Ron Baker, FounderVeraSage Institute Profit

Starts with

Pricing on Purpose

“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

- Warren Buffet

Price for Profit.

Innovate for growth.

It’s to increase profits.

The default purpose of

marketing is not to increase sales.

1. Profit is a marketer’s ultimate objective.

2. Profit is driven mostly by price.

3. Price is driven mostly by brand perception.

4. Brand perception is driven mostly by what agencies do for their clients.

The value of agencies

“Even campaigns that don’t do much to boost sales can increase margins by differentiating brands and thus allowing companies to raise prices.”

Harvard Business Review“If Brands Are Built Over Years, Why Are They Managed Over Quarters?”

By Leonard Lodish and Carl Mela

What are you really selling?

What are your

customers really

buying?

“The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.”- Peter

Drucker

Paradigms drive practices

The wrong theory: Time worked equals value created

The wrong practices: Time tracking software

A Tale of Two Theories

The Labor Theory of Value

The Subjective Theory of Value

Value creation and capture

Valuecaptured

Valuecreated

Price

Customer’s Gain

Costs

Cost-Plus Pricing

Value-Based Pricing

Customer Value Price Cost Service

Service Cost Price Value Customer

Seven Steps to Implementing Value

Pricing

Implementing Value Pricing1. Conversation with customer

Not:“What do you need?”

But rather:“What are you trying to accomplish?”

Implementing Value Pricing1. Conversation with customer

Listen > Talk

Opening: “Mr. Customer, we will only undertake this engagement if we can agree, to our mutual satisfaction, that the value we are creating is greater than the price we are charging you. Is that acceptable?”

Implementing Value Pricing2. Form a Value Council and appoint a CVO

Role of the Value Council

1. Ensuring that the agency prices on purpose.

2. Constructing and experimenting with various value-based compensation agreements.

3. Assuring continuous learning and teaching every team member the importance of pricing for value.

4. Dealing with price objections from clients.

Implementing Value Pricing2. Form a Value Council and appoint a CVO

Role of the Value Council (continued)

5. Keeping the agency focused on tracking client results instead of agency inputs.

6. Establishing client selection/deselection criteria. 7. Conducting “after action reviews” at the end of

major assignments.

AAAA PRICING PRACTICES SURVEY

CFO

Costing

CVO

Pricing

=

How often do agencies track the following?

Chief Compensation OfficerNeal Grossman

“We have as many compensation approaches as we do clients.”

Jeff Hicks, CEO

“All of our compensation agreements are experiments in value.”

Carl Johnson, Partner

“We don’t believe we’re in the business of selling time.”

John MintyChief Value Officer

Value CouncilKen Whyte, Glen Drummond, Bob Wilbur, Mandy Moote, Tony Mohr

“At innovation consultancy Fahrenheit 212, we put up to two-thirds of our potential revenue at risk, subject to achieving agreed commercial milestones on a project.”

Implementing Value Pricing3. Determine the optimal pricing method (fixed, results, usage)

Not:“What do you need?”

But rather:“What are you trying to accomplish?”

34 Sources of Client Value

Increase Reduce Improve Create

RevenueProfitMarket ShareRetentionRoA or ROI EfficiencyCash FlowVisibility

CostTime/EffortComplaintsRiskTurnoverConflictPaperwork

ProductivityProcessServiceInformationMoraleImageReputationSkillsQualityLoyalty

StrategySystemProcessBusinessProductServiceBrand

Intangible Value• Specialist expertise/knowledge• Unique social capital• Brand/reputation• Unique result––creativity & innovation• Reducing risk• Excellent experience• Relationship• What else?

Outcome-based agreementsRisk reserves

Ownership of intellectual property

LicensingUsage fees

Royalties

Equity

Fixed value price

Implementing Value Pricing4. Develop Options

Rational vs. Irrational

Behavioral Economics

Anchoring

Options

Options factors to consider:

TimingScopeNumber of deliverablesDegree of

customizationLevel of service or

accessData archivingPayment terms

Implementing Value Pricing5. Effectively present your pricing

Presenting your pricing

1. Present your most expensive option first; this is your “anchor price.”

2. After stating your price(s), shut up.3. Use the word “price” instead of “fee.”4. Use the word “agreement” instead of “contract.”5. Use the word “fair,” as in “Is this a fair price to you?”6. Remember to negotiate value, not price.7. Place a timeline on proposals; no price should last forever.

Implementing Value Pricing6. Engage in superior scope management

Implementing Value Pricing6. Engage in superior scope management

Elements of an effective scope document

Scope statement

Objectives

Constraints

Project structure

Role definition

Assumptions

Deliverables

Functional requirements

Project change control

Approval process

Implementing Value Pricing7. Conduct an “After-Action Review”

After-Action Review Questions

How could we have enhanced our client’s perception of value?

What were the business results and performance against key metrics?

Did we have the right team on this assignment?

How high were the costs to serve?

Did we stay within time and budget parameters?

Could we have captured more value through higher price?

If we were doing this type of assignment again how would we do it?

What are the implications for the way we design and deliver our services?

What could we do better next time?

TIME

HOPE CONFIDENTCOMPETENCE

Insight

PERF

ORM

ANCE

Cycle of Change

Pricing is an art and a skill, requiring…

Patience

Wisdom

Ron@verasage.com

Twitter @ronaldbaker

Phone 707.769.0965

Versage website/blogwww.verasage.com

Thank You!