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Getting Paid For Value Instead of Time

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An introduction to value-based compensation for advertising agencies, including the basic principles of value pricing. More information about additional materials and workshops at ...

An introduction to value-based compensation for advertising agencies, including the basic principles of value pricing. More information about additional materials and workshops at www.ignitiongroup.com.

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  • @tvcnetcom Thanks for the comment about the value pricing deck. You're absolutely right about the necessity of pricing in phases (at least three and sometime more) as well as much more buttoned-up scope management. Most traditional ad agencies are exceptionally sloppy when it comes to scope management, and need to learn from both digital agencies and consulting firms who have much better discipline in this area.
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  • Only problem, is the old, I paid $1k for X, and then client expects you to continue to supporting X (changes infinitum, time on phone, yada yada, etc.).

    Unless you are starting with some particularly high dollar for prepaid 'value,' many find this prepaid 'value' simply doesn't work, since client will virtually always abuse your time commitment, and when you say I'm done, you lose the client and likely bad rep. to boot.

    This is a very hard road to travel. If you are going to present the prepaid value card, then just make sure you are clear on the performance objectives. Consider a phase model of work to ensure client is on board. That virtually always ensures you get a good testimonial at the end of job (unless you totally screw up that is).

    Phase the work like, phase 1, finish design of x (look good client?), phase 2, implement x in ad (look good clent?), repeat until performance objectives accomplished.
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  • Couldn't agree more.
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  • Tremendously useful for agency management!
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  • Good Stuff
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  • Carl Johnson of Anomaly opened his address at the recent AAAA Management Conference by stating that it would be not a presentation about capabilities, but rather beliefs.
  • Strategic pricers don’t ask, “What prices do we need to cover our costs and earn a profit?” *Rather, they ask “What costs can we afford to incur, given the prices achievable in the market, and still earn a profit?”
  • The role of the agency is to create value for their clients.
  • “ Before you can charge a premium price, you first have to believe, internally, that you are worth it. “ If you don’t think you’re worth multiples of your hourly rates, your clients will never believe it either.” (Ron Baker) “ You will never be paid more than what you think you are worth.” (

Getting Paid For Value Instead of Time Getting Paid For Value Instead of Time Presentation Transcript

  • Burying the Billable Hour: An introduction to getting paid for value instead of time Tim Williams | twilliams@ignitiongroup.com ignition consulting group | www.ignitiongroup.com
  • The current state of affairs 1. Advertising agencies get paid for hours worked instead of value provided. 2. Agencies earn most of their money from execution (the area least valued by clients). 3. Compensation agreements are based on costs instead of value. 4. Agencies often give away their most important product – ideas and strategies. 5. Agencies give up all ownership of intellectual property (even though no one else in related industries does).
  • Chronic disadvantages of billing by the hour n  Misaligns interests of agency and client n  Focuses on costs, not value n  Places risk on client n  Fosters production mentality, not entrepreneurial spirit n  Focuses on efforts and inputs, rather than results n  Penalizes technological advances/investments n  Self-imposed limit to profitability n  Does not differentiate your firm n  Allows compensation consultants View slide
  • “There is no standard price on ideas. The creator of ideas makes his own price, and, if he is smart, gets it. Napoleon Hill, “Think and Grow Rich, 1937 View slide
  • What are your clients buying? Clients are not buying your time, your work, or your efforts. They are buying business results.
  • “Value-based compensation essentially revolves around reaching an agreement on what our ideas are worth to the client and what the opportunity is worth to Anomaly.” Jason Deland, Co-Founder, Anomaly
  • Common resistances to value-based compensation MARKETER AGENCY Fair evaluation of marketing ROI Outcomes we have no say in Different definitions of value Clients reluctant to share metrics Risk-reward sharing No one model Agency little control business results Inertia Takes too much time Conventional thinking CFOs Timing of measures Clients too busy Mutual distrust Zero-sum thinking Lack of investment needed for KPIs Only works for new clients Agency won’t walk away Clients don’t want it
  • A better model n Client/agency first defines scope of value n Agency then determines scope of work n Agreement on tenure/territory/IP n Agency uses price-led costing instead of cost-led pricing n Client and agency agree upon pricing method(s), based on value created instead of hours worked n “After Action Review” to assess value
  • COST-LED PRICING Product Customer Cost Value Price Price Value Cost PRICE-LED COSTING Customer Product
  • The Value Firm Strategy Value Marketing Value Selling Value Pricing
  • The agency of the past Income Profit = Capacity x = Intellectual Capital x Efficiency Effectiveness x x Activity-Based Price Value-Based Price The agency of the future
  • 1.  Focuses on value and effectiveness, not time and cost. 2.  Places importance on results instead of efforts. 3.  Fosters an entrepreneurial spirit instead of a production mentality. 4.  Actually gives the agency an incentive to reduce costs. 5.  Shares the risk between client and agency. 6.  Aligns the interests of the agency and client. Foundations of value pricing
  • The 5 Cs of value 1.  Comprehend the key value drivers for clients. 2.  Create value for clients. 3.  Communicate the value that you create. 4.  Convince clients that they must pay for value. 5.  Capture value with a value-based pricing approach.
  • Questions to ask yourself when setting a price 1. At what price would this engagement be so expensive a client would not consider buying it? 2. At what price does the engagement become so inexpensive the client would question its value? 3. What costs can we afford to invest at this price and still earn an acceptable profit? 4. What’s our reservation price and our desired price?
  • Questions to ask your client when setting a price 1. If price wasn’t an issue, what role would you want us to play in your business? 2. How do you measure success? 3. What is it now? 4. What would you like it to be? 5. What’s the value of the difference?
  • Effects of a cost-based approach Effects of a value-based approach Reactive Proactive Costs Value Fewer Better Efforts Results Doing things right Doing the right things Tactical Strategic
  • Fixed price vs. variable price Service guarantee Pre-authorized pricing Customized payment terms Assumed risk Accountability for results Why a value-based price is worth more
  • Making pricing a core competency 1. Begin with a discussion of value, not cost. (If you start by discussing cost, you’ll never get to value.) 2. Ask clients what they think the assignment is worth. 3. Don’t estimate – price. 4. Never quote ranges. 5. Always provide pricing options in RFPs. 6. Never discount, except on payment terms. (Being creative on terms can help sell the price.) 7. Remember, nothing raises price like being willing to walk away from an engagement.
  • Agencies that create value £  Define metrics of success. £  Have a clear set of principles. £  Offer a differentiated product. £  Are focused on outputs, not inputs. £  Have disciplined business processes. £  Track results and outcomes.
  • Cost-Based Pricing Value-Based Pricing n  Investment of time on the back end. n  Investment of time on the front end. n  Easy and precise, but precisely wrong. n  Difficult and approximate, but approximately right. n  Perpetuates the chronic problems in agency-client relationships regarding clarity of expectations, sharing of information, accountability for results, and mutual trust. n  Forces resolution of these chronic problems.
  • “We don’t believe we sell time. We’re in the intellectual property business. Jeff Hicks, Partner-CEO, Crispin Porter & Bogusky
  • The central question: Do you believe you are worth a higher price?
  • Additional resources Ignition Website An online resource for marketing communications professionals. www.ignitiongroup.com Ignition Blog Ignition’s online discussion about how agencies can create and capture more value. www.ignitionpropulsion.com twilliams@ignitiongroup.com ignition consulting group | www.ignitiongroup.com