Dear Commercial Acuman...

Dear Commercial Acuman...
A client wants to buy one of the ideas we presented in a pitch without the execution - how do we value it?

There are two elements of selling - pricing and negotiation.

Pricing

When pricing, you need to bear in mind:

  • Customer value is subjective and changes over time.
  • Cost-to-create is not an appropriate basis for price to the customer.

This means you should not base your price on how long the idea took to develop or how much time is recorded against it.

In any event, the idea exists now so all the costs involved in its creation are already sunk; given your incremental costs in creating the idea are nil, on a cost-plus method the price would also be nil.

To set a selling price for your idea, you instead need to look at its value to the client; you need to price the client, rather than the idea.

In any transaction, price needs to sit somewhere between cost and value; we have established that marginal cost is nil, so we now need to establish a value to your client.

To address what value your idea may have for the client, you will need to understand the original objective against which you were briefed - was it to increase sales volume? Or support a price increase? In a particular segment, or generally?

Assuming your idea works (obviously you pitched it on the basis it will work and the client wants to buy it on the same basis), what would be the increase in value your client would see as a result?

The answer does not need to be too scientific, your aim is simply to set a best-guess value to the client. So while you want analytical people working on your cost estimates, you need more-imaginative people looking at value.

Your final decision on pricing is where to set price between cost and value that gives you a seller's profit and the client a buyer's profit.

One approach is to look at "shared ROI" with your client - if value is £1,000 and your cost to create was £100, then a selling price of around £330 will give both parties an equal 3.3 times ROI.

I don't recommend that you openly share your cost to create with the client; you will also need to make sure that your client agrees with the valuation you have put on the idea, but a discussion on ROI to the client should be a liberating experience for both sides.

Negotiation

Once you have decided on a price, you will need to negotiate it with the client.

The negotiation has in fact already begun - your client showed their hand when they expressed an interest in buying the idea from you, so everything you do from this point is part of the negotiation.

Here are my tips for a good negotiation:

  • You need to be prepared to walk away; set yourself a minimum price below which there is no deal.
  • Don't reduce price without also reducing scope
  • Provide options.

Taking points 2 and 3 together, you might offer your client various prices for your idea; the lowest price might be for a single medium in a single territory for one year only with the option to increase any of the above later on. Correspondingly, your highest price would be for all-out unlimited ownership; as an analogy, renting hotel room for the night costs a lot less than buying the building outright.

  • 80% of concessions are given in the last 20% of the negotiation.
  • The more emotionally involved someone is in a transaction, they more reluctant they become to pull out, aka the gambler's dilemma.
  • If you spend time with your client discussing the value of your idea before you move to price, you are both training them to look at value rather than cost and increasing their emotional engagement with the process.
  • Agree principles before specifics.

Start by discussing total potential value (by year, medium, territory) and get agreement on that. Then agree ROI as a basis in principle before haggling about whether 3 or 5 times ROI is appropriate.

Finally, present your prices as options; base price for a single-medium / single territory / single year with fixed increases for extra years, media and territories.

 

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