In a recent email to a potential client, I said this:
“We are moving away from time-based pricing and to a value-based pricing model, which is a more accurate reflection of our experience, and offers greater benefit to our clients. For example, a change may take us 15 minutes to action, but it took us 20 years’ experience to get up to that speed. If it saves the client 30 hours a quarter, that is where the value is.”
Value-based pricing isn’t a new concept, but it’s fairly new to our way of working. Here’s how we’ve done things previously, in no particular order:
A fixed price
This is when we know what the definitive target is, and there is a clear end point or deliverable. The route to get there is clearly defined and we don’t expect any scope creep. In this case, a Statement of Work is invaluable and we must watch our billable hours closely.
Time and materials pricing
This is more suitable for when a project is expected to throw up some ‘unknowns’. Which could be something like a new integration, a migration or exploring a new technology. It’s an honest and accurate way of pricing, where client communication is key.
Agile pricing
If a project involves the development of an MVP, or there is a particularly long roadmap, agile pricing is more suitable for us. Agile pricing is flexible, and is also a great fit if clients (particularly startups) who don’t have initial clarity of their budget, or direct access to capital. For instance, perhaps they’re still going through funding.
When taking this approach, we discuss the features that can be completed for the client’s monthly sprint budget using MoSCoW prioritisation. This helps them get to market quicker, and generates revenue sooner, so that it can be reinvested into the future roadmap.
Value-based pricing
This is built on the theory of an agency’s combined experience, how that experience can help the client, and the ‘cost’ of the benefit that the project or product will give them. Our friends at HubSpot describe it as “a method that quantifies your agency’s value in ways a client can relate to their profitability”. You could also replace profitability with customer success or satisfaction.
The frustration with fixed pricing
If you had to drop one of these, which would it be? Our guess would be fixed pricing. Being completely candid, even the best agencies in the world don’t get pricing perfectly right every time. Setting a fixed price for a project is entirely possible with good forecasting, planning, resourcing and even up-front client discovery sessions. But it all falls down when the project hits problems.
Any kind of delay, client or agency-side, means that one or the other will be scrabbling for more time or more resource, both of which will add to the cost. But with the cost fixed, there is inevitably some corner cutting, not only to keep agency costs down, but to achieve deadlines, which are often fixed too. Every agency has at least one fixed cost war story.
What about buyers?
There are different kinds of buyers too. It’s not only helpful to understand these, but to also figure out which of these categories your clients fit into.
Price buyers
As it says on the tin, all they really care about is the price. Not the value-added extras, or the technical flourishes or USPs you can add to the job. Price buyers act like consumers – shopping around for the cheapest, and having a strict budget in mind. They are careful not to get pulled into long-term commitments and will scan paperwork for any signs of additional cost.
Value buyers
These clients will switch to another agency should they feel that they can improve their own financial picture by doing so, or if another agency can contribute to the perceived value that their own clients feel they are receiving. Value buyers are more committed to long-term relationships and investments, willing to pass value down the chain to their end user.
Relationship buyers
This is built on trust. 70% of buyers in the IT industry would prefer to move away from price-based partnerships and establish a stronger relationship instead. Like value buyers, there is a chain here. The client trusts that the agency will deliver the value that the end user is looking for – value that will ultimately win the client more marketshare. A good relationship-based partnership will see the agency and the client celebrating end-user success together, rather than more traditional milestones like ‘we’ve delivered the project’.
Putting your money where your mouth is
If we want value-based pricing to be a success, we need to do this. We need to ensure that the value is actually there. We can’t honestly and ethically offer value-based pricing if we know that Agency X, Y or Z is going to be able to deliver the same product as us in a way that is better value and more efficient.
It’s a delicate balance, because we will never truly know how our competitors price their jobs. But we will always have a strong understanding of market rates, our own experience, and client expectations. This is experience and data that we must use to shape our own value-based pricing model and ensure that we are working as efficiently as possible, but in a way that doesn’t burn us out, lose us money, or put the client relationship at risk.
An eye on the industry
Thankfully, there are ways to understand the industry around us. One of those is BenchPress, an annual benchmarking exercise run by The Wow Company, an accountancy firm working with agencies all across the UK.
Using data from the BenchPress survey, we are able to understand how agencies price their work and any prevalent trends. For example, we learned this year that a staggering 87% of agencies used a fixed pricing model. Only 23% have worked with value-based pricing.
So are we a little nervous? Perhaps. We feel that value-based pricing suits our values and also offers the best, well, value to our clients. Fixed pricing does and can work, but we feel that as we evolve as a business and find what works best for us (and our clients too), conversations about value and relationships based on what we can deliver for the client way beyond the work itself is far more fulfilling to us, and it’s what we want to be known for.
Finding security in SPIN
I’ve been reading SPIN Selling by Neil Rackman, which explores a sales methodology built upon research of 35,000 sales calls made by 10,000 people in 23 countries, over 12 years. That’s some numbers. The underlying message is that many of the approaches used for low-value sales do not work when applied to the sale of major products or projects.
SPIN itself is broken down into this (rather clunky) acronym:
- Situation questions
- Problem questions
- Implication questions
- Need-payoff questions
We found particular value in Neil’s analysis of features, advantages and benefits:
| Behaviour | Definition | Impact | |
|---|---|---|---|
| On Small Sales | On Larger Sales | ||
| Features | Described facts, data, product characteristics | Slightly positive | Neutral or slightly negative |
| Advantages | Show how products, services or their features can be used or can help the customer | Positive | Slightly positive |
| Benefits | Show how products or services meet explicit needs expressed by the customer | Very positive | Very positive |
We can clearly gather from this that when talking to larger clients about bigger projects, they theoretically care less about features, are only slightly interested in advantages, but are more deeply committed to benefits. Which in our context, would be showing the client exactly how our digital product meets their customers’ actual needs. If we were to put these learnings into actions, early discovery or sales calls with clients would take a different tone, where we relax on talking about the tech stack and the platforms, only lightly touch upon the advantages of us as an agency and the technology we use, but lean heavily into how who we are and what we do can solve the client’s brief.
Again, this feels more ‘us’ and aligns perfectly with our values. We don’t want to blind or bombard our clients with technical prowess and long chats about systems architecture. That’s for us to talk about internally, and that’s where our ‘value’ comes into play. The value we deliver is the experience, expertise and understanding of technology and deliverables, so much so that we don’t need to delve into that so much with the client, and instead reserve those chats for gaining greater understanding of the client’s and their customers’ needs and goals.
How do you price work in your agency? Are you trying anything new? What are your pain points when it comes to pricing? Let us know.