March 31st is an important date for many companies, specifically their sales and marketing departments. It’s the end of the first business quarter, a time when many-a-brand will no-doubt be re-evaluating the success of their marketing budget and some asking some hard questions.
Such as: how much have we spent? And, what has performed best? Followed quickly by, should we be doing more of that, or should we be doing this differently? The answer to the last question is almost certainly yes. You should be thinking about switching to a deliverable-based pricing model. It’s more flexible to change tack, quickly.
Of course, agencies have hundreds of reasons not to do it: It requires a 180-degree change of mindset, involving moving from a risk-averse position of covering costs to accepting risk and using management information and innovation to get margin growth. It requires good change management, a new pricing model and a tech stack. All of which most agencies don’t want to deal with, especially when they’re under rate card pressure.
But regardless of whether they want it or not, change is happening. Consider Coca-Cola’s recent announcement of a complete agency review to, as chief marketing officer Manuel Arroyo said in a released internal memo “reliance on highly localized agency models gives us limited control over the data, measurement, strategies, and technology critical to creating and managing a scalable marketing infrastructure that serves all stakeholders, including our consumers.” By the way, Coke’s not the only brand — Pepsi, JetBlue, Amex, Microsoft are all shifting their agency retainers to deliverable-based pricing models.
Clinging to old ways like a raft in the ocean is no defense against the gaining headwinds of market forces. Rather than shake your proverbial fist in the air, the smarter play is to embrace the inevitable change and get out in front of it as a leader.
Stop Selling Time:
Truth be told, agencies were already experiencing the move from annual retainers to more flexible ways of providing services but Covid-19 has accelerated this even further. Selling time — not just with ad agencies but all professionals who sell their professional services such as lawyers or therapists — essentially rewards inefficiency.
Historically, they’ve always sold people, roles and time. Work is priced from scratch every time and it’s a difficult, finger-in-the-air process. It’s rarely right the first time, and it’s inflexible and hard to adapt if something changes once you’ve priced it. Meaning you have to start again. And most importantly it rewards inefficiency because we know the longer it takes to complete a job doesn’t make it more valuable.
Agencies have been doing this forever and it started when they could no longer make money from commissions by selling creative output alongside media. Their solution was to sell the hours it took to complete the work because it was the ‘least taxing’ (some might say ‘lazy’) way to solve the problem.
What’s a better way to do it? When we look at pricing intelligently, I believe that it’s better to sell things — outputs and deliverables instead of marked-up time and materials. Deliverables can be flexible. They can be swapped and changed. They can be set with clear definitions, KPI’s and timings and they reward efficiency. If I produce them better, smarter and with additional value, I will get paid more for them even if they take less time to complete. It’s time to stop selling time and start selling value.
Sell Value Instead:
The value that an agency delivers isn’t just in sales. It’s in creativity, originality, integration. Not only that, every client, brand and market will realize different gains from your work. When you look at it like this, you need to create a much more sophisticated value framework based on the individual value KPIs for each client and circumstance.
There needs to be a base measurement before value is added and an understanding of the risk/reward relationship. Value metrics need to take into account the connection between greater investment equaling greater return. The value you can deliver would be connected to loyalty, awareness and advocacy. If you’re working with a challenger brand in the same market, their priorities are all about growing market share. Their value metric is different. All of a sudden, your simple (or not so simple) framework doesn’t fit all purposes. Different needs require different value metrics.
For agencies to have a chance of creating a framework that takes into account the complex value metrics for each of their clients, they first need to shift to a pricing model that supports outputs or deliverables to start with. Pricing needs to evolve through this phase and only when we start focusing on outputs can we begin to entertain the idea and complexity of charging for value. Like it or not, we need to embrace deliverables.
– The pandemic has created a more trusting and healthier form of accountability. If the output’s great, then it doesn’t matter where we’re working, nor, more importantly, whether a piece of work took fifteen minutes or three hours.
– Brands need to understand what they’re buying. Paying for time tells you nothing — you have no way of linking spend back to what an agency has done for you; to their contribution towards your organisation’s/campaign goals.
– Agencies struggle to track time, defend rates and monetize thinking. They need to understand what they’re selling and price (not cost) it correctly. To do this they need to have a baseline of deliverables that accurately considers the resources and effort involved and the value delivered. These elements need to be tracked to verify assumptions and the MI used to inform pricing decisions going forward. Invest in technology that will support you.