Keith Gutierrez & David Weinhaus - Selling Value (Not Points)

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[David]
Hi Everybody, my name is David Weinhaus and I lead Partner Sales Enablement at HubSpot. Before we start, do we have any Lions in the room? Can I get a roar?

For those of you that are not Lions, Project Lion is what we call our sales Bootcamps programs here at HubSpot. We call ourselves Lions because we hunt as a pack and are fierce, yet graceful.

Speaking of the our Sales Bootcamps, one of the most popular topics we cover is that of pricing. Everybody wants to talk about it and how to do it better.

And within that broader topic of pricing, one specific topic folks frequently have questions about is point-based pricing!

[David]
...Point-based pricing.

It seems like almost everyone is either doing or looking at point-based pricing these day. How many folks in the room are doing it - or have seriously considered it?

Point-based pricing has been a pretty cool innovation and it has been that that has been championed a lot of folks including Paul Roetzer and PR2020.

[David]
The idea of point based pricing is pretty simple actually. Instead of assigning hours to an activity, you assign points. Instead of charging by hours, or effort, you get to charge by points, which represents the value of a deliverable, which you get to assign. like an ebook, or landing page, or nurturing campaign - with point values you decide. So, for instance, 55 for an ebook, 2 points for a landing page, 8 point for an email nurturing campaign.

It’s pretty cool actually and has been a big step forward in pricing. Been championed by many in the partner community, including Paul Roetzer of PR202, who has great stuff on it. Check it out if you want to know more. .

Okay, is anyone from PR2020 in the room today? Okay, this is where we stop talking about point-based pricing and start talking about an alternative to point based pricing. Hopefully Paul doesn’t send a posse waiting for us on the playground after Partner Day ends today.

As much as Keith and I appreciate point-based pricing and it is pretty cool, it has always felt like something is missing.

To think about what might be missing, let’s do what marketer’s do, and put ourselves in the shoes of our ideal persona for a second - the CEO or executive decision-maker.

[David]

What do CEO’s or decision-makers - our prospects - dream about? [When they are fantasizing a bit maybe as they are driving into work in the morning, late at night, or on a jog?]

Now, I’m not a CEO, but I do know enough CEO’s, to have a sense.

[David]
…They dream about being on the cover of a magazine; Fortune or Forbes, or perhaps a local business journal if we are talking about a smaller company, which most of our prospects are. And even if they don’t actually dream about being on a cover, they dream about what it represents. Recognition from peers and investors that they are doing a great job.

And how do I perfect my tough guy stare. Steely eyes, pursed lips - captain of industry.

Now, what gets a CEO recognition like this? A few moments ago we talked about how point-based is based on the value of the deliverable. However, if you explore these covers, you won’t find a mention of ebooks, or landing pages, or nurturing campaigns o them. Those things directly are not what get a CEO on the cover.

What gets a CEO on a magazine cover is what you see in red - revenues, profits, growth.

Because this is what gets recognized - revenues, profits, and growth - this is what CEO’s value. And what CEO’s - or DMs value - they will pay for. And because they will pay for, it is something that we can incorporate into our pricing.

So...of course, that begs the question...how do we do it. How do we price for value, incorporating the measures that DM’s care about? More specifically...
[next slide]

[David]

How do we price for value, increase margins, and do so in a way that is practical and actionable?

Fortunately, we have an answer for you today and it’s going to be my co-presenter who shares it with you.

[David]
By way of quick introduction, Keith has been a HubSpot Partner since 2010 [...see slide]

Oh baby, are you ready Keith?

Keith welcome. We are excited to hear about your journey to value-based pricing.

[Keith]
Thank you, David!

Hello Partners!

As David mentioned, I lead the agency team at Modgility, and I’m also the lead inbound trainer at Manage Inbound.

We’re an Inbound Growth Agency located in Cleveland, OH. Like many of you here today, we’re a small team, currently a Gold Partner that working our buts off to get results for our clients.

Quick question: How many of you refer to your agency as an “Inbound Growth Agency”?

Awesome. I see a few, a few lion graduates I presume.

What does it mean to be an Inbound Growth Agency?

Well. Simply put; we sell growth.

More specifically, we sell the our ability to help our clients generate “closed sales revenue”.

This includes helping them leverage the entire growth flywheel which includes marketing, sales and customer service.

Now back in 2010, when we joined the partner program, Pete Caputa was advocating selling agency services using a retainer model, so that’s the business model that we got started.

[Keith]
In 2013 we adopted the point pricing model.

Our experience with points pricing was overall pretty good.

But while doing point pricing, I realized that we were seen as a vendor who provided services and deliverables, rather than a true partner in growth, and for me, that was a problem.

Another downside that I noticed while doing points pricing, was that we were trying to maximizing our profits by focusing on our agency efficiencies, which was major mistake because we were not focused on the right results. Our agency efficiencies didn’t necessarily align with the success and growth of our clients.

What we really should have been measuring, is how effective our efforts were in generating closed sales revenue for our clients.

[Keith]
So I was considering other pricing models and around that same time I pick up the book Positioning for Professionals by Tim Williams.

Now there were two concepts in the book that I really connected with:

1.The first concept is making the transition from being a service provider to a knowledge firm
2. The second concept is getting paid for creating value

While Tim’s book set the stage, it was really the book that he referenced, “Implementing Value Pricing” by Ron Baker, that provided the steps we need to put it all into action.

These two books have radically changed our agency’s business model, for the better.

Our clients no longer view us as a vendor, but instead as a partner in the growth of their business. They have more confidence and loyalty in knowing that we are completley aligned with their needs, values, and goals.

[Keith]
I had already started implementing value pricing in our agency but, kicking off this year, I had an opportunity to complete all 3 Project Lion boot camps.

They we’re awesome. They’ve added tremendous value to our agency and in our ability to help our clients. I learn a ton a met some really great agency friends too.

I you haven’t had an opportunity to attend these Project Lion classes, I recommend them. David will share more on how to enroll in these classes at the end of this session.

Now while in the Sales Skills boot camp, David taught us about “Selling Value” on the Exploratory Call.

That training created an ah-ha moment for me when I realized how well the value pricing business model fit with the inbound sales process. That’s when the pieces of the puzzle all start to fit together.

In the remainder of this session, I will share the 4 steps that we have found to be the most effective in implementing value pricing for our agency.

I’m going to cover a good amount of information quickly, so I have a link at the end, where you can go to get access to all of the resources and material that I’m sharing with you here today.

[Keith]
In doing so, I’ll be my best to answer the question that David presented to us just a few moments ago.

[Keith]
The first step to implement value pricing, is to establish value with your prospective client.

This starts by having a value conversation.

The value conversation is focused on gaining an understanding of the prospects “true need”.

Understanding the prospects true need allows us to provide the best, and most helpful recommendation possible.

[Keith]
Here’s an example from McKinsey & Company of how they start the value conversation with a prospect.

“Mr. Prospect, we will only undertake this engagement if we can agree to our mutual satisfaction, that the value we are creating is greater than the price we are charging you. Is that acceptable?”

How many of your in this room start the value conversations like this?

Raise your hand.

There’s a few…

For us, it seems a little bit stiff, but we do start the value conversation in a similar fashion.

The point is…

The value we are creating needs to be greater than the amount that we are charging our clients, and we need to make sure our prospective client understands that.

The value conversation is centered on the art of questioning.

We’re trying to uncover what the prospective client is trying to achieve, and what their desired outcome is.

The answers to these questions are their value drivers.

This is a concept that David shared with us in the Sales Skills boot camp, which he calls finding the GAP.

[Keith]
In order to find the GAP, we start by gaining an understanding of the prospects current situation, then their goals and timeline and why it’s important to them.

After we understand their current situation and where they would like to be, we dig into understanding how they plan to there and the challenges that they are faced with.

This provides us with an understanding of all of the available solutions that they are considering to reach their goals.

This is essential in determining the value that you can provide to the prospect.

[Keith]
In order to effectively price using value, it’s critical that you align your Agency pricing with the results your prospective client desires to achieve.

What we learn from the value conversation goes back to our agency, so we can price the customer, not the service.

To determine value, what we really need to know is:

What is this worth to my prospective client?
What are they willing to pay?

Then we figure out how we’re going to do the project, or if it even makes sense to take the engagement.

[David]

On the topic of aligning agency pricing, gonna jump back in here with a survey question.

This is based on a study by TrackMaven, but I wanted to throw it out to the room. Most of us in here are marketers.

What percentage of folks in here say their primary objective is to drive revenue? (It’s not a trick question!) Raise your hand.

Ok, second question, now what percentage of folks in the room [generally] base their compensation on revenue or closed business?

[Build]

Ah, there is a bit of a mismatch!

It’s what one of my former professors would have called hoping for A, while rewarding B.

And as misalignments often do, it presents an opportunity.

To understand that opportunity, let’s take a look at someone, who actually does a pretty good job aligning these two factors...and that is the typical CMO of a business.

It’s an interesting comparison, because in many ways, as marketing agencies, we act like the CMO of a business, or at least a deputy CMO, or we roll up into the CMO. Have you ever thought about how a CMO is paid? Let’s look at the average comp structure.

[David]

As this report from Credera illustrates, CMO’s at SMB - defined as less than $50 and 300 employees typically have their compensation broken up into essentially two parts - base pay and then a bonus based on performance, whether in cash or stock or both.

According to these figures, it has a healthy base - the base works out to about 65% of the total package on average. After all, CMO’s have a mortgage bill to pay too. But it is also well aligned to performance, where 35% is paid out as a bonus.

It certainly raises the question, If marketing execs get paid in part based on performance, shouldn’t agencies too?

[David]
Alright Keith, it’s looks like CMO’s have pretty healthy and well aligned compensation packages. Tell us, how do we get paid more like CMO’s?

[Keith]
The concept that David just shared is very similar to the way that we think about value pricing.

This is not a “performance only” type of pricing structure.

Instead, it’s a shared business model that has a fixed price “think salary” and a results fee “think bonus”.

Now let’s take a close look at what this really looks like.

[Keith]
Here is an example of our value pricing model.

This plan shows the forecasted average new revenue being generated per month as well as an annual total.

[Keith]
Our benchmark for value in this example is 10% of the new revenue generated. This is the estimated total investment that the prospective client would make with our agency to reach their desired growth goal.

[Keith]
70% of the estimated total investment price, is allocated in a fixed price agreement. (aka) FPA

The FPA is then divided equally across the 12-month engagement and is paid in the form of a monthly retainer.

The remaining 30% is established as a results fee and is earned by reaching performance targets along the way.

[David]
Does anybody know who this guy is? It is a bit from my father’s generation, so the millenials might have a tough time with this. Yes, it’s Carnac the magnificent!

And what is in the envelope?

Yes, questions! Johnny Carson’s would divine the question in the envelope before he opened them up, and gave a funny answer.

We are not as funny as Johnny, but we have attempted to divine a few of the questions you might have.

[David]

So some of the common questions that Keith gets about his pricing are

#1 - How do you come up with a revenue plan and feel really good about it? How do you not be overconfident, but also not underconfident? After all, a healthy part of your compensation is going to be tied to it
#2 - How do you determine what is going to be the balance between the fixed fee and the results feel. In Keith’s example it was 70/30 or so. Is that always the right balance. How do you ensure profitability.
And
#3 - How do you position all of this to the prospect. They’re probably not used to hearing this kind of a structure. How do you position it.

Keith, back to you to address these questions!

[Keith]

Ha ha...Carnac reminds me of how I used to feel when I was using point pricing, trying figuring out what the deliverables were going to look like each month. It’s kinda like blowing open envelopes!

Now..Assuming that you’ve already found the GAP and established value with your prospective client.

The second step is to develop a growth plan that is aligned with your prospect's goals.

It answers the question: “How do you determine the new revenue plan and feel good about it?

[Keith]
Now before we jump into that, I want to point out that the entire focus of your sales conversation changes with value pricing.

You’re no longer aligning your pricing discussion around activities, like you do with point pricing.

Instead, you’re focused on aligning pricing with the real value that you’ll be providing to the client, that’s the essence of value pricing.

[Keith]
Here’s and example of what a growth plan total may look like over the next year.

We’ve identified the total number of leads and customers needed to reach our goals at our target conversion rates.

Based on the average revenue per customer, we can determine the forecasted monthly and total annual revenue.

We also forecast the total lifetime value generated.

It’s important to note, this is a condensed view of an annual total. We actually map this out by month in our growth plan.

The growth plan provides us and the prospective client insight into the monthly growth targets that are necessary to reach the goal.

[Keith]
From the growth plan, we create multiple scenarios to portray to the prospective client what the plan will look like ahead of plan in a stretch scenario, if everything goes according to plan in our target scenario, and what the results could look like if we perform below the plan’s expectations in a potential walk-away base scenario.

Sharing this information with the prospective client helps us to clearly manage expectations, plus it builds confidence in the plans target scenario.

This isn’t a crystal ball, this is a business case.

The point is that we’ve done our homework and we feel confident in our ability to reach target scenario.

Additionally, we’ve set the boundaries and identified what the plan would look like in a potential walk away scenario, where it may not make sense for us to continue working together.

By providing a stretch scenario, we can show the prospect what’s possible with some additional upside.

[Keith]
Now let’s take a look at how we establish the fee structure and determining which portion is included in the FPA and which portion is earned through a results fee.

[Keith]
Now, while we don’t price based on hours - it’s still important to realize that “we don’t want to go out of business”!

Ha, ha ha

In all seriousness though…

We realize that time is a restrictor, there is only a certain amount of time that we can expend.

So we want to be aware of our estimated average client hours and our effective hourly cost with our overhead factored in.

[Keith]
From there, we will aim to price our monthly FPA (aka. “the retainer”) somewhere between the minimum and high margin. This covers our cost plus it includes some margin.

[Keith]

Here’s an example of what it would look like if we reached the plan’s goal. Our agency captures the full potential value of the engagement.

However, if we exceed the goal and generated, let’s say $100K / month then our full potential value extends to $10K per month.

This means that the better our agency performs, the more value we can create for your agency.

Additionally, the faster our agency helps our clients reach the goal, the faster we can capture the full potential value.

More importantly, our prospective clients will love this approach because it anchors the to total value we’re creating for them, but it lowers their risk by reducing the required up-front investment.

Typically the total value investment price is pinned at 10% of the total revenue growth goal in our target scenario.

However, this can vary between 8%-15% based on the prospects gross margin and other factors.

Generally we price based on lifetime value however, there are some situations where we will base our pricing plan on the annual revenue being generated.

[Keith]
Now let’s circle back to the example that we started with.

Now you can see how we developed the revenue plan with confidence, and how we determined the percentage that should be allocated in a fixed price agreement vs. the portion that is allocated in a results fee.

Now let’s dive into how to position value pricing with our prospects.

[Keith]

To showcase how I anchor using value pricing, David and I will do a quick role play.

Keep in mind that this will be a condensed role play. There are many factors that are not be covered here, that we have an assumed understanding of in the role play.

David, are you ready? (Yes)

Is everyone in the room ready?

Let’s get started!

Keith: David, you’ve told me that you were recently promoted to President of your company and you’ve been tasked with some pretty big 5-year growth goals and, that this year it’s important for you to generate $1M in new sales revenue. Is that right?

David: That’s right

Keith: Great. Have you thought about the level of investment you will need to make to reach 1M in new sales revenue over the next year?

David: Not really.

Keith: Would it be okay if I shared some insight into what other B2B companies like your invest?

David: Sure

Keith: Many B2B companies similar to yours are investing roughly 10% of their total growth goal into their sales and marketing efforts. Does that sound reasonable to you?

David: Well, I guess so, if I feel super-confident. Do you guys guarantee results?

Keith: Well, that interesting. As a matter of fact, we do ask for a fee for the work we do, but there is also a meaningful portion of our pay that is based on the results that we generate for you.

David: That’s cool. How much?

Keith - Well it can vary. But typically for a company who is trying to drive $1M in new revenue, we recommend whether they go with us or someone else, to expect to spend about $100K a year. In our pricing, we might have our based around $70K and our results fee at $30K. You know you can barely hire a marketing associated for $65K with salary and benefits. An that hire would only bring a fraction of what we’re able to with a team of experts that are aligned with your success.

David - Oh, that sounds cool. (If time - push back on percentages.) How do we come up with the exact number and what I would judge you by?

Keith: Next step is to put together a growth plan. Within the growth plan, I forecast three scenarios of how things could potentially unfold, outlining how your success and our success would look in each. Would you like to do that?

David: Yes

BOOOM

[Keith]
So. There you have it. Those are the 4 steps that we have found to be the most effective in implementing value pricing for our agency.

Here are a few key takeaways that have made an impact for our agency by selling value over points:

Value pricing lowers risk to our clients, and they are willing to pay us more for it.
Value pricing positions our agency as a partner in growth, vs. a vendor who provides a service.
Value pricing automatically focuses our agency on being effective and efficient in getting the best results for our clients.
Selling value has enabled us to increase our average (FPA) retainer by $20K per year.
Selling value is enabling our agency to capture an average of $35K more per year in additional earning potential over and above our fixed price agreement.

So if you want to increase revenue and make your agency more profitable, value pricing may be a business model for you to consider.

Alright, as promised, check out the bit.ly link provided above to get access to all of the resources that I’ve shared with you today!

I’ll give you a minute to take a picture of this slide.

We have all of the presentation resources completely ungated, for easy access.

There is also a form on the page, if you want to get access to a few bonus resources.

These include:

Example Growth Plan with Forecast Scenarios,
Example Monthly Performance Dashboard
Expanding Resource Reading List.

David, what is the best way for people to sign up for the upcoming project lion classes?

What Questions Do You Have For Me?

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