As clients continue to trim budgets, the struggle for agencies to grow revenue and improve margins is real. A common reaction is to attempt to do a better job of estimating, recording and billing for the agency’s time. Ultimately though, this is not the answer.
Our recent event brought together 150 agency owners, CEOs and Managing Directors to discuss the changing nature of agency profitability. Procurement, rising staff costs, and more project-focused contracts are all impacting the margins being made. Gone are the hey days of 30% profits; agencies are now making, on average, 10%.
Pricing expert, Tim Williams, joined us to share his experience of working with agencies to evaluate their business model. He demonstrated that the way to improve your profits is to stop selling your costs (time) and start employing some of the modern pricing techniques adopted by other types of companies across the globe.
Below we share the key insights from the session, to help you quickly adopt more effective ways to package and present your pricing and remove many of the barriers that cause clients to push back.
1. Start charging for outputs (deliverables) or outcomes (results) instead of inputs (time).
Economists proved long ago that what buyers really purchase is utility. Clients don't buy our efforts or activities, but rather the deliverables and results those efforts produce.
2. Start presenting at least three options for every assignment.
Buyers need context to evaluate purchase decisions, which is why most products and services offer several different options (Starbucks, Apple, even car washes).
When you present your pricing in the form of options, it changes the conversation away from "how many hours will this take" to "which of these options do you prefer?"
3. Start focusing pricing discussions on client objectives instead of agency costs.
Professional buyers are trained to direct price negotiations around cost. Their job is to reduce the seller's offering to the lowest common denominator. But the seller has a job as well, and that is to focus the dialogue around what clients really buy; specific deliverables and marketplace results.
4. Start replacing the language of cost with the language of value in all client-facing communication.
Behavioural psychologists teach that in order to change our behaviour, we first must change our language. This means trading the language of cost for the language of value. In place of words like cost, estimates, hours, labor costs, billing rates, and utilisation, we should be talking about price, value, outcomes, results, expertise, and accountability.
5. Start every assignment with Scope of Value ahead of Scope of Work.
Even when clients appear to know exactly what they want, it's essential to engage them in a definition of "Scope of Value." What are the transactional, behavioral, or attitudinal metrics of success for this assignment? Every RFP response, scope document, and brief should begin with a Scope of Value before listing the Scope of Work.
6. Start pricing higher-value and lower-value services differently.
Agency services can be classified as "Magic" (higher-value ideation) and "Logic" (lower-value implementation). Because clients view production work as fairly standardised, unit pricing is appropriate. But the higher-value problem solving and concept development work should always be priced on a custom basis and should be the area where we make the highest margins.
7. Start the pricing process by first estimating value to the client before estimating cost to the agency.
Professional pricing methodology starts by evaluating the value to the buyer, not the cost to the seller. Beginning our pricing process with an estimation of value created instead of costs incurred gives us the perspective we need to price with confidence.
In January we are running a full-day workshop with Tim that delves deeper into these topics, providing an actionable plan for you to implement within your own business. If you'd be interested in hearing details of this event, then do get in touch on firstname.lastname@example.org, and we'll be sure to send an invite.