Are ‘estimate’ and ‘cost’ words agencies should delete?

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:

1. Redefine and repackage how the agency creates value. This involves deconstructing the multidimensional ways the agency creates value for its clients and recasting feature-driven services as benefit-driven solution sets. This also means moving away from the language of cost and replacing it with the language of value.
2. Keep clients and prospects focused on value created instead of costs incurred. This includes meeting the predictable tactics of professional buyers (procurement) with the proven strategies of professional sellers, including the immensely effective principles of the "challenger" approach.
3. Create new pricing approaches and diversify the agency's revenue streams. This means replacing the ubiquitous rate card with a "pricing stack" — a rich variety of pricing approaches that can be applied to various client opportunities and help diversify the agency's remuneration portfolio.
4. Measure what matters. This is about injecting a success orientation into every aspect of how the agency approaches client business, starting with the idea of a "success workshop" for new client relationships and carrying through to ensuring every Scope of Work is preceded by a "Scope of Value."
5. Guard the margins on every client and prospect. This means employing "profit analytics" to better assess which clients and services are contributing not just the most revenue, but the most profit. It also means aggressively vetting prospective clients for their profit potential.
6. Institutionalise pricing as a core competency separate.  This is about firmly embedding the concept of pricing as a discipline in its own right — separate from finance — that is responsible for constantly evolving and improving the agency's profit model, guided by a defining set of principles.

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.