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The biggest frustration among CMOs is agency compensation and that impacts new business.
John Winsor, CEO of Victors & Spoils, the world’s first creative (ad) agency built on crowd sourcing principles and former VP/Executive Director of Strategy and Innovation at Crispin, Porter + Bogusky. John addressed the future of advertising agency compensation head on in a recent article, Fees, Lies and Advertising, where he states,
“Businesses act based on the way they are compensated. And, the majority of agencies are compensated by selling their people’s time. Compensation is based on the number of FTE’s or full-time employees working on a piece of business. In the age of collaboration the FTE model is broken. The fact is that many agencies make more money when they put more people, or say they do, onto a piece of business. Likewise, it’s more profitable to take more time to do something. If a project should take a month there’s no disincentive for most agencies to drag it out longer.
If advertising industry is to thrive in the age of collaboration we must address the root of the problem, the way we are compensated for our work. If we don’t many companies won’t survive the current economic transformation that’s underway.” – John Winsor
Agencies have neglected the art of pricing for their services. That’s sad because pricing is the number one driver of profitability and it also impacts new business. Pricing should be an executive function within the agency.
I was introduced to a fresh concept on pricing through Ron Baker, author and founder of the VeraSage Institute, a think tank dedicated to teaching value pricing to especially to professional service firms. Ron and I previously shared a platform as speakers at BOLO 2011. I was so drawn by Ron’s passion for value pricing that I purchased his book, Pricing On Purpose: Creating and Capturing Value.
Ron is a gifted speaker and a brilliant writer who can help anyone who is hungry to learn more about pricing, particularly for professional service firms.
“Baker has done it again! Building on the core principles that he advanced in Professional’s Guide to Value Pricing and The Firm of the Future, Ron Baker has again evolved thought leadership on the critical dynamics of value and pricing. Baker’s latest work, Pricing on Purpose: Creating and Capturing Value, provides real-world examples and practical strategies that provide a framework for pricing optimization. His clarity of purpose and passionate call to action resonates in today’s intellectual capital economy.”
Thomas Finneran, Executive Vice President, American Association of Advertising Agencies
Ron points out the reasons why we should shift our thinking from cost-based pricing (inward looking) to value-based pricing (outward focused).
The book provides examples from a lot of different industries using analogies such as “Why is popcorn so expensive in a movie theatre?” and is a guide to strategically pricing your agency’s services and offer better value to your clients.
This book covers:
- What and how people buy
- The fallacy of commodity thinking
- The five Cs of value
- The market share myth
- The difference between cost-plus pricing and value pricing
Pricing on Purpose should become your textbook for pricing. I highly recommend it.
Click on the following link for more reviews, Pricing on Purpose: Creating and Capturing Value
Additional articles that may be of interest:
Great advice for agency partners. FTE-based pricing is completely disconnected from the client’s value. Best-case, you make money, but are not aligned with the customer’s interests. Worst-case, you make far less money than you should, and have to work much harder.
Thanks for sharing your thoughts Reuben. Very much appreciated.