Dear Commercial Acuman...

Dear Commercial Acuman...
Should our agency set up a Pricing Council and appoint a Chief Pricing Officer?

The idea of a Pricing Council and Chief Pricing Officer was put forward by Tim Williams at the IPA’s Commercial Conference in July.

Tim argued that the agency opposite number to a client CPO, the Chief Procurement Officer, is not a CFO, a finance person; rather, when it comes to conversations about fees, agencies need to be able to field an expert in pricing more than someone who knows about costs.

Pricing vs Costing

When we think of pricing in our industry, we often default to costing – much of our work (with the exception of commission-based media planning and buying) is priced on a cost-plus model; finance simply add up the number of hours to be charged using either a) charge-out rates or b) multipliers and overheads to come up with an overall fee that is then negotiated down by the client’s Professional Buyers.

Professional Selling

Professional selling starts in a completely different place, by pricing the client rather than the service. This begins with a conversation about the business results that the client is aiming to achieve rather than simply jumping straight to allocating and selling time for execution.

Is it appropriate to push back on clients’ requests and pose questions about their aims and ideas of their problems? Absolutely – research quoted by Blair Enns shows that in a complex selling environment, where there are multiple possible solutions, Challengers outperform all other sales types. In other words, clients actively want you to interrogate the brief constructively and come up with innovative thinking.

Moreover, it is this type of proactive, challenging approach that takes an agency from being an order-taker to an order-maker.

Pricing Considerations

Pricing discipline requires something of a portfolio approach; standard executional work, where the required output, and the time / effort to achieve it, is well-known in advance can be priced on either a cost-plus or, better, a fixed menu-pricing basis – with a few standard Ts & Cs around assumptions like work-flow, approvals and scope.

Less well-specified work, such as a transformative campaign idea, or a devising an innovative media strategy, can be priced quite differently.

The first steps in pricing a client start by looking at three things – value to the client, agency cost to deliver and finally price. Value delivered can be defined simply as the business results of achieving your objectives. If the aim is, say, to increase average product selling prices by 3% globally, then this gives you the value to be delivered. Increasing “likes” on Facebook or gaining more RTs is not a business result, so this is where a Challenger approach is needed: what business results are you trying to achieve with your social media targets?

Next, establish a best-guess of cost to deliver and somewhere between these two sits price; there needs to be a buyer’s profit as well as a seller’s and shared ROI is a good way to start pricing considerations.

As an example, if total value to be created is £100 and cost to deliver is £10, then a price of £33 gives each side a 3x ROI.

Pricing the customer

It is also helpful to bring other considerations to bear when pricing the customer, such as:

-        How important, strategically, is this piece of work to the client; how emotionally invested is the client in seeing it succeed? This may also require a consideration of what the client’s competitors are doing.

-        How tight / fixed are the client’s deadlines for this work; it is likely to be a late-nights rush job?

-        How well-disciplined is the client in keeping to deadlines – both agency and internal?

-        Is the client’s style motivating for agency staff to work with or demoralising?

-        How many of the agency’s competitors could do as good a job at this and are not conflicted out?

Pricing Council and CPO roles

You should start not by hiring in a Chief Pricing Officer, but by co-opting a number of self-confident, driven agency members with sufficient gravitas onto your pricing council.

Their remit initially, should be:

-        to understand the agency’s value proposition

-        to create a pricing discipline by setting policies, reviewing arrangements, developing new approaches and conducting price negotiations with clients

-        to review the client portfolio for balance, outplacing low-margin clients, focusing the firm on effectiveness over efficiency and on winning high-margin business

-        to hold after action reviews for all major client assignments

The IPA is developing a Pricing Discipline white paper due to be launched later this year.

For more on Tim Williams’ call for agency CPOs, see here.

Tim will also be speaking at the IPA’s Commercial Conference Roadshow in Manchester on Thursday 6 October. Find out more and buy tickets here.

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