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    Value is a matter of perception.

    Posted by Luis Serpa on May 7, 2009 - 11:47 AM
     

    Last week I participated in a very good discussion about the value of a service from both the agency and the client’s perspectives (see the post that originated the discussion and the follow-up post, both by @ginidietrich from Arment Dietrich PR).

    It’s very interesting to see how passionate people are about the value of their work (and about the perception of value for the same service in the client’s eyes).  Despite how much this topic is discussed, I don’t think we will ever see a simple answer for it.

    The problem here is that there are several different ways to understand “Value” in a service, so a “Value-based” pricing model will never be unique from agency to agency or client to client, and not even within the same agency and the same client.

    To understand the value of a service, we need to consider 3 factors:

    1. Expectations – No matter the case, value is a matter of expectation. Setting the right expectations from the start is, in my experience,  the only way to ensure satisfactory results and to avoid discussions on the actual value of the service provided.  (I wrote about it 2 years ago – click here to see the post)
      Now, how to set the right expectations? It is a mix of confidence in your own capabilities and knowledge of the market you work in. Each professional will deal with this in its own way, but successful professionals can set right expectations without any effort, because they know their capabilities and limits as well as the current state of their markets. This, of course, doesn’t take into account unforeseen circumstances, but remember that acknowledging the possibility of unexpected outcomes and planning for them is ALSO part of setting right expectations to your clients.
       
    2. Trust – A good level of trust is essential to both sides. The agency needs to trust the client and, even more, trust the client’s products or services being advertised. No matter how much effort is put into the message, customers won’t be coming back and the campaign success will be short-lived if the service is not good enough for them.  Agencies that work with products they don’t believe are just fooling themselves (and their clients) and, in the long run, are compromising their relationship, results AND the perception of value to their services.
      On the other hand, the client need to trust the agency and its methods so they can give them enough room to do what they believe will work better.  Clients that question the agency’s strategy every step of the way don’t really trust the agency’s capabilities and intellectual authority.  They are looking not for brains to bring them solutions, but hands to implement their own ideas and strategies. There’s no real perception of value in this kind of relationship and there will never have any.  If you need to do a project like this, charge an hourly rate…
      My analysis here is that you CANNOT work based on value when there’s NO trusted relationship established with the client yet.
       
    3. Risk – As with everything, a value-based pricing model is about taking risks (for both sides) and making them worthwhile taking (again, for both sides). The best approach is the one where the agency minimum costs are covered (no one will risk for long if they have to pay to keep working), the main fee is based on achieving expected results and there’s a percentage (bonus) based on overachieving milestones. Clients usually don’t have any problem in paying more for these stretch goals as long as they believe they are proportionally getting (way) more in return.
      Another approach is to agree previously upon separate cost streams based on risk:  
      -  A minimum monthyly retainer cost for allocation of resources for the whole duration of the project (no matter how long);
      -  A main fee based on specific goals and milestones ;
      -  A percentage of revenue, based on a pre-agreed KPI for results clearly above original goals.
      This way each party shares the risk of a minimum cost for believing in the engagement (or the need of the engagement), a fair price for its success and a premium for any extra ROI provided.

    I know this answer is not a simple one, but I learned over the years that nothing is simple in our line of work, that client relationships can never be understood by simple numbers and practical wisdom (or just plain common sense) and real empathy are our best tools in the process of understanding the perceived value of our servies (see Barry Schwartz’s video presentation on Practical Wisdom at TED).

    All in all, it is good that it isn’t easy or we would all be out of jobs…

    Follow Luis on Twitter at www.twitter.com/luiserpa



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    2 Responses to “Value is a matter of perception.”

    1. Luis,

      You know where I stand on this, but it’s funny…we’ve been trying a few value-based comp proposals with new clients and they don’t like it. They’d want to know what they’re paying each month and what they get for it.

      So now we’re back to how do we agree on success measures so, when the invoice arrives, they aren’t fighting us on our bill? It’s a work in progress…

    2. Luis Serpa says:

      I think the key point on what you just said is “with new clients.” I was never able to do value-based comp work with new clients either. That’s something that I think is only feasible after the relationship is established enough for the trust factor to matter.

      I had a few good value-based comp situations in the past but, like you said, it’s a work in progress :)

      Thanks for the comment!

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