It’s very hard for a Professional Knowledge Firm to implement Value Pricing without first establishing a core purpose and strategy. Most of strategy consists of deciding what your firm is NOT going to do.
A lot of firms fail at this, as they try to be everything to everyone.
We at VeraSage adamantly believe there is no such thing as a commodity—anything can be differentiated. There are examples of throughout our blog of this, from a $1,000 pizza to a $100 hamburger.
In the September 2008 edition of Ignition’s Propulsion newsletter, Tim has written an excellent article on what to do about those services your firm offers that are viewed as “commodities” by your customers.
Here is Tim’s article in full:
One of the greatest challenges to agency profitability is the perception on the part of customers that some agency services are commodities. Because customers feel they can get these services down the street—or across the ocean—for less, there is intense pricing pressure on agencies in areas such as print production, website programming, and media buying.
Unless you do something to add value and turn these perceived “commodities” into something customers can’t get down the street, you’ll be in a downward spiral of competition for work that doesn’t have much of a margin. Not a very attractive business to be in.
Deciding What Is Core
If you step back and look at your services and capabilities, there are certain core competencies that are central to the positioning and focus of your agency. For most agencies, these services will be in the area of strategy and ideation (vs. tactics and execution). For the services that define your value proposition you should be charging a premium for two reasons:
- Because they’re worth more, and
- To help offset the smaller margins you make on execution.
Another, more radical approach is to decide that you won’t offer “commodity” services at all. This is the philosophy adopted by many (if not most) of the successful new agency start ups in recent years. Strawberry Frog, Toy, Brew, Brooklyn Brothers, Fort Franklin, Wexley School for Girls, and others have all adopted the philosophy of what Ignition calls “big brains, small machine.” Their business model is to assemble a group of talented people who provide primarily strategy and ideation and outsource virtually everything else.
When asked how Strawberry Frog handles global brands with a relatively small staff, one of the partners explained, “We outsource everything the customer views as a commodity.” In other words, they follow the precept “Either add value and charge accordingly or don’t do it at all.”
The Hollywood Model
Some agencies refer to this as the Hollywood model; staff the agency with a core group of very smart people, then assemble teams around them for each project as needed. Boston’s Partners+Simons has been following this model for years.
How do you decide what services to handle in-house and which to outsource? Spend a morning with your leadership team and take them through an exercise of listing all the services and capabilities needed by your customers, then rating these services on a scale of 1 to 10 based on the following:*
- Value: How valuable is this to our customers?
- Differentiation: To what degree does this service help us truly differentiate our firm?
- Performance: How would we rate our performance in this area?
- Investment: If we’re not already excellent in this area, how much of an investment (time, money, resources) would be required to achieve excellence?
- Repeatability: Are the outcomes of this activity or capability inherently repeatable and predictable (in terms of time, cost, quality, etc.)?
Based on your analysis of the above, each of these services and capabilities can be assigned to one of four groups:
- Core: Done in-house as a core competency of the firm
- Partnered: Performed in partnership with another firm
- Outsourced: Assigned to an outside resource with little supervision from you
- Automated: Turned into an automated service using technology
If you choose to simply do “everything” for your customers yourself, you will continue to dig yourself deeper into a “high-volume, low-margin” business. And that violates the first rule of holes, which is “When you’re in one, stop digging.”
Tim Williams is founder of Ignition, a consultancy devoted to helping marketing communications firms create and capture more value. He welcomes your comments at firstname.lastname@example.org.
*This model adapted from the work of Ric Merrifield, Jack Calhoun, and Dennis Stevens as published in the Harvard Business Review, June 2008 under the title “The Next Revolution in Productivity.”