Value Based Pricing – Eliminating Billable Hours

Customers Demand Accountability from their Partners

The question that often starts a discussion about fees is, “What are your hourly rates?” For years, I struggled to answer that question until I decided that I could live with an hourly rate of about $10,000. My daughter will understand a few missed opportunities to read her a book and put her to bed. In fact, I bet she’d probably say, “See you tomorrow, Daddy! That $10,000 is going to turn into a pony someday.”

Clients do not like the billable hour. There is little correlation between quality of service and cost as the client still gets charged the same amount. Psychological Skills for Professional Services.

Does Time Really Matter?

Sure, the value of an hour is unlimited in the context of a daddy-daughter relationship. But all ponies aside for a moment, time offers zero value to a client. Selling time is like telling a client, “we have no idea.” Buying more consulting time, doesn’t necessarily lead to better results, and time-based relationships tend to incentivize behaviors that maximize profits for the provider of the services and encourage both parties to focus on costs, instead of results.

Where Conflicts Arise in Billable Rates

Here’s an example, Client A invests $5,000 a month in an Agency B’s hourly-based retainer. As agency improve methods, they deliver value more quickly, but across the footprint of agency revenues, profits decline? The agency recognizes that retainer investment is still available from the client and they find value-creating ways of investing the additional resources. Though unintentional, the agency is in a precariously ethically-gray area and the incentives, again though innocently perhaps, encourage them to maximize use of the clients budget, which can take priority over focus on the intended objectives.

The Big Problem with Variable Pricing for Clients

In a recent study, (Forbes, “Getting to the Bottom of What Clients Think of Agencies,” 2012) 71% of corporate clients claim that “accountability” is the area that agencies need to improve most. As CEO’s face increased pressure to demonstrate results, clients want a value with “better, faster, and cheaper” solutions. A majority of clients are increasingly viewing traditional marketing agencies as “suppliers” rather than partners (CMO Network, 2014), even though many are struggling with reduced budgets and fewer internal marketing resources and increased pressure to perform.

Consulting Services are Not Commodities

Both buyers and sellers have a hand in creating a world of hourly-fee structures and more-of-the-same consultants. The assumptions that drive the commoditization of marketing agencies and lawyers alike are that they’re all created equal, and they offer similar capabilities, strategic processes, and expertise. That simply isn’t true. Each client has unique business goals and challenges, and even companies in the same category don’t behave exactly the same.

All tactics are not created equal. The way solutions are delivered varies greatly depending on knowledge and skill, rather than time.

What will this cost me?

Agencies who price there services in terms of hours are doing what attorneys have done forever. They are selling time instead of a solution, thus they are educating the client that the value created is only a function of how many hours have been invested, rather than the quality of the solution, or the impact of the solution on the client’s bottom line. Therefore, the only market-based function of a billable rate is whether or not one providers hourly-rate, is priced appropriately compared to other providers.

Hourly Rates are Pure Laziness

Projects can be designed around a specific scope, and applied appropriately when they are required to achieve a client’s goals. History is a great source of data. An hourly consultant, could analyze their legacy data and use that as one component in setting a fixed price.

Variable Costs are Symptomatic of Not Understanding the Problems

Once you have defined the scope of a particular project, it’s important to understand which variation of your project you would use to solve a unique problem. So, the issue here is part diagnostic. If you have a good understanding of a specific problem, you can prescribe the right solution.

Hourly Rates are the By-Product of a Lack of Repeatability

It is difficult if not impossible to assess the value of any marketing asset without first being able to repeat it within a similar timeframe and with similar resources and costs. For example,  a campaign in weeks 17-28, which targets a specific persona, may be executed the same way as the campaign in weeks 05-16; even though the content is different and some of the nuanced strategies differ. The mechanics of the project remain the same.
A series of agile growth campaigns requires repeatability. To do so, projects are pre-engineered so that they can be selected according to each client’s needs and assigned a single-value.

Developing Value Based Pricing Solutions

So, how can agencies transform their own economic models to deliver greater value and accountability for their clients? The answer isn’t more commoditization, better pitches, or lower billable rates. Businesses are complex environments that require committed, collaborative teams, who are focused on processes and measurement so that strategies can be adapted and continuously optimized to for better, bigger results.

  • Aligning engagements to business objectives
  • Predictable fee structures for better-defined engagements
  • Increased focus on measurement and data analysis
  • Shared risks or performance-bonuses for exceeding goals
  • Specialization, e.g. strategy or collaboration with other agencies
  • Integration and training for limited client resources
  • Increased focus on the up-front diagnostic process
  • Commitment on behalf of both partners

And finally, having the discipline to “just say no” to an hourly-rate, even if it’s $10,000.

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