This document discusses the importance of pricing services based on the value provided to customers rather than costs. It argues that the default purpose of marketing should be to increase profits, not just sales, and that profit is driven mostly by price. The document provides a 7-step framework for implementing value-based pricing including having conversations with customers about their objectives, forming a value council, developing pricing options, and conducting after-action reviews. It discusses using various pricing models like fixed fees, outcome-based agreements, and royalties. The overall message is that agencies should focus on capturing value for their work rather than just tracking time.

1. Ron Baker, Founder
VeraSage Institute
Profit Starts
with
Pricing on
Purpose
“The single most important decision in evaluating a
business is pricing power. If you’ve got the power
to raise prices without losing business to a
competitor, you’ve got a very good business. And
if you have to have a prayer session before raising
the price by 10 percent, then you’ve got a
terrible business.” - Warren Buffet
Innovate for growth.
Price for Profit.
1

2. The default purpose of
marketing is not to
increase sales.
It’s to increase profits.
1. Profit is a marketer’s ultimate objective.
2. Profit is driven mostly by price.
3. Price is driven mostly by brand perception.
4. Brand perception is driven mostly by what
agencies do for their clients.
The value of agencies
Harvard Business Review
“If Brands Are Built Over Years, Why Are They Managed Over Quarters?”
By Leonard Lodish and Carl Mela
2

3. What are you
really selling?
What are your
customers
really buying?
“The customer never buys a product. By
definition the customer buys the satisfaction of
a want. He buys value.” - Peter Drucker
3

4. The wrong practices: Time tracking software
Paradigms
drive
practices
The wrong theory: Time worked equals value created
A Tale of Two Theories
The Labor Theory of Value
The Subjective Theory of Value
Value creation and capture
Customer’s
Gain
Value
created
Price
Value
captured
Costs
4

5. Cost-Plus Pricing
Service Cost Price Value Customer
Customer Value Price Cost Service
Value-Based Pricing
Seven Steps to
Implementing Value Pricing
Implementing Value Pricing
1. Conversation with customer
Not:
“What do you need?”
But rather:
“What are you trying to accomplish?”
5

6. Implementing Value Pricing
1. Conversation with customer
Listen > Talk
Opening: “Mr. Customer, 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?”
Implementing Value Pricing
2. Form a Value Council and appoint a CVO
Role of the Value Council
1. Ensuring that the agency prices on purpose.
2. Constructing and experimenting with various value-based
compensation agreements.
3. Assuring continuous learning and teaching every team
member the importance of pricing for value.
4. Dealing with price objections from clients.
Implementing Value Pricing
2. Form a Value Council and appoint a CVO
Role of the Value Council (continued)
5. Keeping the agency focused on tracking client results
instead of agency inputs.
6. Establishing client selection/deselection criteria.
7. Conducting “after action reviews” at the end of major
assignments.
6

7. AAAA PRICING PRACTICES SURVEY
CFO CVO
Costing Pricing =
How often do agencies track the following?
Chief Compensation Officer
Neal Grossman
7

8. “We have as many compensation
approaches as we do clients.”
Jeff Hicks, CEO
“All of our compensation agreements
are experiments in value.”
Carl Johnson, Partner
“We don’t believe we’re in the
business of selling time.”
John Minty
Chief Value Officer
8

9. Value Council
Ken Whyte, Glen Drummond, Bob
Wilbur, Mandy Moote, Tony Mohr
“At innovation consultancy Fahrenheit 212, we
put up to two-thirds of our potential revenue at
risk, subject to achieving agreed commercial
milestones on a project.”
9

10. Implementing Value Pricing
3. Determine the optimal pricing method (fixed, results, usage)
Not:
“What do you need?”
But rather:
“What are you trying to accomplish?”
34 Sources of Client Value
Increase Reduce Improve Create
Revenue Cost Productivity Strategy
Profit Time/Effort Process System
Market Complaints Service Process
Share Risk Information Business
Retention Turnover Morale Product
RoA or ROI Conflict Image Service
Efficiency Paperwork Reputation Brand
Cash Flow Skills
Visibility Quality
Loyalty
Intangible Value
• Specialist expertise/knowledge
• Unique social capital
• Brand/reputation
• Unique result––creativity & innovation
• Reducing risk
• Excellent experience
• Relationship
• What else?
10

11. Equity
Outcome-based agreements
Royalties Risk reserves
Ownership of intellectual property
Licensing
Usage fees
Fixed value price
Implementing Value Pricing
4. Develop Options
Rational vs. Irrational
11

12. Behavioral Economics
Anchoring
12

13. Options
Options factors to consider:
 Timing
 Scope
 Number of deliverables
 Degree of customization
 Level of service or access
 Data archiving
 Payment terms
Implementing Value Pricing
5. Effectively present your pricing
Presenting your pricing
1. Present your most expensive option first; this is your “anchor price.”
2. After stating your price(s), shut up.
3. Use the word “price” instead of “fee.”
4. Use the word “agreement” instead of “contract.”
5. Use the word “fair,” as in “Is this a fair price to you?”
6. Remember to negotiate value, not price.
7. Place a timeline on proposals; no price should last forever.
Implementing Value Pricing
6. Engage in superior scope management
13

14. Implementing Value Pricing
6. Engage in superior scope management
Elements of an effective scope document
Scope statement
Objectives
Constraints
Project structure
Role definition
Assumptions
Deliverables
Functional requirements
Project change control
Approval process
Implementing Value Pricing
7. Conduct an “After-Action Review”
After-Action Review Questions
 How could we have enhanced our client’s perception of value?
 What were the business results and performance against key
metrics?
 Did we have the right team on this assignment?
 How high were the costs to serve?
 Did we stay within time and budget parameters?
 Could we have captured more value through higher price?
 If we were doing this type of assignment again how would we do it?
 What are the implications for the way we design and deliver our
services?
 What could we do better next time?
Cycle of Change
PERFORMANCE
HOPE
CONFIDENT
COMPETENCE
Insight
TIME
14

15. Pricing is an art and a skill,
requiring…
Patience
Wisdom
Thank You!
Versage website/blog
www.verasage.com
Ron@verasage.com
Twitter @ronaldbaker
Phone 707.769.0965
15