Monday, January 30, 2012
We sent out an e-mail about budget discussions and how to agree on a price for a project. Maybe you saw it.
Putting it together led us to talking about pricing models in general. And there are both good and bad points to just about any we can think of.
Compensation via commissions and/or markups. This is a dated concept. And bad for a whole bunch of reasons. For one thing, it doesn't really apply to digital or social media. For another, it turns an agency into a bank, taking on financial obligations for clients and depending on them to pay their bill on time. Been there. Didn't like it.
For another, an agency shouldn't make more money because they selected an expensive printer or photographer or recommended a costly media outlet. I mean, that photographer or that media outlet may well be the best, but if the agency has no financial interest in it, the client can be sure of the purity of their recommendation.
Compensation based strictly on an hourly rate. OK, there at least two things wrong with this. Why should I make more if it takes me forever to solve your problem? And on the other side of the coin, why should I make less if I solve your problem quickly?
Performance-based compensation. This is an idea that has been bandied about for a few years without being really embraced by clients or agencies. On the surface it seems like a good idea - the better the agency does its work, the more they make.
But determining that measurement yardstick can be tough. If you base it on sales, for example, does the agency have any say in the price or the selling process? And if you base it on drawing traffic to a web site or 800-number, how do you determine if the traffic drawn is qualified?
A variable price based on usage. This is the same sort of model that photographers, illustrators, voiceover talent and others have used for years. Personally, I don't like it. While there's a real good argument to be made for paying for the use of an idea someone else owns for as long as you use it, it just seems to be unnecessarily complicated.
Besides, some of the most unpleasant discussions I've had with clients over the years have been around explaining to them why they have to keep paying for something that somebody finished working on several months ago. If clients don't like it for photographers, they aren't going to like it any better for their agency.
A fixed fee based on a perceived value. I think we like this the best. Circling back to our e-mail, if you're a client, you must have some idea of how much a project is worth to you. So share it with the agency and get them to tell you how they will solve your problem for that amount. (Or, if they don't think they can solve your problem for that amount, if that's the case.)
I mean, what the hell? You pay for other things based on your perception of their value to you, right? Dinner in a particular restaurant, a particular kind of jewelry, a room in a particular hotel and designer coffee all come to mind. It's not an alien concept is it? (And - ahem - this where a brand comes in. But that's a discussion for another day.)
Anyway, if you want some sort of performance-based incentive in there, perhaps settle on a lower initial fee with a bonus for agreed-upon results.
But then, as I said earlier, you have to agree on the measurement device. This could be its own blog post. I mean, if I'm going to be judged on how well a weekend room package does for a hotel, for example, I'm going to want to have something to say about the rate and where it's promoted. And I'm going to want a lot of control over the creative. Don't offer to pay me a bonus based on how well I do something and then tell me how to do it.
I'm not saying you can't reach an agreement on how to judge "performance". I think you can, and I think this is the best simplest model of those that I know of. I'm just saying that it takes some thought.
There are very solid clients and agencies operating under all of these models (except, I hope to God, the first one), so it's entirely possible to make any of them work for all parties involved. And a larger discussion - or even an essay - on pricing could get really long. This one certainly has and I've re-written it several times.
But I think the bottom line - at least for us here at Nasuti & Hinkle Creative Thinking - is that we'd prefer some sort of value-based pricing. We think we bring value to our clients, and we'd like to be paid based on that value. Not how long it took us to do the work, how big the media budget is or how long they plan to use whatever the hell it is we produce.