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January 28, 2004
Value Pricing: Vicious to Virtuous Circle

During Van Gogh's lifetime, the monetary value of his paintings was as close to the recent value of a Cordiant share as makes no difference. Yet, but a few years ago, the Bates component of the deceased Cordiant alone was bought by the Saatchis for around $800M. As much as economists may try to argue otherwise, price is not often rationally deduced and value is perceived differently by different people and at different times.

For the business of marketing, part art, part science, buyers and providers of marketing services have to judge what they give/get and how much they should charge/pay.

The argument for value charging is that where the criticality, complexity and risk involved in the client situation is large; the charge for expertise and services should reflect the total sums involved. This idea is borrowed from the financial and legal world, and is much discussed by the agencies but as yet little acted upon. What initiative there is on pricing comes largely from clients in the form of much increased interest in forms of payment by results. Agency passivity is not surprising, as agency people never like to talk money with their clients and agencies consistently give ground to price pressure from their clients.

A fundamental change in agency attitude to value, price and negotiation with their clients is called for, as well possibly as a significant change in the business model, if the general pressure on margins is to be resisted. Otherwise the continued competitive pressure on client marketing budgets (on all costs, for that matter), will ensure the continuance of the vicious circle on agency margins.

Presently it is surprisingly common for the agency and client to be on quite different wavelengths with regard to the benefit delivered by the agency and, if talking to each other at all about price, the agency is more likely to be on the back foot, having been put on the spot by the client looking for more for less, than demonstrating convincingly why the client must willingly pay more. The alternative, for the confident agency, is to ensure over time that client expectations are explicit and price is seen in the context of the overall business benefit.

Benefit, like value, can be difficult to define. The commercial impact of communications in the market place remains largely subjective, despite the best endeavours of researchers and econometricians. There are plenty of intermediate "measures" from ad tracking studies to franchisee feedback for example, each with their own inadequacies. Different clients and different agencies have different ideas about success criteria and measures; what matters is that each agency/client reaches honest agreement. In practice, we find that frequently this is not the case. All too often what the agency provides and thinks of as benefit worth paying for is seen differently by the client. What the client values, i.e. "time" (in fee paying arrangements), frequently does not deliver productively. Agencies that take the initiative and cause both parties to tie down their expectations and what both must commit to in order to deliver these, strengthen their position.

Price or total cost is also seen differently from the two perspectives. Being measurable and often large, cost understandably gets attention from client marketing, purchasing and management. The agency comes to feel that the client knows the price of everything and the value of nothing and becomes angry or retires hurt, either way feeling unappreciated and misunderstood. An agency with a tougher and consistent attitude to negotiation, and to the accountability of their "product," does best. Agencies must stand up for themselves not just when down to the wire but at all times. As it is, agencies are fired for reasons that would amount to unfair dismissal at an Employment Tribunal, for example, because client management has changed or the client is in some way 'disappointed'.

Unfulfilled client expectations of the agency, stated or not, fair or unfair, lie at the heart of this disappointment. The more these expectations can be shared in advance and discussed together, the less the chance of disappointment. Better yet, if the deliverables required by the client can be made explicit there can be no doubt about the agency priorities and negotiation at the time ensures provision of only those agency resources (later change costs money, that's part of the negotiation too.)

Progressively the agency client relationship will deepen (or it will be clear that the agency and the client have different values and they part company). The agency earns the right to share an understanding of the moneymaking opportunities and risks for the client and to contribute to client strategy. Only when these much weightier issues underpin the relationship will true value pricing become possible. In the meantime, pursuing the disciplined course to deliverables and negotiation has its own reward.

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Graham Beckett achieves results. As CEO of London-based Results Business Consulting, Graham advises many of the world's leading marketing firms. From mergers and acquisitions to fine-tuning management processes, Graham knows the material. If your agency needs results, your agency may need Graham Beckett.
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