Value pricing, which is the pricing of your expertise based on the value to the client rather than on your costs or other measures, is a great theory but many creative firms are stymied by how to implement it. In this article I lay out two ways to make the transition externally – getting your clients to accept value pricing – and some advice on letting go of tracking time.
Steps to Moving Away From Selling Time
Let’s look at things you can start doing differently in conversations with the client to start pricing closer to value and away from time. There are two I want to cover here.
Distinguish Between New Clients and Old
You reinvent your firm one new client at a time. If I had a dollar for every time I’ve said that I would be a thousandaire, but it’s worth repeating. So many new sales techniques, pricing strategies and other innovations you implement are best applied to those with whom you do not have an existing relationship. Clients who are used to being charged one way often resist being billed another – especially when they’ve been buying time, which is easier to account for than value.
If you’re struggling with the transition, draw a line in time today between your current clients and future clients and resolve that for all future clients you will price the initial engagement based on value, using options, anchoring and other principles I’ve laid out in numerous pricing articles and webcasts.
Go ahead and try value pricing current clients if you’re up for it, but don’t sweat it if you get so much resistance you feel you need to retreat to what they’re used to. Any conversions are a bonus.
Value Price Strategy First
The arc of your projects within your clients engagements follows these four phases: diagnose, prescribe, apply & reapply. The first two phases of diagnose and prescribe are often referred to together under the banner of strategy, planning or diagnostics. In this combined phase your primary deliverable is the thinking that precedes and wraps around the doing that comes later. This thinking is your highest value offering and the easiest to value price so start here.
Some things to keep in mind when value pricing your strategy offering:
- Any time your price implies a formula, you invite the client to use that formula to make the price smaller, so make sure your price is a big round number ending in 000. Round numbers have no formula implied therefore they’re easier to defend.
- Never sell the diagnostic separate from the prescription. They’re always packaged together as the first phase in a phased engagement. The prescription you deliver is the scope document for the rest of the engagement, or at least the beginning of the detailed scope discussions. If you unbundle these two the diagnostic phase will feel like an expensive and unnecessary up-sell. No doctor ever diagnoses without prescribing.
- It’s easier to sell a diagnostic when it’s prepackaged. Write up the description in one page outlining the process and deliverables. Leave the price off that page because you are going to price each client differently based on the value you expect to deliver to them.
- When presenting value/price options to clients you may have situations where it makes sense to have option A as the diagnostic and in options B & C include the diagnostic plus various levels of implementation. Anchor high with option C.
After you get comfortable value pricing the first phase then value price the “initial application” phase. A creative firm’s first translation of strategy into a campaign, website, product, etc. is always more valuable than the repeated applications that follow because design language is set in the first one.
You may never be able to value price the reapplication work of the final project phase. Some firms can do it but in some markets or disciplines it’s just too commoditized. If that’s the case, fine – don’t fight it. In fact, go the other way and step on the tactical to raise the value of the strategic by charging less for reapplication work, treating it like the commodity your clients view it as. (You’ll only do this if you can value price the strategy work, obviously.)
So the two first steps in moving away from selling time are start with new clients and start with strategy work first, expanding into initial application work as you get more comfortable with it. One day you may be able to value price everything but don’t focus on that today, just start moving forward with these two steps.
Moving Away From Tracking Time
I think more firms struggle with the idea of not tracking time than they do with not selling it. How, after all, will you track profitability? How will you allocate the resources of the firm?
First, I’ll point out that letting go of tracking time is not a mandatory requirement of no longer selling time. There are some trade-offs you’ll make if you continue to track time but you’ll still be farther ahead than when you were both selling & tracking time. Those trade-offs include the administrative burden in time and anguish and a culture of hour-counting and efficiency at the expense of innovation and customer value.
Track Time Only For Those Who Sell Time
The first step in letting go of tracking time follows the step of value pricing strategy work. Simply don’t track time for this type of work. If your firm is large enough, free the strategy people up from tracking time altogether. That’s the easiest way – to make some people hourly and others not. Then make it a goal to free more people from time sheets over time.
When I was a young account person and I saw the agency principal billing his expensive time to my accounts, I got a little miffed. My incentives were to keep the senior people away from clients so that I could deliver on budget, profitably. My attitude would have been completely different if the principal didn’t have an hourly rate and there were many thousands of dollars already taken off the table for “strategy” and I only had to account for application/re-application work in my WIP.
Measure Profit More Broadly
When selling time you tend to strive to a consistent level of profitability across every project. When selling value, your profit measurement focus should broaden out to make sure the entire relationship is profitable, accepting that some projects will be wildly profitable and others less so, even allowing some smaller projects to be unprofitable.
When value pricing, you have to give yourself room to get some prices wrong on occasion. If that sounds like heresy well, you do anyway when selling time, only in a value price world you give up the right to go back to the client and ask them to pay more for your poor scoping or project management.
Just accept that you’ll get some prices wrong, and commit to learning from these mistakes by reviewing every project afterward including the value delivered and the price obtained. The key is to use this debrief to inform future prices. Ron Baker spells out the details of this process in his book Implementing Value Pricing In Your Firm.
Track AGI/FTE Instead
Another transition idea and one that works well with smaller firms is to quit tracking time altogether and track something else as an indicator of profitability: agency gross income (AGI) per full-time equivalent employee (FTE).
Take your AGI for the most recent 12-month period (also known as gross revenue, it’s all fee income less any cost of goods sold like media or printing) and divide it by your total employee headcount, adding up any part-timers into a whole or a percentage of a whole. You’ll arrive at an AGI per FTE number in the low six figures or maybe high five figures.
According to ReCourses’ David C. Baker, the “threshold of respectability” in North America is $160k/FTE. (Anecdotally, I can tell you it’s about the same in Australia, about £150k in the UK and roughly €200k in Europe.) Using these benchmarks and your own experience and judgement as your guide, come up with your own target ratio. Then tell your people that when the firm drops below this number everyone is doing time sheets. When you’re sustaining above the number then they’re free from the requirement to track their time.
What Your AGI/FTE Says About Your Firm
We always ask our clients for this number at the beginning of the Win Without Pitching program. From it we can easily tell who is selling value and who is selling time. Not many North American creative firms tend to exceed about $220k/FTE when selling time. In my experience firms selling time typically range from about $90k to $190k per FTE. Then there’s a jump to firms generating $250k to $450k per FTE. These are the value pricers. It’s rare to see a firm doing over $300k/FTE that either sells time or tracks it. These firms are free – selling their expertise in a manner untethered from time.
The World Beyond Time Sheets
Once you become largely untethered from time sheets your whole attitude toward time will change. First, you’ll quit seeing it as a resource to be mined and sold and you’ll see it for the constraint that it is. You’ll recognize that in any creative or innovation business, trying to squeeze more doing (or thinking sold in units of doing) out of your people past a certain point makes them less creative. You will see that the first casualties in the pursuit of efficiency are creativity, innovation and customer value.
Once you more directly see this correlation between the pursuit of efficiencies and the cost you will begin to value the idea that your people need down time to be at their highest level. From there you might decide to drop formal office hours. The next step if you choose to take it is to quit limiting paid time off (while still tracking it). From there, you might move to mandatory minimum time off for all employees, requiring that they take time to rejuvenate (which we do at WWP.)
You’ll never bill upwards of $300k per employee if your focus is on squeezing more hours out of your employees, only when it’s on taking better care of them.
There’s no requirement to quit tracking time today in order to value price today, but once you start to breathe that rare air north of $250k per employee your whole perspective around time will change and you will see that yours cannot truly be a creative or innovation business while still pursuing the efficiencies of accounting for and billing every hour possible.