The topic of value-based pricing often comes up in conversation within the creative industry. Despite this, it’s still a relatively niche way of pricing creative services, and not everybody is sure on what it actually means.
At the moment, the majority of agencies price their projects using a time-based method. This means looking at how many hours a project will take, what you need to charge per hour to make the project profitable, and charging the client accordingly. Of course, this works well otherwise it wouldn’t be the most popular way of pricing. However, only to an extent. After all, the number of hours in a working day is limited and so eventually you’ll hit a ceiling of how much your agency can actually make and how profitable it can be.
As an alternative, value-based pricing is certainly worth a look. But what actually is it?
Value-based pricing is pricing that relates to your client’s profitability instead of your own. It focuses on the end result for the client, asking questions such as what value are they getting out of the work? What is the work really worth for them? What is the tangible outcome of the project for the client, i.e. how much money are they making because of your work that they wouldn’t have made otherwise?
This method of pricing is used in so many other industries already. As an example, a designer t shirt uses broadly the same materials and time to make as an unbranded one. Yet, customers are willing to pay far more for the designer t shirt because it offers more value to them: they are perceived as having a certain level of status if they’re seen wearing something designer.
If it’s so successful in other industries, isn’t it about time creative agencies started embracing value-based pricing too?
The problem with value-based pricing
Unfortunately, this dream method of pricing doesn’t come without its issues. The good news is that the major issue can actually be largely overcome, and that is selling the pricing structure to clients.
Selling value-based pricing to clients is the main reason why most agencies don’t do it. Sure, charging more based on the value a project brings sounds good, but what are clients going to think of higher prices?
Agencies are afraid to start charging their clients more after years of the same pricing structure. They think it’ll be a shock to clients who are used to the ‘old-fashioned’ way. Ironically, they worry that clients won’t see the value in it.
However, clients who see the true value of your work and know that your agency is the right fit for them in other ways should embrace value-based pricing. After all, they will recoup the investment they are making as ultimately the whole point of your work is to make them more money!
Furthermore, clients who are reluctant to pay more likely don’t see the true value in your work anyway. These are probably not the sort of clients you want to hang onto in the long run. If they’re unwilling to pay for value-based pricing, agencies can always make space for higher value clients who will.
Remember that your clients likely already pay for value-based pricing with other professional services. For example, if an accountant used a solely time-based pricing method, their hourly rate would likely be a lot lower. However, they know that a business needs their services to operate, and so they bring value to them and are confident in charging on a value basis.
Of course, it’s not that simple and getting rid of all of your clients is probably not the best thing for your agency. However, if you are serious about scaling and profitability, you’re going to have to get rid of less profitable clients at some point, so it’s worth bearing in mind.
How does value-based pricing work?
We’ve already established that value-based pricing works by charging the client a price based on what the work is worth to them, rather than an hourly rate based on what the agency needs to cover costs. This means that you can usually charge more on a per-project basis. However, establishing what that value is, and how much you should be charging, can be confusing.
The majority of creative agencies have some kind of niche that they specialise in. As such, they get to know the industry very well. In these cases, it can be easier to work out how much a solution is worth to a client as it’s likely these agencies have case studies to determine how much value past projects brought to clients, or at least the insider knowledge to give a good estimate.
Essentially, your first step should be to determine what outcome the client wants. This doesn't mean what work they want, but what do they want that work to do for them? Is it to get more clicks to their website? Gain new customers? Retain existing ones? Brand awareness? To stand out from competitors? Once you have figured that out, you need to determine how much a solution to that problem is worth to them. For example, if a new creative ad campaign brings in £1million for your client, it’s not unreasonable to charge 10% of this for the work that enables them to make that money. Usually, this is a lot more profitable than what you would charge on a time basis.
The truth is that deciding on how much to charge will take industry analysis, competitor research, and trial and error. That’s something else that often puts agencies off trying it. They’re worried that they will undercharge and end up worse off. However, in the long run, value-based pricing should be more profitable for you. And, you can always gradually move clients over to this system to ensure you’ve still got enough coming in from your time-based projects until your value-based pricing structure finds its feet.
So, is value-based pricing the way forward?
There are certainly a lot of perks to value-based pricing for creative agencies. It can bring in more revenue, and therefore make your business more profitable. It can also be used as a good differentiator from the competition, showing that you are confident in your work and the value it brings.
Of course, it doesn’t come without its drawbacks, namely the willingness of clients to pay more for services they previously got at a lower cost.
Despite this, I predict that as the industry becomes more educated about value-based pricing, it will become more common and clients will be more willing and used to it.
Implementing value-based pricing in your agency can be tricky to do if you aren’t experienced in doing it before. To find out more about how I can help you do this, and assist your agency in becoming more profitable overall, please get in touch.