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Agency Leadership

Why agencies need to stop costing and start pricing

By December 2, 2012 No Comments

Clients don’t buy a shovel, they buy the expectation of a hole – Tim Williams, Ignition Consulting

I’ve just read great post by Tim Williams from Ignition Consulting Group about how little time agencies spend thinking about how to get paid.

In fact he highlights that agencies will put 110{3e234da05fbbdc43a47fef4bb820620bdc41c4d21ad7649eedb08be0e65da68e} effort and time into pitches but little more than 1{3e234da05fbbdc43a47fef4bb820620bdc41c4d21ad7649eedb08be0e65da68e} on thinking about how they will be compensated by the client.

And if agencies did start to think a little deeper about how they were paid, it could lead to a much more meaningful outcome for both parties.

Currently most agencies charge a client by the hour. The hourly rate is calculated using agency metrics such as salary and overheads.

So the agency charges the client based on the cost to the agency rather than the value of the output to the client.

But here’s the thing, clients are not really buying the efforts of the agency (their hours), they are buying the outcome of the efforts.

They look to the agency for things like increasing their brand sales, improving their customer retention, shifting their customer’s perception, enhancing customer brand experience, increasing customer engagement etc etc.

So the question is why do agencies continue to charge by the hour?

Tim uses the following analogy; a client is not buying the shovel they are buying the expectation of a hole.

He cites examples of where agencies have already started ‘pricing’ rather than ‘costing’:

– A Californian agency that builds e-commerce websites at no cost to the client, and then collects 15{3e234da05fbbdc43a47fef4bb820620bdc41c4d21ad7649eedb08be0e65da68e} of the first year revenues

– Most agencies building mobile apps charge not for the development (they tend to retain ownership of much of the development code), but rather per download

– An agency that specializes in food proposed “number of recipes distributed” as a KPI (Key Performance Indicator) that could determine agency compensation

– For a medical diagnostics client, a Canadian agency proposed to be paid 25{3e234da05fbbdc43a47fef4bb820620bdc41c4d21ad7649eedb08be0e65da68e} of the revenues from each diagnostic test

There is no doubt that changing from a ‘costing’ model to a ‘pricing’ model could be viable and profitable in a number of cases.

Even so far back as 2010, according to an article in Marketing Week, a study by one agency cited 55{3e234da05fbbdc43a47fef4bb820620bdc41c4d21ad7649eedb08be0e65da68e} of clients wanting a shake up in the agency renumeration model to move to a more ‘results based’ model.

In response to the idea of changing compensation models for agencies, Scott Knox, managing director of the Marketing Communication Consultants Association at the time said “Revenue sharing is being talked about and being trialled by some, but it can be risky because a lot of brands belong to corporations that are bigger than the agencies working with them. Some of the smaller agencies that some clients favour to deliver the more cutting-edge ideas are not going to be able to take on that risk.”

So what about your agency? Would you consider proposing a different compensation model to some of your clients? Do you think they’d be open to the idea? What kind of performance metrics could you base a new model on?

Please let me know what you think by leaving a comment in the box below.