The value-based pricing debate is just the latest chapter in the history of client-agency haggling over compensation.
Everyone is frustrated. But arguably, different kinds of agencies have different reasons for frustration. Nontraditional agencies (like the one I work for), which never engaged in the pricing methodology that led to today's value-based pricing, are suffering alongside our traditional brethren paying the price for bad pricing.
I'm not here to complain about unfairness but rather to suggest that nontraditional agencies have a pricing approach that offers a better solution.
First, some history. Today's value-based pricing represents the full arc of the pendulum swing from decades ago when agency fees were simply a mark-up on media spend -- an elegant, yet incredibly self-serving approach, because agencies were motivated to spend more for their clients, whether or not it was the right strategy. The important point is that price had nothing to do with the cost to the agency to manage the campaign.
Sound familiar? That's basically the situation we're in with value-based pricing, only now it's the clients establishing the price with little regard for the cost to agencies. With value-based pricing, cost is explicitly excluded from the discussion. Clients openly don't care what the cost to the agency is; they decide, based on historical data, what they're willing to pay, with a potential for upside only if key success measures are met. The eventual upside may merely cover overhead, if that, and may never lead to profit for the agency. Is anyone surprised that less than 1% of agencies are willing to accept value-based pricing?
Once agencies were guilty of pricing with seemingly arbitrary connection to costs; now it's clients. Quite the pendulum swing.
I believe what is needed is a paradigm shift, not this pendulum swing. The paradigm shift can be modeled by those of us at nontraditional agencies (in my case, a brand-experience agency), which have never charged based on media. We have historically been more project-based than our advertising brethren. We make tangible creative products -- brand experiences you can feel and touch, live events, things that have real, hard costs and require extraordinary expertise and talent. We used to regard this as a weakness -- it meant we were "tactical" -- but in pricing, it's actually a strength.
Because we have had to present our pricing to our clients on a much more regular basis, we have had to explain and defend our pricing over and over again. We've perfected a simple approach to pricing our services that works with any client, be they marketers or procurement personnel. It can be summed up in one word: "transparency."
Transparency in pricing shows the buyer, in clear and straightforward terms, exactly what it costs us to deliver what we promised, and exactly where we are making money. We detail how our fees are calculated based on roles, hours and rates. We specify by line-item what we anticipate our third party costs to be (which for a live brand experience may be as much as 80% of the total price). We specify what costs are fixed and what costs may vary (and we limit those variable costs). We walk our clients through all of this and then discuss opportunities for potential savings or potential rewards through the attainment of mutually agreed-upon performance goals.
Ultimately, we set a foundation for an open conversation where cost and price are inextricably linked. Both sides are clear about where we make money and where we are spending money, and both sides are confident that we're doing so in a way that's responsible.
Transparency leads to understanding. Understanding leads to trust. Trust speeds agreement. And transparency has the added benefit of compliance with all the mandates required under the Sarbanes-Oxley Act.
Just as clients have looked to nontraditional agencies for new approaches to their marketing, they can look to us for new approaches to their pricing. And then, hopefully, we can all stop paying the price for bad pricing.