price of usage get calculated? The same way photographs do. The same way actors charge for usage cycles. Or the same way music is licensed. Some online music services have online licensing calculators that give customers an instant price for music usage depending on such factors as length of use, geography, etc. The usage approach is perfectly aligned with value pricing because the more effective the branded content, the more it gets used, the more the agency earns. The agency has a strong incentive to be effective, not just efficient in the development of its work. Basic Value Pricing Options
  • creatingVALUE 16 17 Issue 9: 1Q 2009 (marketplace effects) and Value Influencers (agency and client behaviors). Here’s how it worked: Value Indicators The potential“performance award”for marketplace results is an additional 5% of the agency’s annual fee (which, by the way, is not calculated exclusively based on hours). This is determined specifically by: Value Indicators Benchmark Weighting 1. Advertising effectiveness Advertising recall Likeability Lift to brand impression Lift to brand consideration     u 24% u 50% 2. Unaided brand awareness u 75% u 25% 3. Unaided advertising awareness u 28% Households u 38% Businesses u 25% u 100% Value Influencers The client pays an additional 5%“performance award”if the agency receives an average rating of 8.2 or higher (on a 10-point scale) on a list of desired agency behaviors. What happened The agency exceeded the Value Indicator benchmarks and received an 8.5 rating on the Value Influencers, which resulted in a total of 10% in additional compensation for the year. 3. Results Fee A price based on the achievement of specific results is something we’ve covered extensively in prior issues of Creating Value. Unlike the“straight fee”which is a fixed price, a“results fee”is a variable price. Examples of this type of approach includes the “performance bonus”that is sometimes added to a traditional hourly-based agreement. But of course a true“results fee”isn’t built on top of a time-based foundation, and it has both an upside and a downside -- true“skin in the game.” In the results fee approach, the agency ties its compensation directly to specific indicators. While the knee-jerk reaction from most clients is to choose sales as the metric, this is almost never a good idea. The health of a brand is not measured exclusively by sales any more than the health of the human body is measured exclusively by heart rate. A thorough evaluation of human health would also include blood pressure, temperature, organ functions, and a host of other critical metrics. So it is with the health of the brand. As Einstein said, make it simple, but not too simple. An important side benefit of the“results fee”approach is that it enables both the agency and client to test and learn about the brand’s success drivers, providing both parties with extremely valuable information about what levers to pull to create more value in the marketplace. Relating results and value Boston’s Partners+Simons embraces the results-based approach to compensation. One of their recent client agreements was based on what they called a“Partnership Incentive.” This involved a formula tied both to what Ignition calls Value Indicators Basic Value Pricing Options
  • creatingVALUE 18 19 Issue 9: 1Q 2009 q Perceived value in salaries A recent salary survey conducted by HOW Magazine reveals some interesting differences in the perceived value of creative services employees. In another sign that the traditional advertising agency is slipping in perceived value, here’s how salaries for designers line up by workplace: Ranking Average Salary Freelance designers 1 $52,236 In-house designers 2 $49,526 Designers in design firms 3 $49,442 Designers in ad agencies 4 $48, 181 *Source: HOW Magazine, December 2008 Ignition associate Ron Baker has compiled a list of essential questions to ask when determining pricing for a new client or assignment. This is the result of decades of studying both best practices and next practices in pricing: 1. What is the client’s cost of not solving this problem in dollars? 2. What is the economic benefit to the client if they solve the problem? 3. Are we dealing with the economic buyer in the organization? 4. Who referred this client to us? Why were we referred in the first place? 5. Do they have any time sensitive deadlines for the completion of this project? Why do they need to do it now and not in six months? 6. Who’s paying for the service? Are they spending other people’s money? 7. Do we have any competitors? If so, who? 8. What price information do we have about these competitors? 20 Questions to AskYourself Before Setting a Price 20 Questions to AskYourself Before Setting a PriceBasic Value Pricing Options
  • creatingVALUE Differentiating the Agency Brand 20 21 Issue 9: 1Q 2009 9. How profitable is this client? How long have they been in business? 10. Have they engaged with someone else prior to us to do similar work? Who was the prior firm and why are they changing? 11. How sophisticated is the client? 12. Does this client add to the firm’s skills or markets? 13. Do we like this client? 14. How do we help reduce the client’s risk? 15. At what price would this be so expensive the client would not consider buying it? 16. At what price would this be expensive, but the client would most likely still buy it? 17. At what price does this become inexpensive? 18. At what price does this become so inexpensive the client would question its value? 19. What price would be the most acceptable price to pay? 20. What costs can we afford to invest in at the target price and still earn an acceptable profit? At what price would we walk away? What price do we desire? Becoming aValue Merchant In the insightful book Value Merchants by James Anderson, Nirmalya Kumar and James Narus, the authors observe that most firms are populated not by “value merchants”but rather by“value spendthrifts.” What are the characteristics of a value spendthrift?iv They routinely trade more business for lower fees. They focus on revenue at the expense of profit. They give pricing concessions without changing the offering. They give away services for free to close the deal. They prefer to give quick price concessions to close deals and go on to other business. They are unwilling to hang out in tough price negotiations. The goal of developing a competence in pricing is to make your firm a true value merchant; one that understands how it creates value and how to effectively capture that value in client compensation agreements. Value merchants are both born and made. You can learn the art of pricing and negotiating for value, but it requires the same kind of commitment and creativity you bring to other dimensions of your professional life.       20 Questions to Ask Yourself Before Setting a Price
  • creatingVALUE 22 Issue 9: 1Q 2009 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. ------ i As reported by Freud’s leading biographer, Peter Gay. ii Bad Medicine: Doctors Doing Harm Since Hippocrates, by David Woolton iii Mark Earls and Alex Bently,“Forget Influencials, Herd-Like Copying Is How Brands Spread,”Admap, November 2008. iv Value Merchants, by James Anderson, Nirmalya Kumar and James Narus. 1”rugby” Frederic Humbert (Flickr , Creative Commons) 2”camera” nzgabriel (Flickr , Creative Commons) 3”blueprint” army.arch (Flickr , Creative Commons) 4”microscope” Orin Optiglot (Flickr , Creative Commons) 5”earlyman” Ben Sutherland (Flickr , Creative Commons) A Declaration of Value for Professional Knowledge Firms We will begin each new assignment or relationship with a discussion of scope of value before we discuss scope of work. We will price our services based on the value we provide rather than the hours we work. We will stop estimating and start pricing. We will abandon our“standard rate card”and start charging different prices to different clients at different times. We will charge more for high-value services and less for low-value services, regardless of the time or cost. We will commit to devote the same level of creativity to pricing and compensation as we do to solving our clients’ marketing problems. We will never lower price without also subtracting value. We will show enough confidence to accept some risk in our compensation arrangements. We will view each new client relationship as an opportunity to experiment with (and learn from) value pricing. We will never enter into a pricing discussion that we’re not willing to walk away from. 1� 2� 3� 4� 5� 6� 7� 8� 9� 10�