Pricing is a sensitive subject because often talking about money is taboo, in some people’s eyes. However, you’ve to want to get paid and you’ve to want to talk about money if you’re going to run your own company. Once you’re comfortable talking about money then you’ve to honestly figure out the harder question of…
How Much Am I Going To Charge?
This isn’t as easy as it seems. Traditionally people said you should take your costs for the year and divide by 2,000 hours. The reason people said 2,000 hours was because it was assumed you’d take 2 weeks of vacation. Plus 50 weeks X 40 Hours/Week = 2,000 hours. Lets not forget that predicting your costs for the year is wildly inaccurate most of the time.
1. What happens if an emergency comes up?
2.What if you want to take 4 weeks vacation?
Plus by selling hours to your clients, means you can only make more money if you work more hours each year. This usually means you work more hours or you hire someone to help out. When that person is maxed on hours you start the vicious cycle all over again. A twist on selling hours is adding 10% or even 20% on top for profit. This can work but again you’re still limited by hours and you’re assuming you’ll bill 2,000 hours/year. Plus it incentivizes agencies to work as many hours as they can to max billable hours each month. There is no reason for them to be effective and then efficient with your account.
Some say just charge a percent of the client’s media spend. This can work if you keep profitability in mind but many agencies are just looking for ways to increase the spend, so they can charge you more money each month you’re with them. The incentive is misaligned again with what the client is looking to achieve.
Clients care about outcomes and growing their revenue, profit and number of customers they have. If they are in ecommerce then growing their Average Order Value (AOV)/customer or in SaaS Average Revenue Per User (ARPU) is an important metric on top of revenue and profit.
If your client says they want more revenue, higher profits and growing their AOV or ARPU. Then you should be charging based on value. Yes value. The value you will be providing to the client over the next 6 to 12 months as you grow their revenue and profit. This is nothing new and many companies have been trying value based pricing since as far back as 2009.
Pricing depends on a lot of different factors but I take the following into account when I think about what to charge a client:
- Value of project to the client
- How much is the revenue potential
- What services are they buying
- Number of people on the project
- What skills does the project need
- Who the client is; big brand or startup
- How long is the project going to last
If I know a project will last 6 months and add $1MM in revenue over the next year then I’m going to want to charge a lot more then a project that might only add $250,000 over the next year. Especially if the former project is going to require a team of 3 and take all the skills we offer as an agency to pull off.
When you think about and sell value based pricing to a client. I want you sell a future place in time. What will the client’s business look like when this project is done. What opportunities is this project going to offer the client that they can’t get now. If you sell value based pricing this way and talk about outcomes with the client. There is no reason why they shouldn’t pay your fee. Plus you’ll never have to justify why a project took 10 hours to finish and the client thought it’d only take 5.
Value based pricing isn’t just another way to sell your services. It’s truly another way to think about your business and what you offer clients. I want every agency to think about outcomes, revenue & profit and what the future looks like.