Warren Buffet said, “the single most important decision in evaluating a business is pricing power”. And pricing has the power to drive or destroy your agency’s profit margins. Yet pricing for agencies, service providers, and consultants remains an enigma. It can be a significant source of growth if you can be the price setter and not the price taker so let’s talk about Pricing for Profit.
For agencies and done-for-you service providers, prices vary wildly for the same if not very similar services. Then you throw in the gig economy and online marketplaces, it's a jungle. You know you need to raise your rates but with all these downward forces there’s no rational basis to do so. Unless you can figure out how to get paid for twiddling your thumbs.
Systematically improving your pricing is possible and it can have a lasting impact on your profitability and sustainability. I mean you do such a great job, surely your clients want you to stay in business right?
So how do we lean into this Pricing For Profit thing?
1. Understand your services
Doh! I know how that sounds but seriously, which of your services are the most profitable, which are “loss leaders” and which are a black hole where all your profit goes? You need to understand your services on this level. If you’re a full-service agency, you might use logo design and branding as a loss leader to land a client and then upsell them to a website project and beyond. If you know your services, you can strategise which ones to “offset” as a cost of winning more business. Meaningful analysis of your pricing and profit at a service level can help you make these decisions and design your value chain.
2. Understand what clients really value
A client’s perception of value is not the same as your perception of price (read that again). Client insights and understanding are the start of value-based pricing. It requires you to identify all their buying criteria, pain points, and factors that determine how much something is worth to a client. Being able to articulate value for the client is your ticket out of the race to the bottom.
If you understand how you get to your price, how it was calculated and it’s not a “finger in the air”, then your price is defensible. Seasoned negotiators will have a pre-prepared set of arguments to support their price or outcome before they step into the arena. You must have a similar strategy to move from negotiating on price to negotiating on value because you can’t discount time. Practice this skill and become a master at pricing value.
4. Train your team on your pricing-for-profit strategies
Creative entrepreneurs aren’t fully motivated by money, and that’s ok. But if you train your team on your adopted pricing methods, and train them on how to show value, they will become skilled at spotting opportunities for increasing the price or upselling value. Plus you really want your whole team to be building commercial awareness. I come across dozens of instances where teams do things for free because it’s “part of the job” or because a client just asked for “this quick thing”. Pop some corks in those leaks and what your profit margins grow.
I quoted Warren Buffet earlier, it’s worth mentioning here that he went on to say that if you have the power to raise your prices without losing business to a competitor you have a very good business. If you have to pray before raising your prices by 10%, you have a terrible business.
Pricing is a powerful lever. Yes, pricing in agencies and done-for-you businesses is complex. You have to contend with time estimates, scope, the quality of the brief, and moving goalposts. Sometimes it really does feel like a game of how long is a piece of string. You can turn that complexity into your advantage.
Don’t tell your clients how good you are, show them your proven process for getting them the results they desire.
Take them behind the scenes and show them why this is the price you recommend to achieve their objective
Give them options and move from “which agency” to which option should I choose
Always show value first, outcomes and deliverables need to be super clear (it’s about them not you)
Gather intelligence, ask clients what their buying criteria is, ask to see competitive quotes so you can keep improving
PS. If raising your prices by 10% gives you the creepy crawlies, come to the Pricing For Profit workshop on March 23rd at 4pm GMT. It's free but you have to register here >