Value pricing isn’t the answer for every agency

The path to profitability or just a white whale?

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Despite all of the gurus who tout the idea of “value pricing” to agency owners, it may not be the best approach for everyone.

In fact, it is a concept that is often misunderstood and rarely implemented properly.

Chip and Gini talk about what value pricing — and what it isn’t — as well as how and when it may be useful. They also explore some of the pitfalls, misconceptions, and downright bad advice that agencies get.

Transcript

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

Chip Griffin 

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

Gini Dietrich 

and I’m Gini Dietrich,

Chip Griffin 

and you again had that lovely delay as if you didn’t know what your name was or you didn’t.

Gini Dietrich 

I got through it this week. I got I made it this week.

Chip Griffin 

Well, I guess that’s a good thing. But you know, we do have this same setup every single week. So I say, I’m Chip Griffin, and then you say, I’m Gini. Dietrich, there’s, there’s no need for a pause, you should be you should be prepared for it. Now, okay. Or at least more prepared than we are for the topic of today’s show, which we came up with 30 seconds before I hit the record button. But I think it’s gonna be a good one to do.

Gini Dietrich 

It was two minutes. Well, that’s not entirely true. Because you did put together a list of topics like three weeks ago, and we’re just going through the list right now. So

Chip Griffin 

it’s, but this was one that was decided, we just we just

know what it was.

Gini Dietrich 

I just didn’t Yes, it was. I just didn’t say it out loud.

Chip Griffin 

Oh, okay. All right. Yes, I’m glad you remember what’s on the list. I thought it was an original idea I had this morning. Just that that goes to show where my head’s at. All right. So let’s let’s get into the show. Because all right, I really want to rant about this one. Because I’m really annoyed. I know, I am annoyed, because I spend a lot of time reading and listening to the advice that agencies are given. And a lot of that surrounds pricing. And my pet peeve these days, in particular, is this notion of value pricing. And the reason why it drives me just bonkers is because most people first of all, don’t know what they’re talking about when they say value pricing. And secondly, it’s very difficult for most agencies to properly implement value pricing, even if they wanted to. So I want to talk about this because I think that a lot of folks are getting some some really bad advice out there. And or they are misconstruing the advice that they are being given.

Gini Dietrich 

Okay, so let’s back up and talk about what value pricing is, and how that compares to fixed pricing.

Chip Griffin 

Yes, that’s, that’s one of the that’s one of the biggest misconceptions. So that’s. So value pricing, when implemented properly means that you price the work that you’re doing for a client based on the value that they will receive from your work. And what that fundamentally means is that each of your clients could and probably should be charged different amounts for effectively the same work. Because the value for of a logo to you is different than the value of a logo to Procter and Gamble. Okay, so I should be charging you differently based on that. Value pricing gets thrown out there, because most agencies don’t charge enough for their services.

Agree.

Chip Griffin 

And so, agency owners love hearing about value pricing, because to them, it means I can charge more. And you can, but doing it right trying to figure out what is that logo worth to you, versus Procter and Gamble versus someone else is very, very difficult. Very few agencies actually have the ability to make that kind of a calculation. And so most of the time, when an agency says that they use value pricing, and I dig into it with them, they really just mean they’re doing fixed pricing. But they’re, they’re charging a premium or so what I would call premium pricing. Okay, that is very different. You can have premium fixed pricing, without having any substantial understanding of the difference in value to different clients. Now, you do need to know, the value you’re creating, right, because the clients are gonna make a basic assessment there. But true value pricing, where you’re adjusting it based on the actual value of that actual work to that actual client. Really hard to do and not something that’s worth pursuing for most agencies.

Gini Dietrich 

Is it not worth pursuing? Because it’s really hard to do or for another reason?

Chip Griffin 

I mean, well, I think it’s it’s for a number of reasons. I think it’s because it’s very difficult to do. Right? I think that it is it makes your sales process less scalable, because now you need to have some expertise in the sales process, as opposed to, you know, more of just figuring out if there’s a fit, right? Because if you have to if you have to do some sort of, effectively an economic analysis of how it’s different for this client versus that client, that’s a problem. You absolutely need to have a general understanding value and you need to be creating value. If you’re selling something that’s not creating value, you know, you’re up a creek already. But But you need to, you need to come up with a more rational pricing system. And the solution to not charging enough is to charge more. If you need to convince yourself, it’s because it’s value pricing, I suppose that’s okay. But don’t pretend that what you’re doing really value pricing, and really just doing fixed pricing. Because if I, if you tell me you’re doing value pricing, I go in, and I compare projects from one client to the next. And it’s always roughly the same pricing, which I guarantee you almost every time I look at an agency that you know, this the same pushback I get, when I say, well, you should you should have sort of standard packages, customized blah, blah, blah, well, it isn’t until you look at the invoices, and you look at the invoices, and they’re all roughly in the same band. Well, how customized is that? It’s not customized,

Gini Dietrich 

it’s not customized. Right?

Chip Griffin 

Right. Right. You’re selling packages, you’re pretending you’re not. But you are. Yeah. And there’s nothing wrong with that. I’m not saying you shouldn’t do that, you should, it makes you more efficient. But at the same time, if you’re pretending you’re doing something that you’re not, it’s gonna make you make bad decisions. So recognize what you’re actually doing.

Gini Dietrich 

go fix fine. I think a good example of this, and I think about this a lot is the Got Milk campaign. So Got Milk campaign was created a decade ago. And they’re still using it, which is great. And it’s it’s been something that has allowed the organization to continue to grow and build awareness for milk and all those kinds of things. Fantastic. Did the agency and I don’t know the answer to this, but did the does the agency continue to be paid for that campaign? Because it’s been used year after year, after year, after a year? So is provided huge value to the milk industry? Or did they get paid for the work doing that doing? You know, whatever their annual budget was for that year, they came up with the campaign? And that was it. So when you think about value pricing, you think about it from that perspective? Am I and a logo is a great example, too? Am I building something, or helping them achieve something that they’re going to be able to use year after year after year after year? Or is this a, you know, something that is going to be used just this year, and has to change next year? So when you think about it from that perspective, you start to go Okay, there’s a lot of value in here, there’s a lot of value in the Got Milk campaign, because it has been used for at least a decade. Right? So do you get it? How do you get paid for that?

Chip Griffin 

Well, and so part of the thing there is, you may think that the campaign that you’re developing is going to last for years, and it might not. Or the other way around, you may think it’s a one time campaign and it may stick in you’re like, Okay, you know, so so being able to predict accurately that value from the get go, is incredibly difficult. And, and pricing at its root is really it’s a it’s a negotiation of risk between the two parties. And so as the agency, if you’re doing fixed pricing of any kind, your need, you need to measure the risk of losing money by doing more work than you’ve promised in or or you believe you have to do in order to meet your promise. on the client side, you know, their risk is, you know, will they actually be able to get enough value to make their investment worthwhile. So, so price is balancing risk. And so what you’ve just raised is something where the risk of knowing that the accurate value is much higher, because some campaigns last a month, some a year, sometimes two years, right. And you often don’t know, upon creation. Now, if you really, if you if you really want to go down that road, then what you look at is not so much value pricing, but performance pricing, right, where you’re where you’re sharing risk with the client, and you’re compensated in part based on the outcomes that your work is producing. Now, that’s very complicated, too, we can have a whole nother episode where we talk about it. We’ve talked about it a little bit in some past episodes, but that, again, is different from value pricing, because that’s sharing the risk in a much more substantial way.

Gini Dietrich 

Correct. So let me let me throw this at you and see where it falls. I have a client who has a team of writers, and it typically takes between 10 and 15 hours to get a really good piece of content. 1500 words we’ll call it a blog post from a team of writers to be able to publish it. So let’s call it 15 hours. For me, it takes me two hours to do the same amount of work that it takes. Some of some of their writers do the same thing. I should get to charge more for that correct?

Chip Griffin 

Absolutely.

Gini Dietrich 

Is that value pricing?

Chip Griffin 

Absolutely not.

Gini Dietrich 

Okay. What is it

Chip Griffin 

It’s really important if you are charging for your expertise. And so what you’re bringing is decades of experience and specific skills that allow you to perform the task more quickly. And so and this is one of the reasons why a lot of folks don’t like doing hourly pricing, because then you do have to differentiate between who’s performing the work. And and agencies like to do simplified things where you just do a blended rate. And they’re like, Oh, you know, I can’t do hourly billing, because, you know, we’re not getting paid for the real value. No, you’re just not pricing those hours correctly. Right? Because, I mean, when I work with my law firm, I get charged one thing by the partner who’s got 25 years of experience, I get charged something less for the associate with five years of experience, I get charged something different for the paralegal who doesn’t have law school training and those kinds of things. Sure, so so you already have those differentiations. And that’s how you account for the fact that you can do something better and quicker and all that, and you still get compensated fairly for it. But value pricing that people are using it as as an excuse, I think, to charge to simply charge a higher amount. And you should charge a higher amount, because you’re worth it because you the work that you’re doing is worth it. But that doesn’t necessarily mean that it’s different from client to client. I’ve been in agencies where we charge differently based on the client, and you sort of look and you say, Okay, how much can they pay. And I remember, in my, in my early days, in my first agency, I had a prospective client who flew me out to his home in Beverly Hills. So I flew cross country as a limo pick me up, take me to the hotel, we have a meeting the next morning. And so I’m already you know, increasing my fees as a result of, you know, what I’m seeing. And then, and then as the limo picks me up the next day, just taking me up to his house, and we’re winding up the, you know, the hill or the mountain or whatever, you know, the hills of Beverly Hills, am I Oh, every, every every trip around, you know, price has gone up price view of the LA skyline, and, you know, he’s got a personal chef who’s making us lunch, and I’m like, Oh, I you know, I’m increasing the prices even more. Okay, but but those price increases, those aren’t really, they’re not value pricing, right? Because the value ultimately that I was creating for him, wasn’t going to be that much different than the client who was scrounging together the budget, right, because of what he was looking for. But But I knew that he could afford more, so I was charging more. And so you can certainly do that you can take that premium pricing approach, you need to be a little bit careful about that. Because then you have to be careful with the whole, you know, saying pigs get fat hogs get slaughtered. Right. So, you know, I i’ve in my own businesses and other businesses have gone too far down that path. But none of that is true value pricing, it’s ability to pay, not the actual value that they’re getting out of, and that one of the common examples that I’ve seen for value pricing as well, you know, the logo for FedEx, you know, should cost a whole lot more than the the logo for the restaurant down the street, because you know, the value is different. The value of that logo isn’t necessarily different. Right? FedEx has deeper pockets, that’s going to be a much more cumbersome process to go through, because you’ve got all these constituencies you have to go through. But I mean, I would argue I mean, there are some products like retail products, logos matter a whole lot on those, right? Because that’s there’s plenty of research that shows that the packaging makes a big difference in the sales of those products. But for a b2b services company like FedEx, I guarantee you there’s not a huge difference in their sales based on their logo change. I mean, UPS has a god awful, ugly logo.

It is it is terrible. Yeah. Right.

Chip Griffin 

I mean, their corporate colors are atrocious. Yeah, they’re doing okay. Right. So with, with apologies to all of my brand identity friends and creative types, you know, for some businesses, you’ve got to cross the bare threshold that you can’t look stupid, right? But that’s about it. So you’re not even in that case of FedEx, you’re not really charging based on the value, you are, in some ways charging based on their risk of a really bad logo, right to try to avoid that. But more so you’re charging them more because they can pay it. And because they are hat, they have a process that’s going to take a lot longer for you to get through, then it’s going to take you to get through with a small business where you’re working right with a decision maker. So you can still charge different amounts for different clients. But that’s not value pricing, because it’s not truly about you understanding what the value is. I mean, if I’m putting together a logo for a company, am I really going to try to calculate what the value of that logo is? How are you gonna do that? was luck. You can’t do that.

Gini Dietrich 

Yeah, you can’t do that. Right.

Chip Griffin 

So if you’re if you’re not fine deal with that, get your prices, you know, you need to as I always say you need to start With the floor, you need to know how much you need to make off of the work. Right? The value to the client is not the first there’s not the starting point, right? That’s you get to that you need to know what the bare minimum is that you need to make off of a project in order to actually generate a profit, and generate the profit that you want to have for your business. So that’s your floor, then you just need to try to figure out, you know, how far above that can you go. And part of that, yes, is thinking about value. But part of that is thinking about what the market will bear part of that is thinking about, you know, how you can speak to the benefits that you’re providing. Part of that goes to risk there. I mean, you the risk is the biggest driver of this, and I can’t emphasize that enough, you need to understand that clients will pay a premium if they’re short of a result. Right? Correct. If I am charging in, then that’s why clients tend to like performance pricing a lot of the time because that D risks things for now, the problem is when it goes really well, they end up writing a much bigger check than they would have otherwise. And so that’s why not every client will go for performance pricing. But if they’re really concerned about risk performance, pricing works great for a client. Because if you’re charging, that’s why a lot of these sales lead companies charge you by the lead, or they guarantee you a number of leads, you know, well, we’ll get you five leads this month, and we’ll charge you $5,000 for it. Well, cool. I know what I’m getting. I know exactly what I’m getting. So there’s no risk for me in that or very little. Yep. Yep. That’s that’s not value. That’s risk.

No, that’s not value that Yeah.

Gini Dietrich 

Yeah. So I guess what you’re saying is value pricing is challenging, you can do it. But it takes significantly more expertise on the front end from a sales perspective or business development perspective, to get it done. versus doing premium pricing or performance based or projects or, you know, retainer or whatever it happens to be.

Chip Griffin 

Yeah, the question. The question is, why are you doing? You know, what, why are you embracing the idea of value pricing? And if you understand what’s motivating you, you probably can find a much simpler path to get there. For sure, it’s the problem is that most agencies undervalue what they’re doing, just generally, they’re afraid to say that it costs this much to do the work with us. And I’ve very recently been working with an agency owner, who knows that she is charging too little. She’s known for a long time, she charges too little. But she’s afraid of what will happen if she raises her rates. And if she charges more for specific projects, she might get less of them. Well, you might, you might get more though, because people also assess value in some respects based on the price, right? So if I charge more, they may value it more, even though what you’re creating hasn’t changed, right? It’s like a Mercedes. Mercedes is a little bit nicer than a Kia. Is it? Is it? Is it better than akia? To the amount that you pay? I think that’s open for debate. Right? Because you put the Mercedes logo on it, they can charge more. And because you assume it’s better. Right?

Gini Dietrich 

Right. Yeah, the the logo gets stolen all the time.

Chip Griffin 

Right. But yeah, I mean, it’s the logo, but it’s also the price. It’s, you know, if Mercedes came out with a car and charged $10,000 for it, it probably wouldn’t sell that. Well. People would be skeptical,

right? They’d be like, Well, wait, what? Yes.

What corner?

Yeah, what’s wrong with it? Yeah,

Chip Griffin 

right. Yeah. I mean, is this is this gonna collapse? As soon as I you know, bump into a pole or something? I mean, what’s, yeah, so. So raising your prices sometimes can have the effect of getting more work?

Gini Dietrich 

And, yes, and I would say, I would argue, because I have been where your client is. You do more strategic, more sophisticated work versus a bunch of busy work. Versus, you know, I mean, for me, personally, I don’t want to be sitting on social media all day posting for a client. So if you want me to do that, it’s going to cost you a heck of a lot of money. Where I want to spend my time is on really strategic, sophisticated builds of, you know, like, I’m working on a content marketing program for a client right now, that is extremely sophisticated. That’s where I want to spend my time. And so and it also costs a lot of money, but it doesn’t cost as much money in the big bigger scheme of things as it would if they hired five people because they don’t have the same expertise. So you have to think about it from that perspective. And truthfully, I will also say that this year, if this year has taught me anything it is where do I want to spend my time? And how much should I get paid for it because I if I’m spending my time while I’m also managing a second grader who’s sitting next to me in my office, it has to To me on stuff I want to do, and it has to be on stuff that makes you know that I’m excited to do. So I’m going to charge a premium for that. And I’m not going to do as much work I’m not going to do you know, I’m not going to have 10 clients a 10th $2,000 a month, I’m going to have one client at $20,000 a month.

Chip Griffin 

Right. But But the other thing to keep in mind is, it’s probably not really a premium, you’re probably just getting to where you’re being fairly compensated. Right? Because, again, there there’s a distorted view amongst particularly small agencies, what fair compensation is. I mean, one of the first things I do when I work with an agency is I asked how much the owners pay themselves. And I ask it two ways, I asked, Are you being fairly compensated? And then I asked how much I often get I’m being fairly compensated. But you know, I’d like to earn more as sort of the the qualitative answer, the quantitative answer is usually showing that they’re not paying themselves, nearly enough, nearly enough, right? Most agency owners are not a lot of the agency owners I work with, may only be paying themselves 6070 $80,000 a year in the United States, that is not fair compensation for an agency. That is not

Gini Dietrich 

one of the questions I always ask is, if you went back to work for somebody, and you have the level of experience you have right now, number of years, what job would it be? And usually it’s a chief marketing officer, it’s a Chief Content Officer, a chief communications officer, Officer, something like that. It’s a big job, and how much money would you make? And then they tell me, and I’m like, and how much you paying yourself. And it’s never, ever the same? Never. It’s never even close to what they think what they think they could get going to work for somebody else. But for some reason, we think it’s okay, because I don’t know, do we have some idea that we’re going to make it up on the back end or something?

Chip Griffin 

Right? Well, and I mean, the other way I like to ask clients to look at it is if someone bought your agency. And so a larger agency buys your agency, and you left, they would have to hire someone to do your job, overseeing your team doing it. And I say to them, so what would what would that person get paid? Yep. And that tells me two things. First of all, that’s a very low number, then it shows the value of the work that they’re doing probably isn’t that high, and they need to relook at what they’re doing. Right. So they are creating more value of some kind. But usually, they end up just saying, well, it’s, you know, it’s like three times what I’m being paid now. And I’m like, well, that’s the number that you need to be going for. And that will increase your floor, which means you will be charging more. But that’s not value pricing. And the the the fear I have with value pricing, is that that if you try to do it, well, it’s complicated. If you don’t try to do it well, and you’re simply trying to figure out how much can I extract from this client? What’s the most I can get out of them? That’s a bad dynamic to because I hear people in fact, I was just listening to a podcast recently, where someone was talking about value pricing and how you know that they’re able to get, you know, orders of magnitude more profit? Well, if you’re, if you’re at normal profit, that’s a problem, right? If you’re if you’re below profit than orders of magnitude, so if I’m at 5%, profit, I’m getting tremors. Okay, for x is fine. If I’m already at 20% profit on that work, and now I’m getting to 80%. That’s actually a problem. It doesn’t seem like it at first, but the problem is that clients eventually find out when they’re getting robbed. Right. And, and, and if you’ve got 80 90% profit margins on work, right, you’re robbing the client. Yeah. And it works in the short term. And I’ve had projects like this, and I can tell you, every time it cut, those are the kinds of projects that don’t come around, again, because eventually the client figures it out. They’re the kind of projects where eventually someone has a conversation, and they realize that someone similar to them is paying a whole lot less for the same work from you. And then it comes back to bite your reputation. So So and honestly, it’s just the wrong way to think about your clients. I mean, I’m not a big believer in this whole Oh, we’re partners with our clients. I mean, that’s rubbish. You’re not you’re a service provider, you know, you can build a partnership of sorts, but you’re not partners, you’re not taking on the same risk that they are, they’re not taking on risk with you. That’s what partners do. Yep. Right. But they’re but you are building a relationship. And if the relationship is based on, you know, how much can I take from your back pocket? What kind of relationship is that? If you had a friend who was trying to figure out how they could get into your pocket, you know, how can I? How can I get you to pick up you know, more of the price when we go to dinner or to the movies or whatever?

Right? Are you gonna want to hang out with those people? No, no, absolutely not.

Chip Griffin 

You want people who are working with you on that kind of stuff. And it’s the same thing with the agency client relationship. So So value pricing, I think leads people in very bad directions. If they’re actually even think that they’re doing it, but the most of the time, as I said, they’re just doing fixed pricing. It’s just fixed. pricing. Right? That’s all it is. And there’s nothing wrong. Don’t pretend it’s value price. All right,

Gini Dietrich 

right. Here. Yeah, I was gonna say the moral of the story here is that you have an opinion on fixed pricing versus value pricing. I do. And that we should charge more for our time.

Chip Griffin 

Yes. Yeah. I mean, I have yet to come across an agency just

Gini Dietrich 

wrapped it up for you. Yep.

Chip Griffin 

I’ve yet to come across an agency they say yep. Your pricing scrape. I always say yeah, charge more. Yeah. charge more. Yep. So yep. Got more. If it makes you feel good to pretend you’re doing value pricing to charge more, I guess whatever, fine. But let’s just stop listening to all these gurus you’re telling you to do value pricing and just get your pricing right. That’s it. Okay. That brings to an end box. Yes. We’ll put the soapbox away. And I didn’t I didn’t say anything truly horrible. So I don’t have to wash my mouth out with soap and now you know, your alarms going off. So you need to be done. So we’re gonna have to map this one in they can go go to math. Oh, good. Well, man, he’s got some pricing there. So

Gini Dietrich 

maybe we can Yeah. So when grade math so Probably not, but you know,

Chip Griffin 

well, that’s about where pricing is. So with that, I’m Chip Griffin,

Gini Dietrich 

and I’m Gini Dietrich,

Chip Griffin 

and it depends

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