Pricing for Value, Not for Time

Giles Edwards, founder of the UK-based marketing agency Gasp, wrote a Twitter thread about pricing.

In 2018 I put together a Pricing Strategy deck, with the help of various courses and desk research, to present to the team at Gasp. To help both define and trade the value of our creativity. I’ve recently shared it beyond our agency walls, and break it down here…

“It’s true ‘what gets measured gets managed’. Unfortunately, this also means ‘what gets mismeasured gets mismanaged’. The misalignment between how agencies create value and how we make money is now so great that we are in danger of being incentivised into irrelevance.” – Rory Sutherland

“Time is money! But using purely time to define the value of our work is simply crazy. The truth is we all know this, yet for too long the industry has failed to create alternative approaches, choosing to place the blame on client procurement teams or zero-based budgeting approaches. There is only one business responsible for pricing its services and agreeing the price and that is us. We all know that ‘time’ is no measure of creativity or of the return (sales and profits) that advertising delivers.” – Janet Markwick

There is Factory work and costs (i.e. resizing a banner, standardised unit of time) …but there is also Knowledge/Garden* work (where amount of time spent to solve a problem has no correlation to the output – therefore inappropriate to use a “Cost Plus” method) which is the key for Gasp. *The IPA call it the “Logic and Magic business”

“This movie is 15 mins longer so it must be better.” (Said nobody, ever)

The only place time spent should matter is prison.

A ridiculous notion to think the 5 mins a Creative Director (for example) spends solving a complex business problem due to years of industry experience goes down against a Rate Card.

3 choices when looking at what to base our charges on:

1. Inputs (hours)
2. Outputs (defined workload irrespective of input)
3. Outcomes (market effects)

At the moment, there’s a mis-alignment. What the buyer wants less of, hours, we want more of. Classic misalignment. Must align the economic incentives. Sell your value instead of your costs. Move the dialogue away from inputs to what clients really buy; outputs and outcomes.

Trade the language of Cost for the language of Value. (Behavioural psychologists teach that language is always a precursor to behaviour change), e.g. cost, estimate, rates, billable time – which is how agencies have trained clients how to buy.

Instead, use, value, talent, solutions, outcomes. A change in language is a critical precursor to a change in behaviour. Always give options of prices, ideally 3. It changes dialogue from how long does it take, to which of these outputs/outcomes look best to you.

In some respects this is how we’ve operated for some time, but we’ve never rationalised or recorded it. Value is complex and muti-faceted and not reflected in an hourly rate. There’s an incredible amount of intellectual capital, and property value generated from what we do.

Cost > Price > Value. Typically, agencies start at the left. We need to start at the right. Companies leading the pricing revolution start on the right.

A Value Manifesto – courtesy of (aka stolen from) Tim Williams, Ignition Consulting

1. We will price our services based on the value we provide rather than the hours we work. We will stop selling inputs and sell outputs or outcomes.
2. In remuneration discussions, we will use the language of value in place of the language of cost.
3. Because pricing is an important strategic decision that requires judgment in place of calculations, we will never quote pricing on the spot.
4. We will always provide pricing options, but never ranges.
5. We will never lower our price without also subtracting value. We will downsize instead of discount.
6. We will begin each new engagement with an in-depth understanding of Scope of Value before we execute a Scope of Work.
7. We will trade the standard hourly rate card for a “pricing stack” — a variety of different ways we capture the value we create for our clients.
8. We will identify opportunities to benefit from varying levels of risk and reward and create a diversified portfolio of remuneration agreements.
9. Beyond “work for hire,” we will develop new revenue streams based on the intellectual property we create and the intellectual capital that resides in our firm.
10. We will enter each pricing discussion by asking ourselves “How can we align the economic incentives of both buyer and seller?”
11. We will define and manage scope not as hours worked, but as outputs delivered or outcomes achieved.
12. We will only begin work after we have an agreed price and an approved agreement.

*I’ve not created this, I’ve collated this. Like finding a great song & passing it on. Agencies should stop charging for the time it takes to do the magic trick, & start charging for the magic*/