Dollars and Sense
The many benefits of value-based pricing
When trouble comes rolling along, it’s good to have a guy. My friend Greg has just such a guy for his inevitable automotive needs. Located less than a mile from our downtown office, there’s a shop belonging to a reputable mechanic who manages to keep Greg and his family on the road.
Recently, Greg’s car was experiencing an unseemly wobble and he faithfully brought it in for service. Upon inspection, it was determined that a new tire would be needed. Beneath the fluorescent glow at the front counter, the proprietor announced how much the tire would cost as well as his fee for installation and balancing. C’est la vie! Greg asked when he should plan on coming back and was told if he could he wait 20 minutes or so, they’d have him back on the road lickety-split. “I’ve got my best guy already working on it—he’s fast.”
Gifted in the subtle arts of wise-assery, Greg quipped, “Wow! I assume I still pay full price?” The owner — busy preparing the invoice — paused to peer over his glasses. “Well, I can put the new kid on it if you prefer.” He went back to typing while Greg considered his options. Still looking down, the mechanic added, “He’s so green it will take him all day. That way, you can get your money’s worth…” Then, he smiled.
Sometimes a thing is just worth doing right the first time. This is clearly the case with the most important safety equipment on our cars: the tires—and I believe it’s true for a great many design projects, as well. Whenever feasible, I’m an advocate of value-based pricing in creative work and particularly digital work. Having tracked and billed hours for many years, I understand the model and that it’s sometimes appropriate, but I think the future is fixed.
To quickly define our terms, by value-based pricing I mean a business model in which providers are contracted under a predetermined fee for services based on perceived value as opposed to cost-based pricing. These fees can vary widely based on location, experience, niche markets, and reputation, but the contract is based on a final all-in price—not an estimate and not an hourly rate. Buyers are given a dose of confidence, and service providers can scale and deploy their teams without anxiety about nickel-and-diming their way through a poorly defined project.
Value-based pricing is professional
Nobody likes a surprise bill. And there aren’t many feelings worse than telling the boss your project is over-budget because you chose the wrong vendor. Journey Group’s clients are largely public institutions for whom integrity is paramount. Our buyers need to know exactly what they’re getting and how much it will cost when all is said and done. And they also need to know their project will be executed to the highest possible standard.
By taking time before a project is awarded to sort through all requirements and budgeting for completion, we can ensure that we’re seeing eye to eye with our prospective partners. Plus, the extra time to differentiate our proposal from others bidding on the same work increases the likelihood of an excellent fit. When a competing firm is using similar language to describe something for which they’re charging half as much, we see an opportunity for education and dialogue.
And while employing a cost-based model might smooth over tough conversations early on in a client relationship, it actually erodes trust over the long haul. If there’s going to be a discrepancy, it’s more professional to uncover it at the onset of a partnership and avoid awkward conversations about pricing down the road once more is at stake.
If you’re developing a new product or service and lack the experience to confidently offer value-based pricing, consider finding a pro bono client for your first time to market. You’ll learn on the job without letting growing pains become tensions with a committed, paying client. Once those lessons have been applied, you’ll be in a great position to approach new and existing clients with a roadmap for a repeat performance—and a fixed fee that makes sure all parties are happy.
Value-based pricing rewards exceptional work
Reputation is everything in our business. By clearly articulating the full scope before the work is won, demonstrating fastidious project management throughout, and ensuring the client is satisfied with both the product and the agreed-upon price, digital agencies can build credibility as craftspeople who know how to talk about our business.
As an aside, we view this approach as a counterpoint to the move fast and break things ethos emanating from places like Silicon Valley. While the reward structures in a VC-funded or SaaS model are powerful for rapid development and market domination, they don’t work well for the sorts of institutional clients we’re motivated to serve. In the first case, the rate of failure is untenable, and in the latter, one-size-fits-all design and a tendency toward bloat cause issues at scale. Once an investment has been made, our clients need to be able to count on long-term relationships with the people who came up with their solution. A better slogan for these partnerships might be move carefully and support things.
Thirdly—and to step back into the mechanic’s garage for a moment—value-based pricing cultivates internal cultures of excellence. When members of the team can see that our collective compensation isn’t based on how quickly we can complete individual tasks, it refocuses our efforts on the whole. Efficiency gives way to mastery. And rather than boosting (and eventually burning out) standout performers, a model that insists on fixed pricing creates a culture in which we challenge each other to become truly exceptional at each aspect of the product. Our success as a team depends on end-to-end excellence.
Value-based pricing creates space for innovation
There’s a common critique of this model that goes something like this: If you adopt a fixed fee for similar products and services, won’t you end up just doing the same thing over and over again to maximize your profit margin? With the caveat that you need to hire and retain an incredible team, I’ve actually found this criticism to be anything but valid.
Applying a rigorous process to balance the contending priorities of client service, creative leadership, and operations has provided a surprising amount of room for continuous innovation. I don’t mean the sort of game-changing, paradigm-shifting innovation that gets all the press but something more akin to the Japanese concept of kaizen. We continuously improve everything about our practice—from the handshake to the hosting—applying lessons from the previous project to a fresh scope of work. Over time, this generates exactly the sort of sustainable innovation institutions need.
To borrow from Lee Clow: Every client wants something new. And three examples of where it’s worked before. A value-based pricing model allows for this by orienting our collaborations toward the actual value of what we sell while simultaneously incentivizing our ability to do it better than anyone else. We can say with confidence: “Here are three examples of this idea working, and here’s the new something we want to add for you within the same budget.” You’ll never be the low-cost leader, but you’ll also avoid the race to the bottom.
Quick reality check: No matter how thoughtfully we plan and document, there are always unanticipated turns in the road. Depending on a client’s internal culture and tolerance for the unknown, one of the two pricing models may be more comfortable than the other. While cost-based models allow for endless additions to scope, uncovering new ideas and tacking them on as you go, a value-based model forces us to pause and reimagine how we’ll use our fixed resources in light of what we’ve just uncovered. It’s not unheard of for us to exchange one subset of requirements for another mid-project, updating our tasks and timeline without altering our overall budget. As you’d imagine, this requires exceptional project management both on our side and the client’s. We love the ability to turn on a dime in service of a new insight, but it’s not for everyone.
So if you earn your bread pushing pixels, and even if you don’t, consider how a value-based model might be a boon to your culture and business. What’s true for tire technicians is true for you, too: An hour is never just an hour. With the right process and partnerships, “getting your money’s worth” has less to do with costs and more to do with what we’re all really looking for anyway—value.