Many of your proposals fail because the client isn’t sure what they would be buying.
One of the first pricing principles I address in Pricing Creativity: A Guide to Profit Beyond the Billable Hour is the idea that there are three things you can sell and price: inputs, outputs or value. If you’re not clear on what you’re selling then the client can’t be sure what they’re buying. So they don’t buy. Or they proceed nervously like someone entering a dark alley with no idea of what they’ll encounter, hoping they’ll emerge unscathed at their destination on the other side.
Let’s say a retail client wants a new loyalty app and would like to keep the project at or below $200k. They get three bids from three different design & development firms, each selling one of inputs, outputs or value. Let’s examine each to see what the client is really getting and what they’re giving up.
Firm #1 Sells the Inputs of Time
Firm number one proposes to put a four-person cross-functional team on the project at a blended hourly rate of $175 which works out to $49k per two-week sprint. Doing the math, the client asks, “Can you get this done in eight weeks or less?” The firm responds that they don’t know and thus can’t commit to a timeframe or a fixed budget, but they can make a guess at a probable range. “Maybe eight weeks, maybe twelve, maybe longer. That’s the undefinable nature of this iterative type of work,” says the firm’s principal.
With firm number one it’s clear the client is buying the inputs of time and therefore they are taking all the pricing risk in the relationship. If the agency works quickly, they might deliver at less than the $200k target and those savings will be passed on to the client. If the firm takes their time or runs into trouble and the project is still not completed after 12 weeks, the client’s only recourse is to buy more time–another sprint or bucket of hours.
Firm #2 Sells the Outputs of Deliverables
Firm number two charges the client a small amount of money to do a detailed scoping exercise which leads them to essentially arrive at the same conclusion as firm number one. Based on their blended hourly rate, the identified requirements and the few remaining variables they can’t solve for, they determine the project should be priced between somewhere between $200k and $300k. They present the client with a proposal to deliver the app with specific features and functionality for $290k.
With firm number two it’s clear the client is buying the deliverable–the finished app. $290k is more than they hoped to spend but for that premium they get price certainty. If the project takes longer than planned, it doesn’t increase the client’s costs, instead it decreases the agency’s profit. The scope and features are agreed upon in advance and the price changes only if the client changes the scope/features or otherwise cannot live up to their obligations outlined in the agreement. The agency is taking the price risk but if they’re confident in their ability to scope accurately then perhaps they can deliver at the shorter end of their time spectrum and make an extra $90k in profit above the profit already built into their hourly rate. If they miscalculate, they will earn less or even lose money–something that cannot happen when selling time.
Firm #3 Sells the Value of the Outcomes
Firm number three determines that the app could net the client millions of dollars in net new revenue every year. They put forward a proposal with no constraints on time and only a broad vision of what the feature sets and final deliverables might be. The agency commits to working with the client on the app even after it’s in the market, to keep iterating until key benchmarks are reached, including adoption rate and target increases in average ticket size (spend per customer per visit) and repeat purchases. The price is $600k but the agency is willing to put most of that compensation ($450k) at risk, tying payment to hitting specific KPIs.
With firm number three it’s clear the client is buying the outcomes of net new revenue. The agency might have specific ideas about the time required and the deliverables or they might have only vague ideas of either, but they’re confident that they can create the app that creates the desired value. If their assumptions about time or deliverables are wrong there’s still plenty of room and incentive for them to keep working until they create the desired outcomes.
Your Requirement to Communicate
Let me point out that none of the three proposals above are either right or wrong in terms of ethics or fairness to the client. Each proposal and price contains incentives and tradeoffs, for both client and agency. I’ll also point out that these three proposals needn’t come from three different firms. It’s perfectly appropriate for one firm–yours–to put forward three different options that clearly communicate to the client that they can choose to buy inputs (time), outputs (deliverables) or value (outcomes)–whichever the client prefers. This is one of the many benefits of delivering multi-option proposals–you can let the client decide what they want to pay for. Whatever you sell, your obligation is to communicate to the client exactly what they are buying and what they are giving up.
If your client buys time, you need to be clear about how much time they get and how things will proceed once that time is used up. They also need to understand they give up a guaranteed output, outcome or price.
If the client buys deliverables, your obligation is to provide as much detail as you can on the features, quantity, frequency, etc. of those deliverables. This kind of detail usually requires a paid scoping engagement first and a high degree of confidence in your planning process. The client gives up the right to change the features or scope without incurring increased charges via change orders.
If the client buys value they give up the right to dictate how much time the agency must spend on the project. They also have to increase the agency’s latitude in some of the specific features, holding them accountable to outcomes and not outputs. (Of course both parties should agree in advance on any must-have features.) The client may also have to agree to share confidential sales information or relinquish control to the agency of other variables that may affect success.
If this value option seems messy, it is. There has to be a deep sense of trust at the highest levels of both organizations with both truly aligned to value creation. If the results are not forthcoming, the two partners must come together to discuss and agree on the corrections required, and the agency gives up the right to charge extra for the additional work. Conversely, the client cannot suddenly start demanding new features and unnecessarily increase the agency’s costs if the agency does not agree that these new features will contribute to the targeted value creation. This messy relationship is the closest thing to the true “partnership” that so many agencies so blithely claim to offer their clients. (If you can’t imagine a relationship like this with your clients then you’re not really partnering with them, you’re “vendoring” to them, hoping to be treated like a partner and you should take that empty claim off your website.)
Of course selling value is the highest echelon of pricing, but it doesn’t always make sense for you to sell/price value and it doesn’t always make sense for the client to buy value. Whatever you are selling and pricing, you owe it to your client to clearly communicate what it is they are buying, what they’ll be getting and what they’ll be giving up. Have these direct conversations and you will learn more about what your client really wants to buy, allowing you to close more business.