Performance-based compensation and other creative pricing tactics for agencies

How to price fairly, decrease client risk, and increase agency profitability
Agency Leadership Podcast

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One of the toughest things for agencies to get right is pricing. If it is too high, you scare away good prospects. If it is too low, you sacrifice the profitability and sustainability of the business.

Agencies and their advisers have come up with all sorts of creative approaches. Performance-based pricing. Value-based pricing. Equity-based compensation. It goes on and on.

Chip and Gini talk about some of the options, as well as the underlying motivations of both clients and agencies in seeking new models and approaches.

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Transcript

The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.

CHIP: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin,

GINI: and I’m Gini Dietrich,

CHIP: and we’re getting creative today. Very creative about pricing. Pricing show itself, the show will be the same bland, boring thing that it always is.

GINI: We’re not bland and boring.

CHIP: True, we’re more of a train wreck than anything else. Sometimes, sometimes, sometimes. But what we will try not to be a train wreck for the next 20 or 25 minutes or however long we run with this. But we are going to talk about pricing and this is yet another one of those questions that’s come that comes from Reddit. You know, I think we need to get off of Reddit Gini and look at a another source for questions. Because

GINI: I mean, to be fair, even though I don’t like it, that agency thread is pretty. It’s pretty good. There’s some pretty good, there’s some bad stuff in there too. But there’s some pretty good stuff in there.

CHIP: There are very good questions and a lot of very, very bad. Yes,

GINI: yes. Very bad answers. Yes.

CHIP: Somebody answers something fairness, some good answers. But yeah, some Yeah, really careful what so hopefully, we’re giving you better advice than you would get on Reddit. But the questions do come from there. And in this case, it is a pricing and sales question. And it starts out it’s common knowledge that performance based compensation or guarantees are logistically a bad idea for the vast majority of agencies, but pricing related sales tactic tactics work from any other industries. I’m curious, any of you mentioned or push things like no commitments, cancelled any time project based versus retainer, minor free trials or services limited or partial refunds, etc, etc, etc. So this is really a question of how do you price and and how do you make the prospect feel like there’s minimal or modest risk in seeking you out as an agency? I think that’s really what the question is getting at.

GINI: Yeah. And I also think that we’re in a world of instant gratification and software as a service where you get free trials and you handle refund and you know all those things. But for the most part we have, we’re selling our time. So giving a refund or providing guarantees on things that are outside of our control, probably not the best idea

CHIP: for free trials, bad bad idea, Bad idea don’t do work for free. You know, guarantees I’m a little bit softer on I think it’d be very careful with them and and minimize them. But at the same time, I’ve offered guarantees in both software and service businesses in the past. And I have to tell you, I have had clients cash in on them exactly zero times and over two decades of running businesses. So I think that guarantees can be something that you could use but I think really the question here that was a little bit more interesting to explore is how do you are there more interesting ways to price more creative ways to price that can help you make more money as an agency and Make the client at least perceived there to be less risk. So whether that’s performance based pricing, or, you know, is that everybody likes to talk about value based pricing? Is it is it? Is it the guarantee? Is it you know, cancel anytime, you know what, what are the different things that that you think might be useful for owners to be thinking about?

GINI: I think it’s hard. And I come at this from a from a PR perspective. So keep that in mind. But you know, when when you think about, especially the work that we do, it takes a good 90 days to get everything set up and ready to go. And if you’re pitching media, or you’re creating content, or you’re trying to improve search engine optimization, or search engine rankings, you know, there are things that you can do to quote unquote, guarantee. But it takes time. You can’t It’s not like I can deliver that to you by tomorrow. I can’t deliver it to you in two weeks, and it will take me time to do that. Those things. You know, Google doesn’t respond overnight. It takes weeks, sometimes months, you know, so So I think you have to be really careful.

CHIP: Google never responds in fairness, sometimes they’re the software will help you out. But, but good luck ever getting support from Ray

GINI: Ray. Right. But yeah, I mean, like if you’re, if you’re if you’ve created content and you’ve done all the right things from an optimization optimization standpoint, you’re not going to be on the first page of rankings for your priority keywords tomorrow. It’s that’s just not how it works. So I think it’s really challenging for the kinds of things that we do to offer performance based pricing, because it it creates an expectation that you can do that overnight and you can’t,

CHIP: but you know, what about the and I know that various agencies, agencies have done this in the past? I think the current prsa stance on it is that it’s that it’s, they’re silent on it, I guess, more than anything else they used to, I think be opposed to it. But you know, bonuses if you get in the Wall Street Journal, New York Times are things like that, you know, we’re Where do you come down on on things like that or, you know, a bonus if you rank the their website in on page one or, you know, in spot number three or above or, you know, whatever I mean, how do you feel about that kind of performance based pricing where it’s not necessarily the core way that you’re compensated, but it’s an it’s an escalator.

GINI: I mean, I guess the challenge that I have it with it, and what I would say to a client is, I can get you in the Wall Street Journal, I can get you in the New York Times, I can get you a column in Forbes, if that’s what you really want. But that’s not necessarily going to help you reach your goals. It’s not necessarily going to help you increase your sales. So if you want sales increases, then let’s talk about something else. But if you want your ego stroked, and you want to be out on the golf course, and somebody says, Oh, I read your article in Forbes is really good, then yeah, okay, I’ll take a bonus for that. But you’re going to be mad at me six months from now, because you bonus to me, and it didn’t translate. Or maybe that’s not entirely true. It’s harder to track to show that translation to actual sales. So What’s your goal? Is your goal to build awareness and make yourself feel good? Or is your goal to increase sales? And if it’s to increase sales, the No, don’t bonus me on getting you in Wall Street.

CHIP: Yeah. But you know, it’s funny I was I was once part of a group of communicators, advising a member of Congress on some communication strategy. And he indicated that he wanted a lot more media coverage than what he was getting. And it got to be one of these sort of circular arguments. And so at one point, someone said, we’ll look, Congressman, if you really want press, just go down to the House floor and drop your pants, we guarantee you, you’ll get a ton of coverage. Yes, it’s probably not what you’re probably not what you want. But yes, it will work.

But I could see the member of congress pausing and thinking for a moment in the world of politics that you know, there there is an old adage that it doesn’t matter what they write about you as long as they spell your name correctly. You know, there is to just being out there, but So, okay, so you don’t like bonusing nap but you know, so So what about you brought up the sales? You know, what if is there value in being compensated in part based on sales performance or actual lead generation or things like that?

GINI: Yes. My caveat to that is a client has to be a client for a year before will do that. And the reason being is that, just like we talked about in last week’s show, there is a lot of optimism when you start working with the clients and you also don’t know everything and in many cases, you can ask questions and during the prospecting phase, and get answers that seeming that seem okay and don’t raise any red flags, but then you get into the client’s business and you go, Wait, that’s not right at all. Or they may tell you, yeah, we have that it’s no problem and they don’t have whatever it is you need to be able to be successful. So my caveat on that is we absolutely will do those things after a year. So so you know, we need to work with a client for an entire year, figure out their business, figure out their quirks, figure out their sales process, figure out where things are broken in operations, because there’s always something broken, figure out how we can truly measure the efforts that we’re doing back to sales. And then in year two, we’ll negotiate that.

CHIP: Yeah. And I think that’s a great point. And it’s anytime that you want to get creative on pricing, whether that’s performance based or in any other fashion, the more that you understand about the the client, the better that you can work out an arrangement like that. And it’s probably one of the best arguments for a paid discovery process of some sort. Because you know, that and even that’s not that’s not foolproof, but it allows you to get in there and start to dig a little bit deeper. And this is this is true of any kind of consulting oriented business. It’s certainly true in the agency space, frankly, in my current role of advising agencies, I always learn a lot once I start having real meetings and start looking at you know, deeper into documents than even I, I had in and I’ve had some cases where I’ve where I’ve talked with an agency owner and felt like yeah, I really knew their business based on The first hour to have conversation and then the more you dug, you’re like, well, now wait a minute. That’s when you said you had this document. You didn’t you don’t quite have that document. Yes, I know. It’s what you think of as that document, but it’s not really right. And so understanding more about the business, I think really helps you. And at the end of the day, you really need to be careful with pricing. And I, I will harp on this as often as I can, you need to understand what your actual costs are, and you have a floor Yes. and protect yourself with that floor of pricing. So you need to never ever fall below that floor. You can you can come up with any high number that you want above that floor. And I encourage you get as much space between the floor and the ceiling or the sky as you want. But you’ve got to know what that floor is. And if you don’t have your arms around your actual project cost your actual commitment to various clients. You can never ever be profitable because you won’t. You just won’t know it. You might be accidentally profitable, but that’s not a good way to run a business.

GINI: No, it’s a terrible way to run a business. Because it’s not producer predictable or sustainable. And you have to also know we were talking earlier in a meeting that I was in about virtual agencies and how some clients really love that because they’re not they know, they’re not paying for the overhead of an agency. They’re paying for the actual work. But at the same time, there are things that you should be including in your fees, which would be part of your floor, right? If subscriptions if you have just subscribed to scission, or talk walker or co schedule or whatever happens to be what the software is, and then you know, you those, those things have to be in your floor pricing, so that you can make a profit and you can’t just say, well, it’s the cost of doing business. No, it’s not. You wouldn’t subscribe to those things if it weren’t for your clients.

CHIP: Yeah, and I think and I don’t want to get too far off track here. But you know how we like to do that on the show. We follow a thread wherever it goes. People need to be very cautious about thinking of virtual agencies as necessarily cheaper from an overhead perspective, right? Because if We’re running it, well, your costs really aren’t going to be all that different, you’ll be spending it on different thing, right? But because you should be bringing your team together in person, unless you’re virtual, but all still in the, you know, a relatively compact geographic area, you know, you could actually end up spending more than you would on rent, if everybody was locally oriented versus airfare and hotels and all that kind of stuff if you’re bringing people together. So, you know, be very cautious, both on the buyer side as well as on the management side, about assuming that a virtual agency is cheaper and has less overhead

GINI: unless you live in a large city, in which case it is. Okay, significantly cheaper. I was I was spending 12 grand a month in rent. I would not spend that much money. I’m bringing everybody together.

CHIP: Fair, fair enough. Fair enough. But it never you do need to actually look at it and it depends on you know, because you know, if your team is internationally located, you might still be spending that much if you’re bringing people together. regular basis. I mean, some of these overseas flights can be extraordinarily expensive, particularly if you’re not planning them out. Trust me, I’ve been on a lot of five years. And some of those, particularly when you find out how I meeting next week, and you look at and I’m like, Oh, hey, that’s what that flights gonna cost. Well, that’s going to put a dent in the budget department. Yeah, so

GINI: I agree, you have to know what your floor is. 100%.

CHIP: Yeah. And and, and once you know your floor, then you can start getting creative beyond that. And the more that you know about your client, the more likely you are to be able to be creative successfully. But you certainly do want to be careful about it. And look, I know that, that a lot of folks are looking for magical ways to price higher without having to say that they’re pricing higher. And that’s part of what comes into the performance pricing conversation or value pricing. That folks really want to try to find an excuse to have a client pay them more for the same work. And that’s great, but you You need to not get so carried away with the creative side of it that you aren’t following the basics.

GINI: Yes, and you still have bills to pay. So don’t get so creative that you’re not having cash flow because cash is king. So make sure that that is all covered First, you have you’re not covered every month no matter what, and then you can start to get creative.

CHIP: Yeah, and I think that, you know, you’re in a better position if you, you know, allow your client in easy exit versus getting overly creative on pricing. So if I had to, you know, if I had the those old fashioned skill scales where you have things on each side, and, you know, I would skew towards give the client an easier out as a way to de risk as opposed to getting super complicated or creative with my pricing structure. Because at the end of the day, you know, my my belief is I don’t like locking clients into long term contracts. I don’t do it in my agency consulting. Now. I didn’t do it with my agencies in the past. If they were if I was doing a retainer work where there was some ramp up time, I would often have a minimum, you know, guarantee of three or six months that they’d have to stay because basically it sets amortizing the setup costs and a monthly fee, as opposed to charging them an upfront fee. But after that they could get out I, I’m a big believer, you want to let if you have unhappy clients, don’t make them stick around.

GINI: Yeah, it’s not good for anybody. No, yeah, as you

CHIP: know, I mean, I know, I know that you’re sitting there in your owners chair saying, but, but if I let them go, then I’m going to lose six months worth of revenue. But you know what, maybe they’ll pay you maybe they’ll slow roll you maybe they’ll fight you, you know, you’re certainly going to lose a lot of sleep over the the battle with that client and their remaining, whatever period of time they have left on their current contract. And they’re going to have ill will towards you. They’re never going to come back. It just you know, but if you let them out, maybe your paths will cross again, two or three years down the road, and that makes sense to work. Or maybe they refer business over maybe they will, but you can be darn sure they’re not going to if they sat there and they felt like you know I had to keep paying this person for six months even though they weren’t delivering what I wanted. We just didn’t have the fit. Stop, walk them out.

GINI: I will say that we have a 90 day outs clause. Most clients negotiate it down to 60. But I mean, and I think only twice, we’ve exercised that. But in both cases, it was necessary because there was a transition. And there were things in the works. And it had to transition to an age new agency. And so there was still work that had to be done. It wasn’t like we were like, Okay, well, we’re done, but you have to keep paying us.

CHIP: Right. And just to be clear that when you say 98, you mean 90 day notice, right? That’s what you’re talking about. They give me 90 days before they leave? Yes. And I think look, I’m a big believer in your your default contract should generally stack things in your favor anyway. Sorry. So I think that makes sense. And if even if you have 90 days in the contract, you can always work something out if it makes sense in that individual situation. So you know you you need to understand that your contract is about document that you have leverage over you created it, you signed it. And if you want to go easier on the terms for whatever reason you can, but it is certainly nice to have those things in there. It’s like, you know, I like people building late fees into contracts. I’ve, I think in my career exercise too late fee, maybe?

GINI: Yeah, maybe Me too. Yeah.

CHIP: And, and over thousands of clients, various businesses over the years. But, you know, I, I like having that available to me as a tool as a lever. And so you put a lot of things in your agreements that give you those tools and levers. And so, you know, if you want to play around with some of those things in your contract, so that you can, you know, D risk, right, since I going back to the original question on Reddit was partially, you know, how do you how do you make the risk seem less from the prospects perspective? You know, those are certainly things that you can give on particular if you say look, you know, I always wave this right, you know, I mean, so anytime I have someone in a contract negotiation one to get rid of the late fee, I’m like, Yeah, fine, right. We’ll get rid of the cut, cuz I never charged him. Anyway, so what on earth is the point in fighting over it? Right? You know, it’s sort of like, you know, one of the things that I learned a long time ago with big corporations is you don’t bother fighting over the venue for law, because you’ll spend the whole time running around in circles. Yeah. And so at the end of the day, I always put in, you know, my preferred legal venue, which is whatever my lawyer prefers, but it based on my conversations with him, I’m always willing to just waive that if the big company x says, Hey, it has to be this short. Yeah, fine. I mean, the reality is, in my entire career, I’ve gone to litigation over contracts, exactly. Zero. And I know very, very few people who have gone to litigation or arbitration or anything like that. So contracts are good leverage in you know, in an exit negotiation, but you know, they are they are rarely taken all the way doesn’t mean you don’t want to pay attention to them and put the right things in them. But yeah, you’re realistic about them too. And, and so that is certainly a way that you can de risk is by negotiating some of those terms don’t though, negotiate on payment terms. Those are things that are just crazy. And clients, particularly big ones are getting more and more aggressive. You know what they want? 420 days?

GINI: No, you cannot have 120 days.

CHIP: I’ve seen 180 days. Oh, no. And that’s I would

GINI: walk away from a deal because of that.

CHIP: That way. Absolutely.

GINI: Yeah, there’s no way gotcha. As a small business, you cannot survive that way.

CHIP: Particularly, because even the big companies typically don’t pay on time. Right with that, right. So, you know, I’ve worked with big companies who have payment terms of 90 days, but they never pay before 120 or 150. And you just, that’s not a way to do business. And I would certainly if I were running those businesses, and I had someone do that to me, I would fire them immediately for that kind of man. I wouldn’t sign a contract that’s that long. You know, I, you know, I at the at the farthest I might think about 60 but Even that,

GINI: well, I’m talking about creative pricing. So we worked with a fortune five company who I’m not allowed to say but

CHIP: but but you got a 20% chance to be in right folks if you get

GINI: correct. Um, and they had as a four month term and I was I was like, I can’t there’s no I mean, I was just honest with them. I was like, there’s no way I have staff to pay. You know, you’re you’re asking us to do this, this and this there are costs outlaid for that there’s no way. So what we did is we postponed the start date for four months. And we, you know, we continue to meet in person and all those kinds of kinds of things just to keep the relationship alive and make sure that we were all still on the same page. But we postponed it for four months, but so let’s just say that we’re starting in January, we invoice did in January, but we didn’t actually start working so I didn’t have to pull team and all that until April. And that worked really well because then we were right on pace. And they were wanting to do that with me. So

CHIP: Yeah, and and that’s, you know, as you’re thinking about those creative pricing, it’s not it’s not always about the how you calculate the dollars of compensation. It’s how you time things. It’s how you time pieces of the project. It’s, you know, going back to, you know what we’re talking about for as far as paid discovery, sometimes you can do paid discovery, and that comes in below some companies procurement, yep, minimum. And so that allows you to at least get the ball rolling on a on a discovery project, before you get into something bigger. That then requires more scrutiny in negotiation or all that kind of stuff. So, you know, there are a lot of different ways that you can creatively structure your agreements with clients to remove risk to improve compensation for you and to overall grow your business. So just be willing to think creatively about it. But always understand what the worst case scenario is never get so excited about what the you know what the big numbers as we were talking about on last episode with Aqua hires, where you’re talking about how people get all excited, right? You know about the D And so maybe negotiate bad terms. Same thing happens when you’re talking to a prospect. It’s so easy to sit there. And, you know, the client says, I want to do this, this and this. And I think we can accomplish that. Yeah, yeah. Yeah, absolutely. We can do that at you know, cool. And and like, Okay, and so how about we do this performance structure, and I get a percentage of leads, and, you know, in the revenue and all that, blah, blah, blah, and you start doing the math in your head about what it could come out to stop, sit down and actually write down on paper. If they generated nothing out of this, what do you end up with, right? And if that number is not above your floor, to make sure that you’re at least profitable, assuming your standard cost structure for this project, don’t accept it. That the anything that you do from a performance standpoint needs to be upside above your floor, it cannot be to help you get to the floor itself. Yep, totally agree. So, with that, I think I’m tired. I’m gonna lie down on the floor. But um, there we go. Alright, well, that will bring to an end yet another episode of the agency leadership podcast and whether you’re listening to us on the floor or in a chair In your car on the treadmill. I’m Chip Griffin.

GINI: And I’m Gini Dietrich

CHIP: and it depends

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