Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
GETTING PAID
FOR VALUE INSTEAD OF TIME
Presented by Tim Williams
@TimWilliamsICG|www.ignitiongroup.com
AGENCIES HAVE A
COMPENSATION PROBLEM.
RFPs that focus extensively on price
Mandates to reduce fees without also reducing SOW
Demands for extensive disclosure of...
The current state of affairs
① Agencies get paid for hours worked instead of value
provided or value received.
② Agencies ...
The chronic disadvantages
of billing for time
¨ Misaligns the economic interests of agency and client
¨ Places all the ris...
“The client/agency relationship is being tested, brought
to new levels of complexities unmatched to this day.
The approach...
WHEN IT COMES TO PRICING,
THE FIRST THING YOU HAVE
TO CHANGE IS YOUR MIND
THEN YOU CAN CHANGE YOUR PRACTICES
What are your clients really buying?
Time, hours, activities, efforts,
percent of staff?
These are not great answers and
e...
The famed Scottish economist Adam Smith
The great economists settled this
question a long time ago
Nobody ever buys a prod...
TIME AND COST
ACTUALLY HAVE NOTHING
TO DO WITH VALUE
Cost of paint, canvas, brushes,
and labor hours spent painting
=
The value of Rembrandt’s output?
Q: What’s the cost of a bottle of water?
A: About 3 cents.
Q: What’s the value of a bottle of water?
A: It depends. Are yo...
Cost is objective and calculable
Value is subjective and contextual
What it cost the
seller to provide
A SCIENCE
What the ...
Salaries + Overhead + Desired Profit
Expected Hours
= Hourly Rate
There’s a formula for cost,
but no formula for value.
Price-Led Costing
Customer Value Price Cost Product
Product Cost Price Value Customer
Cost-Led Pricing
Two schools of pric...
The Value Pricing Spectrum
Simple Complex
A fixed price
based on perceived value
A variable price
based on outcomes
Unlimi...
A quick quiz
① We begin every new client relationship with a discussion of “Scope of Value” (expected
outcomes) before we ...
THREE BASIC WAYS TO THINK
ABOUT PRICING FOR VALUE.
Three basic value pricing approaches
① A fixed price based on perceived value.
② A variable price based on outcomes.
③ A d...
The two dimensions of
setting an effective fixed price
① Financial impact
② Strategic importance
③ Value horizon
④ Unique ...
① A fixed price based on perceived value.
② A variable price based on outcomes.
③ A dynamic price based on usage.
Three ba...
“Risk-free fee agreements commoditize
agencies and do much to ensure that ad shops
are viewed as vendors rather than partn...
2. A variable price based on outcomes
① A fixed price based on perceived value.
② A variable price based on outcomes.
③ A dynamic price based on usage.
Three ba...
This is how agencies pay most
of their business partners.
Photographers
Actors
Voice talent
Musicians
Illustrators
3. A dy...
IDEATION
Developing the idea
EXECUTION
Executing the idea
USAGE
Using the idea
3. A dynamic price based on usage
Separatin...
SEPARATING HIGH AND LOW
VALUE SERVICES
Strategy
Concept
Insights
Production
Distribution
Analysis
Optimization
HIGHER VALUE SERVICES
Measurement
Activation
The p...
Strategy
Concept
Insights
Production
Distribution
Analysis
Optimization
Measurement
Activation
HIGHER VALUE SERVICES
LOWER...
CHANGE YOUR LANGUAGE,
THEN YOU CAN CHANGE
YOUR BEHAVIOR
Change
your
paradigm
Change
your
language
Change
your
behavior
Some of the language
agencies should never
use with clients...
One final thought
Agencies were not always paid based on hourly rates. We introduced
this system ourselves in the mid-1980...
“There is no standard
price on ideas. The
creator of ideas makes
his own price, and, if he
is smart, gets it.”
Napoleon Hi...
www.IgnitionGroup.com
@TimWilliamsICG
www.linkedin.com/in/TimWilliamsICG
Propulsion Blog
www.IgnitionPropulsion.com
Upcoming SlideShare
Loading in …5
×

Getting Paid for Value Instead of Time

4,172 views

Published on

An exploration of how agencies and other professional firms can get paid for the value they create instead of the hours they work, by Tim Williams of Ignition Consulting Group.

Published in: Marketing
  • Only TWO comments? What a surprise! There's an ocean of interesting ideas and possibilities in this. For starters, I've been in Sales and Marketing of computer-related products and services for years and the issue of value and price are a constant challenge. You begin to touch on some key issues and solutions in Slides 11 & 12 ( the Rembrant and the water bottle). Then, unfortunately, you go off the rails into cost vs. price vs. value. Cost is really irrelevant in either determining price or value. Price is what you're going to charge the client for the value THE CLIENT SEES IN NOT HAVING YOUR SERVICE. Try reading that again, please. The client is coming to you because he/she/it has a problem, usually centered around not achieving (or fear of not achieving) projected revenue levels. The VALUE is what the client is willing to pay to overcome their PERCEIVED REVENUE SHORTFALL - nothing more, nothing less. That's where it all starts. He/she/it is looking to leverage your output against that perceived, now monetized cost. For example, XYZ expects their new widget will sell $5mm in the first year, and generate $xx mil in profit. They might be willing to spend 10%, 20%, 30% of that profit on having you or someone else promote their widget to reach the revenues necessary to achieve the projected profit. It's just that simple, but you must engage the client in that conversation in order to get at those "values". Your task is to convince the client you are the best path to that outcome. Your price, therefore, is set by your client's assessment (this goes with Adam Smith's quote on the "utility" of your product). IF you can deliver at that price-point, then you have to determine whether YOU make any money based on your costs. In all likelihood, once you get the client talking about their perceived/anticipated shortfall, the number will be much larger than any conversation focused on per-hour charges. Talking at the level of client revenue and profit levels will immediately in the role of an expert and advisor because none of your competitors will be. And, every conversation about cutting your rate should be tempered by the risk to achieving the shortfall by cutting corners or dealing with "just another ad agency". So, in closing (I know ... it's about time!), I completely disagreed with N. Hill and the notion of the person who comes-up with the "great idea". The world's full of unrealized great ideas; the value always lies with the prospective client's goals and his/her/its anticipated shortfall. If no shortfall (risk) existed, they would have completed the project themselves.
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • Tim, you have hit the proverbial nail on the head. Good to see more are becoming aware of this trend as well as speaking out about it. I've been advocating this problem for years and it seems that we (as a professional services/consulting provider) are perpetuating the problems ourselves too. Cheers for the slides, would have loved to have been present at the seminar itself.
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • Hi Tim, I attended your seminar at the me hotel this morning and really enjoyed it - very thought provoking. Is there any way you could point us to the share of the deck on Slideshare? Thanks Peter
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here

Getting Paid for Value Instead of Time

  1. GETTING PAID FOR VALUE INSTEAD OF TIME Presented by Tim Williams @TimWilliamsICG|www.ignitiongroup.com
  2. AGENCIES HAVE A COMPENSATION PROBLEM.
  3. RFPs that focus extensively on price Mandates to reduce fees without also reducing SOW Demands for extensive disclosure of agency costs Clients not forthcoming about marketing budgets Agency services “shopped” based on hourly rates ? The branches of the problem. What’s at the root?
  4. The current state of affairs ① Agencies get paid for hours worked instead of value provided or value received. ② Agencies earn most of their money from execution (the area least valued by clients). ③ Compensation agreements are based on inputs (hourly rates, time of staff) instead of what clients are really buying, which is outputs and outcomes. ④ In the current system, 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).
  5. The chronic disadvantages of billing for time ¨ Misaligns the economic interests of agency and client ¨ Places all the risk on client (the opposite of true “partnership”) ¨ Fosters a production mentality, not an entrepreneurial spirit, on the part of both the client and agency ¨ Focuses on efforts and inputs, rather than outputs and outcomes ¨ Penalizes the agency for solving problems faster, which is a benefit to the client ¨ Agencies place a self-imposed limit on profitability
  6. “The client/agency relationship is being tested, brought to new levels of complexities unmatched to this day. The approach to working with agencies from the past few decades is now obsolete. Clients and agencies must redefine the value realized from their relationship and move towards a new level of strengthened partnership that intrinsically produces better outcomes for clients, through mutual accountability and risk-taking.“
  7. WHEN IT COMES TO PRICING, THE FIRST THING YOU HAVE TO CHANGE IS YOUR MIND THEN YOU CAN CHANGE YOUR PRACTICES
  8. What are your clients really buying? Time, hours, activities, efforts, percent of staff? These are not great answers and every reasonable person knows it.
  9. The famed Scottish economist Adam Smith The great economists settled this question a long time ago Nobody ever buys a product or service, but rather the “utility” that the product or service provides to the buyer. This applies as much to agencies as automakers.
  10. TIME AND COST ACTUALLY HAVE NOTHING TO DO WITH VALUE
  11. Cost of paint, canvas, brushes, and labor hours spent painting = The value of Rembrandt’s output?
  12. Q: What’s the cost of a bottle of water? A: About 3 cents. Q: What’s the value of a bottle of water? A: It depends. Are you just thirsty and a bottle of water would be nice; are you lost in the Mojave desert and and water would save your life, or is your basement flooding and the last thing you want is more water?
  13. Cost is objective and calculable Value is subjective and contextual What it cost the seller to provide A SCIENCE What the buyer is willing to pay AN ART Costing vs. Pricing
  14. Salaries + Overhead + Desired Profit Expected Hours = Hourly Rate There’s a formula for cost, but no formula for value.
  15. Price-Led Costing Customer Value Price Cost Product Product Cost Price Value Customer Cost-Led Pricing Two schools of pricing Only the professional services business is trapped in the outmoded “Cost-Led Pricing” approach. The rest of the business world follows “Price-Led Costing.” For example, guess which approach was used to price the iPhone?
  16. The Value Pricing Spectrum Simple Complex A fixed price based on perceived value A variable price based on outcomes Unlimited creative ways to be compensated
  17. A quick quiz ① We begin every new client relationship with a discussion of “Scope of Value” (expected outcomes) before we discuss “Scope of Work” (expected deliverables). ② In discussions with clients around pricing, we focus the dialogue around outcomes and results instead of hours and efforts. ③ We apply as much creativity to pricing and compensation as we do to solving our clients’ marketing problems. ④ In addition to employing accounting professionals who are experts in understanding and analyzing costs, we also have pricing professionals who are experts in understanding and pricing for value. ⑤ We pay just as much attention to external measurements (marketing outcomes, business results, etc.) as we do internal measurements (hours, labor costs, etc.). ⑥ We are willing to be a true stakeholder in our clients’ success by sharing in both the risks and the rewards. ⑦ Our current culture and systems incent our people to be effective (produce results), not efficient (hold hours to estimate, meet billable time target, etc.) 1 2 3 4 5 6 7 8 9 10 STRONGLY DISAGREE STRONGLY AGREE
  18. THREE BASIC WAYS TO THINK ABOUT PRICING FOR VALUE.
  19. Three basic value pricing approaches ① A fixed price based on perceived value. ② A variable price based on outcomes. ③ A dynamic price based on usage.
  20. The two dimensions of setting an effective fixed price ① Financial impact ② Strategic importance ③ Value horizon ④ Unique agency qualifications ⑤ IP ownership ⑥ Degree of risk sharing VALUE FACTORS COST FACTORS ① Resource requirements ② Talent level ③ Scope complexity ④ Time sensitivity ⑤ Client responsiveness ⑥ Client organizational complexity 1. A fixed price based on perceived value
  21. ① A fixed price based on perceived value. ② A variable price based on outcomes. ③ A dynamic price based on usage. Three basic value pricing approaches
  22. “Risk-free fee agreements commoditize agencies and do much to ensure that ad shops are viewed as vendors rather than partners. Editorial To get out of this cycle, agencies need to look at risk differently. They need to take hard look at whether their output for marketers has value beyond churning out a commodity product, whether their work is something worth making a real bet on.”
  23. 2. A variable price based on outcomes
  24. ① A fixed price based on perceived value. ② A variable price based on outcomes. ③ A dynamic price based on usage. Three basic value pricing approaches
  25. This is how agencies pay most of their business partners. Photographers Actors Voice talent Musicians Illustrators 3. A dynamic price based on usage
  26. IDEATION Developing the idea EXECUTION Executing the idea USAGE Using the idea 3. A dynamic price based on usage Separating the value of:
  27. SEPARATING HIGH AND LOW VALUE SERVICES
  28. Strategy Concept Insights Production Distribution Analysis Optimization HIGHER VALUE SERVICES Measurement Activation The perceived value of agency services can be plotted as a “smile curve” LOWER VALUE SERVICES
  29. Strategy Concept Insights Production Distribution Analysis Optimization Measurement Activation HIGHER VALUE SERVICES LOWER VALUE SERVICES But overlay the way agencies typically make most of their money, and the smile becomes a frown
  30. CHANGE YOUR LANGUAGE, THEN YOU CAN CHANGE YOUR BEHAVIOR
  31. Change your paradigm Change your language Change your behavior Some of the language agencies should never use with clients: Hourly rates Labor Billable time Time of staff Estimates Costs Language is the precursor to behavior change.
  32. One final thought Agencies were not always paid based on hourly rates. We introduced this system ourselves in the mid-1980s, and our clients learned it so well that they now play it back to us relentlessly. So, now that both parties have learned that this is a sub-optimal system, it’s time to change it. And guess who’s job it is to do that? Ours. The agencies. We’re the sellers, so we get to choose how we want to sell our services. The client community learned our present system really well. They can learn a new approach just as well, and most of the progressive marketers are primed to do just that. One of the most frequent questions Ignition hears from marketers when it comes to value pricing is “Why isn’t my agency talking to us about this?
  33. “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
  34. www.IgnitionGroup.com @TimWilliamsICG www.linkedin.com/in/TimWilliamsICG Propulsion Blog www.IgnitionPropulsion.com

×