Tim Williams, Founder of Ignition Consulting Group and speaker at this years’ IPA Business Growth Conference, provides practical steps you can take to price projects on the value they add, not the hours you put in.
As marketers continue to aggressively cut costs, agencies are struggling to grow their revenues and improve their margins. The reaction of most agencies is to attempt to do a better job of estimating, recording and billing for the agency's time. That is not the answer.
Agencies are on the defence because they are stuck in a deep rut of reactively defending their costs (hours) instead of proactively pricing and selling their value. The result has been a 20-year decline in average agency profitability.
Reaching an Inflection Point
But it's not too late to reverse this trend. Several studies have proven that the single most powerful way for organisations to improve profits is not to increase revenues, but rather to improve pricing. Just a 1% improvement in pricing can produce an 11% improvement in profitability.
Many agencies are now convinced that it's time to bury the billable hour and adopt more progressive pricing practices, but aren't sure how to make this transformation take hold inside their organisations. The first step is for leadership teams to commit to devoting as much time and energy to pricing as they do to new business. The most effective way to make this happen is to formalise and centralise the pricing function within the agency, separate from finance and accounting. Accounting is not pricing.
Enter the concept of the Pricing Council. The Pricing Council is a small, interdisciplinary group of senior executives who take responsibility for ensuring that the agency prices on purpose, according to the value received by the client, not just the costs incurred by the agency.
The Guardians of Value
While the traditional finance department is focused on internal measures driven by costs, the Pricing Council is focused on external measures driven by value. The foundational job of the Pricing Council is to direct the focus away from efforts and inputs — which is what cost accounting measures — to outputs and outcomes, which is what clients really buy.
The six essential roles of the Pricing Council are to:
In most agencies, serving on the Pricing Council is a part-time role, not a full-time responsibility. By involving professionals from multiple disciplines within the company, you obtain insights and ideas that would never arise from a traditional financial management group. Most importantly, the formation of a Pricing Council sends a strong signal to your both your team and your clients that pricing is a professional discipline in your agency, never again to be confused with just counting your hours.
Tim Williams leads the consultancy Ignition Consulting Group, which teaches agencies better ways to capture the value they create for their clients. Tim will be joining us at the Business Growth Conference on 5 July to share real-world examples and provide actionable strategies for agencies to join the pricing revolution. Find out more and book tickets to the event here. You can also catch up on Tim's speech at last year's event here.