Nick Hand is a commercially savvy, hands-on Finance Director and a CPA with over two decades of experience managing the finances of media, creative, PR agencies and more. He returns to Managing Marketing to discuss the considerations for agencies, advertisers and procurement in dealing with value-based pricing models.
Value-based or Output-based pricing has been around for quite a while but, until recently, has struggled to gain any meaningful traction. Driven by the rise of generative AI and the downward impact this has on resource-based fee models, more agencies are embracing value-based pricing models.
The problem is that many agencies struggle with the approach with often confusing or conflicting advice on approaches. Likewise, many advertisers and their procurement teams are unsure how this approach will work.
Nick provides a financial perspective on making value-based pricing work for both agencies and their clients.
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“Faster turnaround, lower cost production. I don’t need the craft, I just need lots of it and I need it quickly”.
Transcription:
Darren:
Hi, I’m Darren Woolley, Founder and CEO of TrinityP3 Marketing Management Consultancy. And welcome to Managing Marketing, a weekly podcast where we discuss the issues and opportunities facing marketing, media, and advertising with industry thought leaders and practitioners.
Now, if you’re enjoying the Managing Marketing Podcast, please either like, review, or share this episode to help spread the words and wisdom from our guests each week.
This week, we’re discussing value-based pricing models for agency fee arrangements, and looking at the considerations for agencies, advertisers, and procurement. Value-based pricing or output-based pricing, as I often called it, has been around for quite a while, but until recently, has struggled to gain any meaningful traction until now.
Driven by the rise of generative AI and the downward impact this has on resource-based fee models, more agencies are embracing value-based pricing models. The problem is that many agencies struggle with this, with often confusing and conflicting advice on approaches. Likewise, many advertisers and their procurement teams are unsure how this approach will work.
To discuss this, please welcome back to Managing Marketing Podcast, someone who knows firsthand from all perspectives, the commercially savvy, hands-on finance director, our CPA with more than two decades of experience managing the finances of media, creative PR agencies, and more, Nick Hand.
Welcome, Nick.
Nick:
Hello, Darren. Thank you for having me again.
Darren:
Well, look I couldn’t think of anyone more qualified or suited to talk about this issue because one is that we work with this virtually every day, this idea of value-based models or pricing models. But the other is that with your agency experience, and now, working with clients and procurement teams, your perspective will be reasonably unique in the level of your experience in that space.
Because I think there’s a lot of pretenders in this that have jumped on the bandwagon.
Nick:
I think there’s a lot of people that have as you say, jumped on the bandwagon, but a lot of the advice I’ve found is not really practical. And the philosophies aren’t necessarily conducive to the realities of that advertiser agency relationships. So, hopefully, we can unpick some of those problems today.
Darren:
Well, I think a good place to start is to actually define what value-based pricing is. Because I think there’s some confusion even around that. From your perspective, how would you define value-based pricing in regards to agency fees?
Nick:
I think the first thing, and this is where a lot of the literature that’s out there makes a fundamental mistake, is it’s not performance-based. The commercial outcomes of the advertiser’s business are obviously important. That’s what all agencies are striving to improve.
But to base the fee on that entirely, I think is wrong. That’s what we would call and have for many years performance-based remuneration, and that still has a separate place to play over and above what we’re going to talk about today.
So, it’s not solely performance-based, and neither is it cost based. So, the traditional agency resource and head our model is basically the agency attempting to recover their costs of doing business. And what we’re going to talk about in greater depth is moving beyond that to something that’s hopefully, going to be more sustainable for both the agency and for the advertiser.
Darren:
So, Nick, if it’s not cost-based and that’s the traditional model, what’s my salary cost, billable hours, overhead and profit margin to get me an hourly rate, that then can be used to calculate retainers or project fees or even bill by the hour, and it’s not a performance-based model where you’re actually rewarding the agency for the delivery of financial performance — then what is it?
Nick:
It’s simply a price for delivery of a service. The output that’s commensurate with the perceived value from the advertiser or the buyer’s perspective.
Darren:
Okay. So, in many ways, it’s the same way as most clients would be pricing their products and services anyway, that it’s not actually based only on cost, it’s based on the perceived value that that has.
Nick:
Correct. When we go and buy a car, we don’t inquire with the dealer what the costs were of the inputs to build the car. We see a car, as a consumer, we like the features and the benefits that it provides, and we decide whether the price they’re asking aligns with what we perceive as the value of that car and pay or not accordingly.
Darren:
And often that variation has got nothing to do with the rational things like most cars have four wheels and a way to steer them. And in fact, I was surprised at how many of the prestige features, like the dynamic cruise controls and things like that, that you a few years ago only saw in the luxury car market, and now through virtually every model and brand.
Nick:
I think those sorts of features as technology moves on and consumers become more savvy about particularly the safety features, those sorts of things become more valuable to the consumer, and so they’re prepared to pay for it. And if you’re not then you go and you look at another model that doesn’t necessarily have all the bells and whistles.
Darren:
So, on that basis, it’s pretty much from what you’re saying from the buyer’s perspective, that the buyer has to perceive the value that the agency is offering them.
Nick:
Correct.
Darren:
That would be difficult if the market is a commoditized market, wouldn’t it?
Nick:
It is, and for some services that agencies offer, you could say that it is a commodity, but for the majority of services and certainly, the type of services that advertise turn to agencies for, that’s not a commodity.
So, great strategic thinking, great creative, those are the sorts of things that agencies can stand out from their competition and potentially charge more for, as opposed to the commoditized services, like straight buying of media or producing artwork and those sorts of things.
Darren:
And look, those commodity areas are things that are the most likely to be challenged by technology. One of the things I said in the introduction is generative AI and AI at technology generally is being focused on making processes much more efficient by removing the human element.
So, I imagine that if there’s areas of the advertising and marketing process that are going to be automated through AI, then they’re probably likely to be the ones that are more commoditized anyway.
Nick:
Exactly. And that’s what agencies are struggling with moving to this model. How do they therefore, price the premium services that they’re offering based on the thinking and the insights that their practitioners can give to clients as opposed to the more commoditized services, which are much more easily priced, I think.
Darren:
Because that’s one of the problems, isn’t it, with the cost-based model, is that it does lock you into a formula that goes across all services and all roles in that you have an hourly rate, which will vary depending on seniority and the type of role or discipline or capabilities that person has.
Then you have billable hours per year. You have an overhead which is applied across the whole agency, and then a profit. So, it locks in the model to be for all agency services. And so, whether you’re charging $1,000 an hour for your chief creative officer or your head of strategy, your strategy director, the same formula also gets you down to $100 or $90 an hour for your account exec or your junior designer in the studio, doesn’t it?
So, there’s not a lot of flexibility in that because the cost recovery has to be consistent.
Nick:
Effectively, the agency is placing the same value on all the services that it provides. Yes, there’s varying degrees depending on the seniority but effectively, because it’s that same cost recovery model, the same value placed on all the services it provides, but that’s not necessarily how the buyer, the advertiser is going to perceive to them the value of those services.
Darren:
Well, and we’ve seen that, haven’t we? We’ve seen that slow leakage of, for instance, production work away from very large or established agencies off to more low-cost opportunities, the Hogarths and the OLIVERs of the world who are offering to do a certain component of what agencies do at a much lower cost base on a cost base model.
Nick:
Once upon a time, those sorts of services were very craft-focused. Whereas as technology has improved and as the media landscape changed, so that lots of fast turnaround content for social media channels for example, is needed, those sorts of craft-based production facilities no longer have as much relevance.
And that’s why, as you say, the proliferation of the faster turnaround, lower cost production centers has shown that the advertiser’s perception of the value of those services has diminished. I don’t need the craft, I just need lots of it and I need it quickly.
Darren:
And the other thing that’s impacted this is obviously the social and digital media channels that have created such a large explosion of demand for that content. It’s not like that the agencies are being asked to come up with thousands of let’s call them ideas or creative platforms.
But what they are being asked to do is come up with thousands of executions of that creative platform to feed the Instagrams and the TikToks of the world with new content every day. And that scalability demands automation because the traditional way that agencies did that, almost like the craft workshop doesn’t actually scale that cost effectively, does it?
Nick:
It doesn’t. And again, we’ve seen that advertisers are moving away from agencies who traditionally did those things to those specialist practitioners as you talk about. And I think agencies are grappling with, “Well, how do I play in that space?” Because they’re equally capable of performing those functions, but on that cost recovery model, they’re always going to be too expensive.
Darren:
So, obviously, there’s a big advantage for agencies of moving to a value-based price model, but there is a lot of resistance, isn’t there? And from your time as being a CFO finance director inside agencies, if someone said to you, “We’re going to move from our cost recovery model to a value-based pricing model,” what would be the steps in your mind that you’d need to go through to actually do that?
Nick:
I think again, one of the problems with a lot of what’s out there around this space is that it’s almost, “Well, what can I get away with charging?” And any number is ascribed to it. And I don’t think that that’s the right approach. I think the agency needs to ask themselves a few questions.
So, what are we currently charging? You can’t just throw out any random number. It still needs to be market competitive. And the best place to start is, “Well, what am I currently charging for these services under the cost recovery model?”
Darren:
And look, I’ll just jump in there Nick, because it’s not like when you’re running an agency, you’re actually charging the same price for the same service across all your clients, is it?
Nick:
No.
Darren:
You’ve got a portfolio of clients, and some will be paying a premium like for like services compared to others.
Nick:
That’s right. No client is on exactly the same rate card. So, having that variation is somewhat built into the cost recovery model.
Darren:
So, I imagine looking at your own portfolio of clients and looking at what the typical total cost to client is of each of those from an agency perspective is a really good place to get a sense of the range of what the current pricing is in the market.
Nick:
Absolutely. So, you can look at that range and determine what services are we charging a premium for, and what services are we treating more as a commodity and charging less for, so that’s the next thing to look at in addition to what are we currently charging.
Breaking a down of that premium offering versus the commodity offering, and then looking at that portfolio of clients, do we have clients that are prepared to pay a premium for certain services? Or are there clients that we know are price-averse and are looking for a more commoditized service? And then making your pricing decisions within that spectrum accordingly.
Darren:
It’s interesting because when we’re running a pitch process for a client, I don’t think I’d find many clients that on the general question of, are you happy paying a premium would say, “Oh, absolutely, yes, very happy.”
Well, interestingly, when you get into the proposition of what the agency’s offering, particularly around things like strategic and creative thinking, connection point planning for media, there are certain services where they perceive value and that under the current cost model, they link that value to particular individuals.
And it’s really interesting because I’ve seen and had the conversations where they go, “Well, I really need the head of strategy, or I really need the head of connections planning 100% committed to my business.”
Now, first of all, incredibly expensive because those senior people have very high salaries plus the overhead profit on the cost recovery. The second thing is they’re going to already be significantly committed to other clients. So, even if you wanted them a hundred percent of the time, you’re never going to get them.
Nick:
And I think also the fallacy that it’s that sole individual that’s driving all the great ideas and all the insights. I mean, one of the reasons that agencies are engaged is that the teamwork involved that there is no one person that is going to be better than a group of individuals come together to solve a problem.
So, you are going to get that, whether you are paying for the individual in a cost-based model, or whether you’re paying for an output-based model, the agency is going to put their best people forward to try and solve the problem that they’ve been engaged to, in order to deliver the right result for the client.
So, I think it’s a mistake to assume that you only need that one person or that the advertiser is going to not have the access or the contribution from that one person that they want. The agency’s going to wheel out the best people for the job, otherwise they’ll end up getting fired.
Darren:
Exactly. But from an agency’s perspective, okay, well, you’ve looked at the range of what you’re charging for it. Let’s say you’ve got clients that want a discount, they don’t want to pay a premium, but you’ve got others that you can enter into a conversation of, “Where do you see the value in what we’re offering?” Ultimately, they’re going to decide whether something is value or not, aren’t they?
Nick:
Yes. Yeah, it’s completely the buyer’s perspective.
Darren:
And it’s been interesting because we’ve had a couple of pictures recently where while we’ve gone in with a scope of work and asked for a resource plan and a cost, we’ve had agencies come back with a pricing model where they’ve said, “For this type of deliverable,” and there’s been a number of defined deliverables driven by the agency, they’ve put a price on that, haven’t they?
Nick:
So, they’ve basically taken what we’ve been talking about, and decided that we believe that basket of services, that basket of goods should cost X, this is what you’re going to get for it. And then it just involves a conversation negotiation with the client to reach a level of fee that the advertiser’s happy to be paying for the perception of value that they see in what the agency is offering.
Darren:
It was interesting from my perspective, how procurement who are incredibly comfortable with hourly rates and billable hours and overhead and profit, found that whole pricing model incredibly confronting because it was like it’s a price. How do I even begin to analyze the price?
And that’s where our approach to actually being able to break down the underlying resources and costs to actually then replicate a benchmark price, weren’t we?
Nick:
Yeah. So, we’ve got the benchmarks that we’ve built up over the last 20 years, they are still valid as to what is a market competitive price for that particular suite of services or that particular basket of goods.
You don’t necessarily need to be comparing all the underlying metrics behind it, the hourly rates and the hours it takes to do that, the overall price at the end for that particular suite of services as I say — our approach is still quite valid to tell a client, tell an advertiser whether they are paying a fair market price for that, and then they need to decide whether they perceive that there’s value in paying that particular agency based on the team involved or their approach or whatever the other deciding decision factors may be, whether they believe there’s value in paying that amount.
Darren:
And I know it was an interesting conversation because people are inclined to think benchmark means that’s what you should pay. But in that particular example, being able to say, well, the agency wants to charge, let’s say half a million dollars for this particular bundle of work, and we’re able to benchmark that and show that for a tier one agency to do that work in that market would come in at say, 480,000, then they’re able to make a decision as to is it worth the 20,000 premium or not, or is that a point of … because you can still negotiate price.
It’s not like negotiation goes out the window, and considering value-based pricing is about the perceived value that the buyer has of those services, it becomes a probably more robust conversation rather than a nitpicking detail conversation.
Nick:
I was going to say, usually, those negotiations end up down in the minutia of well, this person should be doing fewer hours and this person’s hourly rates too much. No, this is the price that the agency has quoted, we believe it to be a fair price.
Now, it’s a discussion about, “Well, what’s the advertiser’s perception of value? Are they prepared to pay a premium for those services or not?” And the discussion goes as a result.
Darren:
Now, again, thinking back to your agency days, because I know there’s still quite a few agencies that struggle with this idea of moving from a cost-based model to a value pricing model. What do you think are some of the big obstacles? And I’ve got a story to share with you, but I’d be interested in your perspective.
Nick:
I think the biggest one is under the cost-based model, agencies have a certain degree of certainty over what their income’s going to be. They know how much they need to charge for each of their people. And on a full portfolio of clients, they will be able to ascertain that Darren Woolley is now 92% recovered in his cost.
And that level of certainty, particularly for the larger network agencies that have got shareholders and boards and so on to answer to, provides a lot of comfort. So, that’s the first thing you need to perhaps get out of that comfort zone a little bit with the knowledge that you might also be able to over recover on those individuals, even though you aren’t necessarily recovering the cost per se in the way that the pricing has been structured.
But accepting that you might not be able to pinpoint exactly what it is you are recovering on every single person in your agency is the first thing that you need to be able to step away from.
Darren:
Well, I had that conversation with a regional CFO who said to me, “Oh, it’ll be impossible, there’s no way we can manage this.” And I said, “Look, all I’m asking you to do is to transform yourself from a labor hire firm where you’re actually renting people out to us on an hourly basis, which is what you’re doing now,” and he looked at me confused, “To actually running a creative business.”
And first of all, he was insulted by that because he thought he was running a creative business. And I said, “But if you’re running a creative business, you’re charging for the value of the creativity that those people and you are bringing to the client’s business, which is not based on cost recovery by hour, that’s a labor hire firm. You need some people to do a particular job, I’ll hire them out to you at this rate because I know I’ll recover my cost plus make some profit.”
Nick:
It is funny because the CFO will usually have the conversation about, “Well, I need to make sure that I’m recovering these people to these percentages.” The CEO or managing director is usually more concerned with winning pitches and getting more revenue in the door. They don’t care necessarily where it comes from or who’s doing the work or who’s making it.
We just want a half a million-dollar client, fantastic. So, it’s interesting that the CFOs potentially are the ones that need to let go a little bit from the knowing exactly what they’re recovering on every single individual and worry more about what the overall top line’s looking like.
Darren:
I think perhaps that’s why we’re seeing more flexibility in the indies than we do in some of the network agencies. Because the network agencies, as you say, most of are publicly listed, most have reporting lines and some of the things that they’re reporting on is cost recovery and profit margins for each of their business units.
So, that’s probably where that culture of worrying about the cost recovery comes from rather than an independent agency has that ability with the owners there saying, “As long as we’re making good profit, I’m not really worried about where the cost recovery sits.”
Nick:
And I think that’s also why retainers are still popular in a lot of those multinational agencies because it just takes that degree of certainty to another level. Not only do I know exactly how much am I recovering on each of my people, I know I’ve got it set in store for the next 12 months.
We’ve seen a lot of advertisers move away from wanting to pay big retainers to their agencies and engaging on a project-by-project basis. And a lot of multinational networks are uncomfortable with that as well, which is the next point (segues nicely), the next problem that a lot of agencies worry that they will lose where they have retainers in place at the moment.
This is the thin end of the wedge that’s going to drive them towards project-based fees, rather than those big retainers that many are still currently enjoying. And I think the reality there is that if you are engaged by a client to do a scope of work, whether that is chunked up into 12 equal monthly installments, or into different deliverables and paid for by the project, it all amounts to the same thing.
Darren:
Look, I use the example of building blocks. If each project is a building block and we agree a number of projects for the year, then we can immediately turn that into an effective retainer because we can add up the amount that I think I’m going to spend with you, and then even better, track along the way what is actually delivered and see if we need to adjust it either up or down.
If the agency is doing more work and I’m asking them to do more projects and more deliverables, more outputs, then there should be a commensurate way that doesn’t rely on keeping time sheets and going through Excel spreadsheets of how many hours were spent as a way of justifying it. Because the productivity is in the deliverables.
Nick:
I think a lot of those big retainers are built just on the resources. There may not be a scope of work in place to build out a retainer that’s based on deliverables. So, it’s based on the resources.
And so, immediately, the agency instead of counting those hours and making sure that they’re recovering those costs, is now having to focus on something else where in actual fact that’s what they should be focusing on, and not focusing on what’s going into it, but focus on what’s coming out.
And as you say, if there are additional projects that are being briefed, then getting paid more for those projects.
Darren:
The other one Nick that I’ve heard a lot of agencies and particularly agency management talk about, is their fear around missing out on price, particularly in a pitch. And we run a lot of pitches, so this idea that they go, “Yeah, but if I put a price down,” because to the point that you made earlier, that the value is perceived by the buyer. If I put a price down and they don’t see the value, then I could miss out and I could miss out if someone comes in cheaper than me, because they’re cheaper.
But this goes to this whole commoditization of the category, because if the client is going to buy purely on who’s the cheapest, then you’re effectively assuming that we’re working in a commodity category.
And yet we know the client’s value agencies for their strategic and their creative thinking, and the rigor of their account management and the leadership that the agency brings to the relationship. It’s just bizarre that this fear of missing out on price.
Nick:
And the reality is you could miss out on price under the hourly rate card model anyway. So, I think it’s understandable, but perhaps, slightly irrational. And the key there is to make sure that you are putting your best foot forward in the pitch.
Whether it be a creative presentation or a credentials or whatever the case may be to display your agency’s capabilities in those areas that advertisers are likely to value more strategy, creative, those sorts of things.
And focus less on the commoditized services or at least the services that the advertisers are likely to deem commodities. And as we were saying before, you can’t charge whatever you want, but it certainly, if you put your best foot forward makes a better case for the price that you do put up than if you don’t.
And of course, as we said, you might have the most expensive value rate, which could knock you out of the equation under the old model anyway.
Darren:
And look, in another services industry, we’ve seen some prime examples of … in cosmetic surgery, the difference between a qualified plastic surgeon who will charge thousands of dollars compared to some of these cosmetic companies, clinics that are set up by someone that’s basically a GP.
If you buy surgery on price, then in many ways, you have to accept also the risks that are associated with it. And I think that’s one of the things that … while that’s an extreme example for advertising, I think that’s part of the conversation for clients to start to have the thought around, “What do I need to invest in to get the quality of the work I need, and where are the areas that I can compromise on quality to go for price alone?”
Unless the whole market is commoditized, in which case it literally is a race to the bottom — and look, I don’t think it is. I think there are some clients that will always shop around on price, but I think a pricing model is a great way to at least establish a perception of the value being delivered by the way you price your own services.
Nick:
And as we said before, it just narrows the focus of any negotiation that does happen to the important pieces rather than looking at squabbling over the number of hours or $5 an hour in the hourly rates.
This is the price. If the client potentially doesn’t perceive that it’s worth that, then that’s the conversation: “Based on everything that you’ve shown us in your presentation, the people that you have, the team you have at your disposal we’re not prepared to pay that, come back with another offer,” but it’s purely based on the ad agency trying to determine what it is that the advertiser wants rather than fiddling around with the number of hours when-
Darren:
Or discounting your overhead rate or whatever. Now, it’s not just the agencies, is it? The marketers and the procurement teams also struggle with this, don’t they?
Nick:
Yeah, they do. So, we’ve already touched on one about the fear that they won’t get access to the talent or the individuals in the agency that they believe need to be engaged on them 100%. A lot of marketers don’t necessarily know or see where the value in their own business lies.
And how do I quantify that when I’m trying to procure services to help move that along, not knowing what services they potentially should or could be paying a premium for that are going to commercially impact their business versus what is a commodity and what should I potentially be paying less for?
Darren:
And yet, we’ve worked with companies that have a portfolio of brands, but the client is managing a portfolio of brands. Some of those brands are high value to the company. They either drive significant revenue, supermarket shelf space and good margins. There are others that have got great growth opportunities, and then there’s others that are almost like legacy brands that they’re managing the decline.
It’s interesting because budgeting, the investment that the company makes in each of those is actually a reflection of the value that each of those brands has to the business on a financial basis. Like you’re not going to take a marketing budget and apportion it equally to each brand. You’re going to invest in the ones that have the most value.
So, it’s already built into a way of thinking about how you invest rather than spend. And that if you’re investing more, would you therefore, look for more premium and better quality hopefully, in ways of investing in those premium brands, and look at minimizing the cost on the ones that you’re managing decline. Now, this is not an abstract business approach, this is actually a very tangible one, isn’t it?
Nick:
It is. And I don’t think a lot of agencies pick up on those cues to be frank. I think they don’t completely understand. And if they don’t, perhaps they should ask, “Why is this product being given the lion’s share of the budget and this product not?”
It may well indeed be obvious, but perhaps it’s not. And so, that miscommunication, that misunderstanding between what the advertiser deems to be important and what the agency thinks is important can sometimes get in the way of these sorts of arrangements working.
Darren:
And look, we’ve even seen situations where agencies have tried to, because of their cost base or cost recovery model, have tried to charge the same premiums across the various brands that they’re managing only to then lose particular brands because they just don’t represent value for those lower price brands or those areas where it’s been unjustifiable to pay the agency’s premium.
The agency doesn’t perceive that they’re charging a premium. And the client is quite happy to pay that rate for those brands that justify it from a financial perspective, but then they’ll lose the parts of the business that are unjustified. And it seems like to your point, a loss of sort of business savvy of not being able to alter the pricing to actually represent where value exists for the client.
Nick:
And look, again, perhaps that comes down to misunderstanding and the agency not picking up on the signs of under investment in one particular brand versus over investment in another. Perhaps there needs to be a more open dialogue. The agency probably needs to instigate that so they can better understand what matters to the advertiser and then price it accordingly.
Darren:
Absolutely. Now, there’s one other area isn’t there that clients really struggle with. And I think it’s not just with value-based pricing, but the whole move to project fees. And to your point earlier, agencies fear that value-based pricing could encourage a project-based approach.
But even marketers when you’re having this conversation start going, “Well, if we’re paying them for doing the things that we need them to do, does that mean they’ll stop thinking about my business when I’m not paying them?”
Nick:
I think this comes down to advertisers quite often having an over-inflated self-importance that the agency is constantly thinking about their business, which we know is not true. Agencies have multiple clients and the practitioners and especially the key person on those agencies are working and thinking about multiple clients at the one time and not always thinking about one particular advertiser.
But I think that if the agency is any good and if the relationship is good, at various points, the agency is going to think about the client’s brand and come up with ideas that are unbriefed that will help drive the advertisers brand forward. But what’s the usual refrain? “Well, I haven’t got any budget for that.”
Darren:
“Yes, I want you to think about my business beyond the scope of what I need you to do, but don’t ask me for money to actually execute it, because the budget’s being spent.”
I think also there’s an element of the relationship that goes beyond purely the financials, and that is the clients that are constantly engaging the agency in solving problems.
And the ones that value the agency’s input are the ones that are inclined to have people in the agency thinking about their business. That it’s not just about solving an advertising problem, but actually engaging the agency.
No, think about other problems, business problems, marketing problems that they have, and more importantly, listening to the solutions and enacting some of the solutions in the overall project. Because that’s really where the agency feels a greater sense of partnership.
As an industry, we throw partnership around, and yet let’s be honest, it really is a transactional buyer supplier relationship. There are services and there are buyers that are buying those services. Where it rises above that is where they actually start treating each other as equals in many ways to solve bigger problems than just providing the services.
Nick:
And I think that’s where something like value-based pricing comes into its own, because we often hear from agencies that well, there’s no point me spending time thinking about the advertiser’s business because I’m not going to get paid for it. If there’s not a big retainer that covers those people to think outside of briefs.
But these are the scenarios where that partnership, genuine partnership is in place that the advertiser’s more likely to be paying a premium to the agency to get that level of thinking that’s not on brief. And I think that solves that general problem of agencies feeling as though they don’t get paid for that outer brief thinking under the value-based model, they potentially will.
Darren:
And as we touched on earlier, just because you’ve got a pricing model doesn’t mean that you can’t pay it effectively as a retainer anyway for covering all those other services. It’s just that now the “retainer” is linked to particular deliverables, and I think that’s incredibly valuable.
So, just to recap value-based pricing is not cost of performance based, cost recovery and performance based, it’s actually about perceived value. There are specific steps agencies can take to start building a sense of what represents value in their marketplace. And the first one is look at what you’re currently charging your existing clients.
That many of the obstacles the agencies perceive, and particularly the CFOs or finance directors perceive, is really letting go of their reporting and embracing the opportunity of being remunerated or paid based on the value perceived delivered.
And finally, clients need to also realize that it’s not radically changing the marketplace beyond what they’ve already seen as the shift towards project fees and away from retainers. Excellent.
Nick:
We’ve solved it.
Darren:
If only, Nick, if only. Look, thank you. Thanks for coming back into Managing Marketing and having the conversation. I really appreciate it.
Nick:
Thank you for having me.
Darren:
Last question, and that is, so do you ever see a day where time sheets will only ever be used as a sort of internal management tool and not a way of reconciling agency fee structures?
