Author Ron Baker calls himself a “recovering accountant”, a former member of an hourly based billing industry.
And so today, he likes to write about value pricing versus hourly rates.
That is, being paid for the value you create versus the time you spend.
He says that using timesheets to run a marketing agency is like using the smoke alarm to tell when your chocolate chip cookies are done. It’s after the fact. It’s too late.
Makes sense. There’s a lot more value in an unburnt cookie.
But, many still charge for time and materials instead. And that’s not limited to accountants nor marketing agencies. Could be attorneys, contractors, developers, consultants.
The Value of the Project
When time and materials are at play, the risk falls on the end client. Sure, they might get lucky and a project gets done much sooner than expected. But the risk is that it might take longer. A lot. And anyone who creates anything from scratch already knows, it often takes longer.
Website development is no stranger to that.
Clients want to know that the site they’re getting is solving pain points… delivering value. And so, they need to know what that website is. How much it’s going to cost. And when it can go online.
Not how many hours it takes… a number that is impossible to predict anyway.
(Baker likens that to car shopping where instead of negotiating the sticker price, asking the dealer for a timesheet on the vehicle’s manufacturing.)
If an agency outsources its website development work, they need to know the fixed price of what it is they are getting so they can in turn value price it to the end client. By then, they know what it’s worth to the client and what the agency’s fixed cost is to deliver it. The agency can very comfortably put a value-based margin on top of it.
A good outsource web development partner is going to provide a fixed price up front. Eliminating variance. To do that, the partner needs to be there at the front end of the project. Asking questions. Finding out the pain points. Discovering what processes will be needed, what exceptions will have to be accounted for and what sort of validations can be assured… so the end product creates a long-term solution versus technical debt.
Instead of being shoehorned into a pre-existing budget, the outsource will help define the scope of the project and prepare sales contracts based on that. Right from the onset.
Do we need a personalized shopping cart for an ecommerce site?…
What about product configurators for customized purchases?…
Does lead-gen need to link to Salesforce?…
Or does other data need to integrate with ERP?…
Dealer locators? 3D rendering? QA and SEO? Security and compliance?
Where are the assets, who is hosting, what is the domain?
The right questions at the front end leaves room for the agency to add value to the price at the back end. The right web-dev processes, exceptions and validations are accounted from the start.
More Versions of Value
Baker goes on to cite the consulting company McKinsey that says (paraphrasing): We have to agree on one thing at the onset… the value of what we are creating is greater than the price.
He mentions Anomaly, the agency for Virgin America airlines at the time… installing seat back entertainment on its passenger planes. Instead of a set price, it charged a percentage of ad royalties.
Or the behavioral economist approach begun at Ogilvy UK that sets prices based on human behavior. For example, offering an additional €3,000 on the trade-in value of a used car versus a discount off the new car. The customer’s perception is that the trade-in bonus is a much higher percentage.
Or the example of how a photographer may charge a licensing fee, or an actor or a model or a voice talent may charge a royalty. Get paid by milestones.
However the valued result is achieved, knowing a fixed input cost helps set value pricing on top of it.
The Wild Success of MTV Videos
There was nothing else like the launch of MTV in the 1980s… the hottest groups delivering short and sweet entertainment OR an all-day engagement. Viewer’s choice (a new concept back then).
Mark Knopfler of Dire Straits overheard a viewer complain that the MTV performers were making money for doing nothing. “That ain’t workin’,” the viewer said. That’s “money for nuthin’”… and they get their “chicks for free”. Knopfler created a major hit song with those very lyrics: “Money for Nothing”.
The revenue the performers (and MTV) made on the proposition turned out to be well worth it to fans who only had to endure a very small average cost per viewing session plus some exposure to advertising.
An excellent value-price compared to the cost of just one single concert ticket.