Tim Williams | twilliams@ignitiongroup.com ignition consulting group | www.ignitiongroup.com Burying the Billable Hour: An introduction to charging for value instead of time

The current state of affairs Advertising agencies get paid for hours worked instead of value provided. Agencies earn most of their money from execution (the area least valued by clients). Compensation agreements are based on costs instead of value. Agencies often give away their most important product – ideas and strategies. Agencies give up all ownership of intellectual property (even though no one else in related industries does).

Advertising agencies get paid for hours worked instead of value provided.

Agencies earn most of their money from execution (the area least valued by clients).

Compensation agreements are based on costs instead of value.

Agencies often give away their most important product – ideas and strategies.

Agencies give up all ownership of intellectual property (even though no one else in related industries does).

Chronic disadvantages of billing by the hour Misaligns interests of agency and client Focuses on costs, not value Places risk on client Fosters production mentality, not entrepreneurial spirit Focuses on efforts and inputs, rather than results Penalizes technological advances/investments Self-imposed limit to profitability Does not differentiate your firm Allows compensation consultants

Misaligns interests of agency and client

Focuses on costs, not value

Places risk on client

Fosters production mentality, not entrepreneurial spirit

Focuses on efforts and inputs, rather than results

Penalizes technological advances/investments

Self-imposed limit to profitability

Does not differentiate your firm

Allows compensation consultants

“ 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

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

“ 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.”

Common resistances to value-based compensation MARKETER Fair evaluation of marketing ROI Different definitions of value Risk-reward sharing Agency little control business results Takes too much time Timing of measures Mutual distrust Lack of investment needed for KPIs AGENCY Outcomes we have no say in Clients reluctant to share metrics No one model Inertia Conventional thinking CFOs Clients too busy Zero-sum thinking Only works for new clients Agency won’t walk away Clients don’t want it

A better model Client/agency first defines scope of value Agency then determines scope of work Capacity/project management approach Agreement on tenure/territory/IP Agency uses price-led costing Client and agency agree upon pricing method(s), based on subjective value “ After Action Review” to assess value

Client/agency first defines scope of value

Agency then determines scope of work

Capacity/project management approach

Agreement on tenure/territory/IP

Agency uses price-led costing

Client and agency agree upon pricing method(s), based on subjective value

“ After Action Review” to assess value

COST-LED PRICING PRICE-LED COSTING Customer Value Price Cost Product Product Cost Price Value Customer

The Value Firm Strategy Value Marketing Value Selling Value Pricing

The agency of the past Income Capacity Efficiency Activity-Based Price = x x The agency of the future Profit Intellectual Capital Effectiveness Value-Based Price = x x

Clients who see agency as a partner: Clients who compensate agency as a partner: Source: 2006 ANA survey, “Inside Advertiser and Agency Relationships” 78% 7% Source: 2006 AAAA Survey on Agency Compensation Practices

Foundations of value pricing Focuses on value and effectiveness, not time and cost. Places importance on results instead of efforts. Fosters an entrepreneurial spirit instead of a production mentality. Actually gives the agency an incentive to reduce costs. Shares the risk between client and agency. Aligns the interests of the agency and client.

Focuses on value and effectiveness, not time and cost.

Places importance on results instead of efforts.

Fosters an entrepreneurial spirit instead of a production mentality.

Actually gives the agency an incentive to reduce costs.

Shares the risk between client and agency.

Aligns the interests of the agency and client.

The 5 Cs of value Comprehend the key value drivers for clients. Create value for clients. Communicate the value that you create. Convince clients that they must pay for value. Capture value with a value-based pricing approach.

Comprehend the key value drivers for clients.

Create value for clients.

Communicate the value that you create.

Convince clients that they must pay for value.

Capture value with a value-based pricing approach.

Questions to ask yourself when setting a price At what price would this engagement be so expensive a client would not consider buying it? At what price does the engagement become so inexpensive the client would question its value? What costs can we afford to invest at this price and still earn an acceptable profit? What’s our reservation price and our desired price?

At what price would this engagement be so expensive a client would not consider buying it?

At what price does the engagement become so inexpensive the client would question its value?

What costs can we afford to invest at this price and still earn an acceptable profit?

What’s our reservation price and our desired price?

Questions to ask your client when setting a price If price wasn’t an issue, what role would you want us to play in your business? How do you measure success? What is it now? What would you like it to be? What’s the value of the difference?

If price wasn’t an issue, what role would you want us to play in your business?

How do you measure success?

What is it now?

What would you like it to be?

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

Why a value-based price is worth more Fixed price vs. variable price Service guarantee Pre-authorized pricing Customized payment terms Assumed risk Accountability for results

Making pricing a core competency Begin with a discussion of value, not cost. (If you start by discussing cost, you’ll never get to value.) Ask clients what they think the assignment is worth. Don’t estimate – price. Never quote ranges. Always provide pricing options in RFPs. Never discount, except on payment terms. (Being creative on terms can help sell the price.) Remember, nothing raises price like being willing to walk away from an engagement.

Begin with a discussion of value, not cost. (If you start by discussing cost, you’ll never get to value.)

Ask clients what they think the assignment is worth.

Don’t estimate – price.

Never quote ranges.

Always provide pricing options in RFPs.

Never discount, except on payment terms. (Being creative on terms can help sell the price.)

Remember, nothing raises price like being willing to walk away from an engagement.

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. 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 Easy and precise, but precisely wrong. Difficult and approximate, but approximately right. Investment of time on the back end. Investment of time on the front end. Perpetuates the chronic problems in agency-client relationships regarding clarity of expectations, sharing of information, accountability for results, and mutual trust. Forces resolution of these chronic problems.

Easy and precise,

but precisely wrong.

Difficult and approximate, but approximately right.

Investment of time

on the back end.

Investment of time

on the front end.

Perpetuates the chronic problems in agency-client relationships regarding clarity of expectations, sharing of information, accountability for results, and mutual trust.

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

Do you believe you are worth a higher price? The central question:

Additional resources Creating Value Ignition’s quarterly digital publication that explores the leading edge of value pricing. www.ignitiongroup.com/creatingvalue [email_address] ignition consulting group | www.ignitiongroup.com Ignition Blog Ignition’s online discussion about how agencies can create and capture more value. http://propulsion.typepad.com