What is value-based pricing?
It’s a buyer-centric pricing strategy where work is priced based on the value it delivers to the buyer as opposed to the seller’s time, costs, margins, or historical prices. In practice, it’s more than a pricing model. It’s an approach to business that aligns the financial interests of the client and agency to reduce risk and yield a greater return on marketing investments. The only requirement from the buyer is a willingness to share the value they seek at the outset. Talk to us to see if this approach makes sense for your business.
“In the final analysis, time is not money (or value) and customers do not buy hours. Pricing by the hour is causing professional firms to focus on the wrong things, with deleterious consequences.” – Ron Baker, Implementing Value Pricing
For each project, Duffy Agency strives to offer clients pricing and payment options, not a take-it-or-leave-it, cookie-cutter proposition. To do this, we start each project with a value discussion to agree on a price and payment terms at the outset. You’ll notice this discussion is focused on your results and the value you receive as opposed to our costs and the time we spend. This discussion will establish:
- How the project is intended to contribute to your business goals
- The objectives of the project and how will they be measured
- Scope, timing, and expectations for how the project will be run
- Ways to align the financial interests of the client and agency
- Pricing is based on the value the work provides, not agency costs
- Price options that let you choose your desired risk level
- Payment terms based on a range of options
Effective Marketing Strategy and Brand Equity Development are the most potent tools any business has to reduce the risk of poor market uptake or outright failure. Decades of research show that approximately 80% of marketing projects aimed at gaining market share fail. This is not because the products are unsuitable but most often due to flawed strategy. This makes determining the allocation of resources to strategic initiatives less about cost control and all about risk management. Given that, it helps to weigh any investment in these initiatives relative to the expected financial returns and the desired timeline for success since that’s what’s on the line. If budgets or timelines are cut to the point where they impede the effectiveness of these programs, then managers should acknowledge the additional risk of failure they are front-loading into the project and account for that reality in their planning.
Not necessarily. Value-based agreements aren’t intended to reduce marketing investment. They are intended to increase the return on that investment by reducing risk, waste, and disparity between the financial interests of the buyer and seller. While value-based pricing can make budgets go further, it still requires an investment that is proportional to the objective being sought.
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Yes, for the client. Yes, for the Agency. The most compelling reason is that you, the client, are paying what the product or service is actually worth. That incentivizes both parties to be at their best and forge the type of long-term win-win working relationship required for the type of change most CEOs seek from us. In his writings on economics, John Ruskin made one of the most eloquent arguments for value-based pricing:
“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that’s all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better. There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.” — John Ruskin.
How does this work in terms of estimates, invoicing, and payments?
Our work is priced on a project basis. We start by discussing your objectives and the value of the work to determine your ambition level. We agree on a scope of work with you before we price it up. In the pricing process, we develop two or three different pricing options based on our discussions. Timeline and payment terms are provided with each option. Our projects include an upfront partial payment to get the work started, followed by other payments depending on the duration of the project. Lastly, we sign a project agreement with you detailing the scope and terms.
