12 Guiding Principles on the Pathway to Value-Led Pricing
By Tim Williams
Do the executives on the front lines of your firm have a clear, unequivocal understanding of the principles that guide your commercial decisions?
The firms who are stuck in the outmoded paradigm of selling hours cave in at the first objection of well-trained professional buyers, because they only know how to discuss and defend their costs.
On the other hand, the progressive firms that have a genuine understanding of the value they create have the confidence to follow specific rules of engagement during the process of setting and discussing remuneration. By proclaiming their commitment to modern pricing methodologies based on the value they create rather than the costs they incur, these firms are putting stakes in the ground that not only help them create healthier margins but strongly differentiate them from the countless other firms caught in the commercial gridlock caused by hourly billing.
Once you have committed to modern pricing, it’s essential to memorialize the principles that underpin your new revenue model. Here are some prominent examples from agencies who have made the compensation transformation:
We will price our services based on the value we provide rather than the hours we work. We will stop selling inputs and sell outputs or outcomes. This is the cardinal principle of modern pricing. It acknowledges the foundational fact that clients don’t buy our efforts; they buy solutions to business problems.
In remuneration discussions, we will use the language of value in place of the language of cost. Based on the power of language to influence behavior change, we now use the word “price” instead of “cost.” We have also discontinued any reference to hours, staffing plans, FTEs, labor, or other references to internal costs.
We will begin each new engagement with an in-depth understanding of Scope of Value before we execute a Scope of Work. Because agencies and clients alike are too prone to jump straight into execution of program elements without first defining what success looks like, we begin each engagement with a “success workshop” that defines the key predictive indicators that drive the solutions we develop.
We will always provide pricing options. In place of a single take-it-or-leave it price, we always offer multiple ways for our clients to say “yes.”
We will never lower our price without also subtracting value. We will downsize instead of discount. Reducing our price without also reducing scope destroys one of our most valuable commercial assets: our pricing integrity.
We will trade the standard hourly rate card for a “pricing stack” — a variety of different ways we capture the value we create for our clients. We explain to our clients and prospects that our business is built on a variety of different revenue streams that can include such approaches as dynamic pricing and subscriptions, all of which are designed to maximize the alignment of economic incentives between the agency and our clients.
We will identify opportunities to benefit from varying levels of risk and reward and create a diversified portfolio of remuneration agreements. With the right kinds of clients under the right circumstances, we will display the necessary self-confidence to accept a degree of risk in our compensation arrangements. We are willing to bet on our own success, knowing that a diversified portfolio always produces higher average returns.
Beyond "work for hire," we will develop new revenue streams based on new and existing intellectual property. As a professional services firm, we understand we are essentially a fixed cost business, which means our job is to find constantly new and better ways to monetize the expertise and intellectual capital that resides within our firm.
We will define and manage scope not as hours worked, but as outputs delivered or outcomes achieved. Because we price based on outputs and outcomes instead of inputs, our workflow management practices have changed accordingly. Our project managers define and manage scope as outputs delivered and milestones met — not hours worked.
We have traded the practice of costing from the bottom up for an approach that determines pricing from the top down. While costing is a calculation, pricing is a judgment — a strategic decision that starts with the question of perceived value to the customer. Accordingly, we have institutionalized pricing as a core competency separate from finance.
We will never enter into a pricing discussion we’re not willing to walk away from. We understand that unless we are willing to pass up an opportunity (and our prospective client knows it), we have no real pricing leverage.
We will view each new client relationship as an opportunity to experiment with (and learn from) value-led pricing. We believe that every new client is a chance to do something different in regards to pricing methodologies and approaches. We try to devote the same level of creativity to pricing and compensation as we do to solving our clients’ marketing problems.
The ingenious American investor Warren Buffet once observed that even if your firm has enough money, it can never have enough reputation. Your revenue streams aren’t your highest value; the principles that create them are.
