Getting Paid for Value Instead of Time

Getting Paid for Value Instead of Time OF TIME Presented by Tim Williams @TimWilliamsICG|www.ignitiongroup.com Getting Paid for Value Instead of Time

AGENCIES HAVE A COMPENSATION PROBLEM.

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?

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).

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

“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.“

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 every reasonable person knows it.

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.

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 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?

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

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 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?

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

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

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 dynamic price based on usage.

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

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

“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.”

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 basic value pricing approaches

This is how agencies pay most of their business partners. Photographers Actors Voice talent Musicians Illustrators 3. A dynamic price based on usage

IDEATION Developing the idea EXECUTION Executing the idea USAGE Using the idea 3. A dynamic price based on usage Separating the value of:

SEPARATING HIGH AND LOW VALUE SERVICES

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

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

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: Hourly rates Labor Billable time Time of staff Estimates Costs Language is the precursor to behavior change.

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?

“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

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Getting Paid for Value Instead of Time