One of the most fascinating things I have discovered, from my ten years teaching Value Pricing to professionals, was advertising agencies are more mired in the billable hour than law and accounting firms. This is astonishing when you think about it, since advertising agencies are the epitome of an intellectual capital profession. What else do they create and sell other than ideas? In addition, they have the potential to impact the pricing power of their customers, through brand positioning, differentiation, and other marketing strategies.
When I began working in this profession in 2005, I learned that agencies are expected to fill out spreadsheets, listing their overhead, salaries paid, and other costs of running their agencies. This is used in order to compute hourly rates, or a cost-plus price. This is the economic equivalent of a regulated utility only being allowed to earn a certain Return on Investment on its cost of capital. It doesn’t work very well with utilities; it’s pure insanity in a free market.
Since 2005, I have had the great good fortune of working with the American Association of Advertising Agencies, under the leadership of Tom Finneran, presenting Value Pricing seminars around the country. In 2006, I had the pleasure of meeting Tim Williams, and we have combined our intellectual capital, presenting a series of programs last year for the AAAA. This year, Tim and I will be presenting Value Pricing programs for agencies in Chicago and Las Vegas, as well as for various agency associations.
More exciting, we will launch our LIVE model, Leading Indicators of Value Evaluation, a new revolutionary model that we believe will help advertising agencies make the transition from cost-plus pricing to Value Pricing. Tim is a Senior Fellow of VeraSage, author of Take a Stand for Your Brand and president of Ignition Consulting. Tim is a thought-leader in the advertising world, and it has been an enormous pleasure to be able to work with him.
Tim was recently listed as a resource in the print version of an AdvertisingAge article entitled, Fed-up Agencies Quit Punching the Clock, from the January 22, 2007 edition. You can read the online version here. I was heartened to read some of the quotes in the article from Crispin Porter & Bogusky and Anomaly, two agencies that don’t do timesheets, don’t price by the hour, and utilize Value Pricing. Crispin is on the most innovative agencies in the profession at the moment and according to Jeff Hicks, “We’re in the intellectual-property business. We don’t sell time.”
Anomaly, a New York-based agency started by ex-TBWA executive Carl Johnson also doesn’t have timesheets. I love this quote from Anomaly partner Jason Deland: “We price ourselves on the subjective theory of value. That allows us to structure more varied, entrepreneurial compensation agreements.”
For as much as people love to bash, or outright ignore, theory, the fact is there is nothing more practical than a good theory. The labor theory of value, which is the talisman for the majority of Professional Knowledge Firms, is inflicting incalculable damage to both firms and the customers they are privileged to serve. It focuses on inputs, costs, efforts, efficiency, and activities, all at the expense of output, results, effectiveness and value. It is failing both firms and customers. It’s time to change the conversation, and learn from the trailblazers such as Crispin and Anomaly that are brave enough to chart a new course in their profession.
As more and more agencies adopt the subjective theory of value, we will create a critical mass. The one question I find infinitively fascinating is which profession will reach the “tipping point” first—accounting, law, technolgoy or advertising? If I was a betting man, my money would be on the advertising agencies.