Who Decides What to Charge a Client? Not the Finance Team
By Tim Williams
Who is likely to be the better pricing strategist, a financial planner or a brand planner? A CPA or a creative director?
When it comes to pricing, knowing how to count is not nearly as important as knowing what counts in the mind of the buyer. Pricing is a judgment, not a calculation, and it must be done by people who can assess the value created, not compute the costs incurred.
In prosperous companies of all types, pricing is viewed as a discipline distinct from the business of accounting. Major manufacturers have a Chief Financial Officer, but also a Chief Pricing Officer. The finance team employs objective methods for keeping track of the value resulting from the subjective decisions made by the pricing team. This same distinction applies equally to professional services, where decisions about value are even more instinctive. The skill set required to answer the question “What’s the value of this big idea” is much more likely to reside in an art director than an accounts payable director.
Price before cost
Given the archaic pricing practices of most professional service firms, it’s easy to understand why pricing is deemed to be a finance function. This is because “pricing” in many firms is actually just bottom-up costing — a simple process of estimating internal costs, adding a desired profit margin and sending the client a bill.
The rest of the business world practices top-down pricing, which starts by estimating the value to the customer, not the cost to the company. For the most part, pricing involves a series of judgments and subjective decisions, not formulas on a spreadsheet. The costs to the firm are certainly taken into account (we want a price that’s higher than our costs), it’s just that we estimate the costs after we estimate the value. “Price before cost” is one of the basic tenets of professional pricing. We set a target price first (WTP=“Willingness to Pay”) then assess if we can deliver the service at a cost that will allow us to earn an acceptable profit.
QUESTIONS TO ASK YOURSELF WHEN SETTING A PRICE
Agencies are already skilled at estimating costs, but a different set of questions are required to guide decisions about the desired price. Here are 10 useful queries in this process:
Financial impact. If we succeed in achieving the desired outcomes, what will be the likely financial impact for the client? Conversely, what is the client’s cost of not solving this problem?
Strategic importance. How important is this engagement in context of the client’s overall strategic objectives?
Long-term value. In the client’s value chain, is it high-value, moderate-value, or low-value role? Does this engagement help create long-term value for the client, or is it essential tactical and short term?
Unique qualifications. Is our firm uniquely qualified to perform this work, or could it just as easily be done by someone else?
Resource requirements. What resources (human, financial, and other) will be required to complete this engagement? Similarly, what resources will be devoted by the client?
Level of talent. What level of talent will be needed? Does it call for our most experienced people?
Degree of client involvement. If a client organization is willing to put an above-average amount of effort into communicating and collaborating with the firm, this should be reflected in the price. The client’s approval process is one of the key factors to consider here.
Scope management. How difficult will this engagement be to manage? Do we anticipate relatively simple project management, or is this more complex in scope?
Marketing sophistication. Does this organization view marketing primarily as a service, or are they willing to invest in marketing as a growth driver?
Client access. Will we have access to the “economic buyer” in the organization – the person who has the power not only to say “no,” but “yes” in pricing discussions.
It could be said that pricing as a discipline doesn’t really exist in the majority of advertising, law, accounting, architectural, engineering, and IT consulting firms. These businesses continue their dependence on costing tools (calculators and spreadsheets) in place of the pricing tools employed by modern corporations.
In the recent Harvard Business Review article “Expand Your Pricing Paradigm,” author Rafi Mohammed lists no fewer than 18 progressive pricing methodologies currently in use by businesses of all types, the majority of which — like subscriptions and dynamic pricing — work beautifully in the realm of professional services. But don’t count on the finance department to forge the path of pricing innovation in your firm. Their remit is managing the cash flow, not creating it.
By devoting the same kind of creativity to pricing as you do solving you clients’ business problems, you’ll be able to respond to questions about compensation in a much more compelling, differentiating way:
Unlike other firms, we don’t sell our time. Because, frankly, you’re not buying our time or our efforts. You’re buying great work that delivers great results.
Let’s face it, paying agencies by the hour actually encourages slow problem-solving, duplication of effort, over-staffing and the kind of fuzzy math that erodes the client-agency relationship.
We earn our keep by building your business. By pricing our services based on the work we deliver rather than the hours we work we’re able to focus on what really matters: the success of your brand.
Staying focused on the axiom “Price before cost” will propel your organization in a completely different direction every time a pricing decision needs to be made. At long last, you’ll be practicing modern top-pricing in place of bottom-up costing.
