Back in my retail management days, pricing was on my radar daily. It had to be. We could lose a bonus, make a bonus, or experience a mini-come-to-Jesus with our tightly-wound district manager based on one weekend’s margin alone.
I spent many an Alabama night analyzing dot-matrix printed reports (this was before the Internet) on our product mix, margin and sales. It was a game.
Working for an agency is a bit different. Pricing is always on our minds, but we don’t have a daily report that spits out GPM. We’re dealing with services, not products. And we can’t make daily pricing adjustments to keep our margin in check.
We can, however, be a little smarter about how we price from the get-go so that our clients receive maximum value and our agency—maximum margins.
That’s why we are rolling out value-based pricing. Here’s a primer.
What is Value-Based Pricing?
Most inbound marketing agencies offer some form of fixed package pricing where certain deliverables are produced in a set period of time. This pricing is usually derived from an hourly rate, which the client never sees.
The problem with this model is that the dollar amount becomes the make or break for an agency. It’s a nearly impossible balance between charging too much (and losing business) or too little (and losing money).
Value-based pricing pushes past this to another level. It’s a lot more involved than simply adding an 11 to the amp to make it louder. Each client is different—what works and what doesn’t in different industries; different goals; etc. So each client is looked at through a different lens.
As all value-based pricing models are a little different, we’re using a hybrid we feel will be most effective for us and our clients:
Life Time Value (LTV): How much revenue a client’s customer will generate in their relationship
Marketing Customer Acquisition Cost (MCAC): A client’s total marketing cost ÷ number of customers acquired during a given period
Hours: The average time a given project will take to complete based on our historical records
Perceived Value: A combination of what the market is charging and what a client is willing to pay.
For an in depth explanation on LTV and MCAC, check out Hubspot’s e-book “Nail Your Pricing Strategy.”
Why Value-Based Pricing?
For us, it’s evolutionary. We’ve been doing this long enough to have the foundations in place. We know how long it takes to create a piece of content because we’ve been tracking this for years. We have a seasoned team that produces at essentially the same pace. And we have a pretty good idea how a deliverable will perform—though this is not an exact science.
Most importantly, value-based pricing better aligns with a client’s goals. Their success and continued renewal is what’s going to continue to grow our agency.
The client wins because we are only creating deliverables that will be most effective for them to reach their goals. There is no one-size-fits-all plan. They are also given a lot of flexibility.
Inevitably at some point, a client will want to do something different with their marketing. Maybe they want to promote a new service or maybe our content team comes up with a new e-book idea that’s beyond the scope of their contract.
This can be handled in two ways:
1) We can add the new deliverable to their existing contract—increasing the total amount of the contract
2) We can substitute a contracted deliverable with the new deliverable—as long as the value of both is equal—and the client won’t pay anything additional.This goes back to predicting how a given deliverable will perform. We can make assumptions based on our historical client metrics, and how a new client performed in the past.
For example, prior to signing them, one of our clients was:
- Getting less than 500 visitors/month
- No inbound leads
- No SEO strategy
- No blogging and no lead generation campaigns
We know from historical data for clients with a similar starting point, in similarly competitive markets, approximately what kind of results we can get for them in that first year.
As the Pricing Turns
Value-based pricing is something we will constantly be refining to both increase our long-term value to our clients and to stay profitable.
So stay tuned: this is the first post in a 23-part series on value-based pricing. “I keed. I keed,” in the words of Triumph the dog and not the Canadian rockers. There will be, however, at least a follow up post as this evolves.
Want to learn more about our value-pricing?