Pricing experts provide lots of advice on how agencies should price their services. Some approaches promise greater profits but do come with some added risk.
In this episode of the Agency Leadership Podcast, Chip Griffin and Gini Dietrich discuss why you should master basic, traditional agency pricing before you advance to some of these more advanced techniques.
The co-hosts explain that you need to make sure you can price for at least minimum profitability before you move on to maximizing the profit potential of each engagement.
They also review the need to understand the true risks you are shouldering when you adopt a creative pricing model, and how to make sure that you are prepared for the results regardless of the outcome.
Gini Dietrich: “I really believe that you should not do any creative pricing with any client until you’ve been working with them for a year.”
Chip Griffin: “Don’t go to graduate level pricing techniques like points or value or performance-based pricing until you nail the basics. If you can’t price a typical fixed fee project, retainer based project, hourly project in a way that you can do the work well, do it profitably, meet the client’s expectations and do it repeatably then there’s no reason to be playing around with some of these fancier and frankly, typically more risky schemes.”
Gini Dietrich: “Get the basics down first and get it right. Figure out how to make a profit. And then you can start looking at creative pricing.”
Chip Griffin: “These things are essentially scientific experiments if you do them correctly. Test your theory. Get your data, your inputs, and then evaluate it.”
The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.
Chip Griffin: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin
Gini Dietrich: and I’m Gini Dietrich.
Chip Griffin: And today we’re going to talk about getting creative with pricing right after this
Now there’s actually a reason why I was honest and straightforward in that intro instead of cutesy. Because it’s the underlying point of today’s episode, which is that you need to be able to execute the basics before you get creative and fancy.
Gini Dietrich: That is true.
Chip Griffin: And clearly I cannot execute the basics on those intros. So I needed to go back to basics.
Gini Dietrich: I would just like to share that Chip said, okay, let’s get started. How do we get started? So it’s one of those days.
Chip Griffin: It is one of those days. And frankly, a lot of these days are those days. So, you know, it is what it is. At least it’s, it is spring time here in New Hampshire, such as it is.
It is as we record this, it is Patriot’s day in Massachusetts, which means we have the Boston marathon and the Red Sox are playing an 11:00 AM baseball game. So what more could you ask for? It’s actually even sunny here outside of our house.
Gini Dietrich: Wow. It is snowing in Chicago. So I am envious of all of those things.
Chip Griffin: Yeah, we had a quick burst of snow yesterday on Easter, but that was, that was the extent of it.
Gini Dietrich: Mother Nature’s drunk.
Chip Griffin: On that note. We are not drunk. Oh this show! This show would be really fun if we were drunk, can you imagine? That would not be good. We’d have to, we’d have to can all of those episodes, I’m sure because we would say so many things that would require editing.
Gini Dietrich: We’d have to censor ourselves.
Chip Griffin: Well, we want to talk about pricing today, and this is a topic that comes up often and it was the in part spurred by a conversation in where else? The Spin Sucks community.
And where can people find the Spin Sucks community, Gini?
Gini Dietrich: Oh, at SpinSucks.com/spin-sucks-community.
Chip Griffin: Excellent. So what was the conversation?
Gini Dietrich: Oh, shoot. I don’t have it open.
Chip Griffin: How about we just summarize it. You don’t need to read it.
Gini Dietrich: So it was that, we’re looking for a good contract of deliverables because it sounds like the content agency is working with the branding agency, the branding agency’s creating all of the, all of the strategy. And then the content agency is creating the deliverables. And so they were trying to figure out like, do we do X number of hours per week? Do we do X number of pieces per week? Do we do X number of pieces produced? Do we do it by number of words, how do we figure this out?
Chip Griffin: And it then evolved into a conversation of how you can get creative with some of your pricing sometimes when you’re working with a client or another agency or that sort of thing. And so, you know, my reaction was sure you can get creative, but here’s the thing. And I talk with a lot of agencies who are very excited about some pricing technique that they’ve read about.
And so, one of the discussions in the Spin Sucks community was points based pricing. We’ve talked about that on the show previously. Value pricing is a very popular term. Performance-based pricing is another one. There are all of these interesting pricing concepts that are out there. And I think that too often, people grasp for these creative solutions before they just get the basics of their pricing correct. And I think it’s really important that you don’t go to graduate level pricing techniques like points or value or performance-based pricing until you nail the basics. If you can’t price a typical fixed fee project, retainer based project, hourly project in a way that you can do the work well, do it profitably, meet the client’s expectations and do it repeatably then there’s no reason to be playing around with some of these fancier and frankly, typically more risky schemes.
Gini Dietrich: Risky and more challenging too, because it’s, I mean, if you don’t know how long it’s going to take you and your team to do something. And if you don’t know what that actual cost is, and you don’t know how much money you should be making on top of your actual costs, you haven’t figured all of that out first?
You can’t do this other stuff. Like you don’t know what the value pricing is. You don’t know, you know, how many points you should be giving away. I kind of do like the point system idea. But there has to be a really specific deliverable. Like I’m going to give you a 20 page ebook, or I’m going to give you a 500 word blog post. Without that really specific deliverable, you know, so much of the work that many of us do is not that specific and time-bound, so it makes it a lot more challenging.
Chip Griffin: Right. And, and things like, I mean, I would put points based at sort of the lower end of creative pricing, right? It’s not, it, there is less risk in it, but you do have to put the work in.
You do have to put in the work to really be clear about what the deliverables are that you’re offering for each bucket of points that you’re selling so that you can be clear about the amount of work it takes you to do it. Because otherwise you can end up in a bind where you’re not making enough money.
A lot of times people look at these and they say, oh, this is how I can make money. Well, absolutely. Some of these creative pricing approaches will allow you to make even more money on the same work, but they can also cause you to lose a lot of money if you don’t do it absolutely correctly. The other thing is it takes explanation, right?
So points based pricing. I like it too for what it allows you to do. It allows you to have a lot of flexibility with a client without getting into a pure hours based conversation with them. At the same time most clients don’t know what it is. Right. And so that means that during the sales process, you have to have an education component, not about the work that you’re doing, but how you’re charging them.
And so that adds a layer of complexity. It adds some friction that can make it harder to close the deal. So while it may be a good solution, you really do need to make sure that you can sell in other ways first so that you can then identify whether the pricing scheme is the obstacle or it’s something else
Gini Dietrich: I will tell you as well, that I got myself into this several years ago, where clients would come and say, well, can’t you do performance-based pricing.
And you know, in my younger days, I would say sure. And we would try to figure that out and what I was too immature and inexperienced to understand is there, there are lots and lots of lots and lots of things that go into performance-based pricing that you may not even have control over. And so to your point, I think which is if we’re going to get creative about pricing, we have to understand and have the basics down, right? Like if I had said to those clients, yes, we will look at performance-based pricing in year two. In year one, we have to do this, this, this, and this, and this is how much it costs. Year two. if we hit this trigger, this trigger and this trigger together, then we can look at performance-based pricing.
And instead I lost my shirt on some of those deals because I wasn’t sophisticated enough and I didn’t have, I wasn’t even making enough money to pay my team, let alone figure out the performance based piece of it.
Chip Griffin: Right. And, and that’s why I always preach what I call floor to ceiling pricing. So you need to understand what your price floor is.
What’s the minimum you need to be paid for the work that you’re doing in order to generate a fair profit for yourself. And once you’ve done that, now you can start mixing in some of these creative approaches in such a way that you’re still protecting your floor. So with the performance pricing, if you’re going to do something that’s, performance-based that, that takes some of the risk and transfers it to you, you still need to make sure that you’ve shaped it in such a way that you’re almost certain to cover your floor, right? Creative approaches should never be designed in such a way that you just barely break even, or just barely make the profits you need.
Creative is really a way to accelerate that, but only by knowing how you protect your backside and make sure that you don’t have the worst possible outcome of losing money while working for clients. And it does happen. Clients do sometimes cause you to spend more to execute the work for them, then you actually make.
Gini Dietrich: Yep.
So if, if you’re designing this, let’s say that let’s say that we have the basics down and we, on an average, we make 30% profit on top of our floor. Could I then say, as an agency owner, alright, I’m willing to say here’s my floor. We’ll do 20% profit. And then that extra 10% or more comes in through the creative pricing.
Chip Griffin: Sure. I mean, if you’re looking at something like performance, then yeah, it would make sense. You know, maybe what you do is you have some sort of a fixed fee that covers at least your cost. So maybe it maybe it’s, it’s the protection it grants you is not that you’re actually making a profit, but that it protects you from losing money.
So that’s, that’s your fixed fee that you would charge. And then your profit is dependent upon performance and you’re then betting that you don’t have no performance. Right? And so now you have to be really careful because depending on how you structure it, you could end up with no performance. You could end up with zero results.
If you get, particularly, if you get to a point where you’re defining your performance in such a way that it’s so far downstream from the work that you’re doing, that you’ve not only lost control, but you’ve also lost the ability really to track it. Because it can be really difficult to collect the information that you need from the client if it’s not something that’s already in your possession and control. So I would always encourage you if you’re doing something like performance pricing to have it be as close to the work you’re doing as possible. So that ideally you and the client are both seeing the data in real time, and it’s not something where you have to wait for the sales team to report back yes, the work that Gini did is what caused this sale to happen. And so now she’ll get a percentage of it, right? I mean, that’s, you want to avoid that if at all possible, but clients obviously would much prefer to do that. They’ll say, Hey, you know, I’m happy to pay you based on the amount of sales we make.
Well, if it’s an e-commerce situation that may be fine, right? Cause you may manage their Shopify store and you may see what sales happen. And so it’s fine. Right? You’ve got that level of knowledge of what’s going into it. But if it’s a B2B sale and it’s an extended, sometimes it may be, they go, you know, they, they first come into the pipeline based on the work that you’re doing.
But it’s three months later that they actually make the sale. Is that actually going to be connected back to you correctly?
Gini Dietrich: That’s exactly what I was going to say. So in my vast experience of doing this wrong. I really believe that you should not do any creative pricing with any client until you’ve been working with them for a year.
And you really truly understand. Because I can give you a great example of a prospect who said to us, we know we have multi-touch attribution, so we know first, middle, and last touch attribution. We know when they came in, what caused them to come in. We know the journey they took and we know what they did last before they, they made before they became a customer.
And which sounds great, right. If you really have that multi-touch attribution model in place. Fantastic. But we got in there and we discovered that that was something that they were aspiring toward and they were looking at software to help them get there, but they were not there yet. They could do last touch attribution, but had I gone on the word of the prospect saying, yeah, we have multi-touch attribution.
I probably would have created – and I not had not the experience I have. I would’ve created a performance-based model based on first touch attribution, because that’s usually where the work that we’re doing is it’s first touch when you can’t track that. And I’ve also learned over the years that if you leave it up to the sales team, they usually take credit for your work, even if they didn’t do it.
So you can’t really rely on that either. So I would never, ever, and I, I feel really strongly about this. I would never recommend that you do any creative pricing with any client until you’ve worked with them for at least a year. And you really understand the inner workings of their business before you go about that.
Chip Griffin: Well, yeah, I would agree with that for these, what I call extreme creative pricing. So performance, I think is that is at the, at the far end of the spectrum for creative pricing, because it involves a tremendous amount of risk on the agency’s part. And, and so I would agree on something like that, but I think some of the other kinds of things we’ve talked about, like points-based, you don’t necessarily have to have the relationship.
You need to have the experience through, whether it’s with that client or just clients generally pricing in a more normal fashion so that you understand what, what it takes to do these kinds of projects. And you’ve really got that track record that you can then put into it. And you can really understand if you’re shaping these packages correctly.
If you’re positioning them correctly. If you’re going to be able to execute on them in a meaningful way, because otherwise, you know, you don’t know what’s going wrong, right. So it could be that you structured your points wrong. It could be that you haven’t explained them correctly. It could be, you know, that you’re not tracking things appropriately in turn, there’s all sorts of things.
And so you don’t know whether it’s the pricing model that’s to blame or whether it’s something else. And you really want to make sure that you’re in a position where you can identify if your creative pricing model is the problem.
Gini Dietrich: Yeah. I still think even with some stuff like that, that you should have a year under your belt with the client.
And, and the reason I say that is because once people get involved, things go crazy. Like you could explain, you could have the best model around, you could have the best point system built. It could work perfectly for eight clients and for the ninth client, it all falls apart because either they didn’t understand or they had their, they were looking at things through their own lens or their expectations were different than what you explained. You get people involved and everything goes to pot. So I would say do those kinds of things after you have, and, and certainly we can disagree on this, but I, I would never do that for our business until I had a year’s worth of working with that client. For that very reason. Like you just, you just don’t know.
You just don’t know, like I have, I have a writer that I work with all the time who says to me, okay. If it’s a 10 page ebook, it costs this and if it’s a 20 page ebook, it costs this. And I’m like, okay, but what if it’s an 18 page ebook? And he doesn’t have anything for in between, but I also don’t want two pages of filler words.
Right? So you kind of have to figure those pieces out before and with that specific client, before you do many, many of these creative pricing models.
Chip Griffin: Yeah. And I think the other thing is you start to develop an understanding of, of what are the trade-offs of some of these creative pricing models, right?
So let’s, let’s look at points again in that regard. So if you’re going to go to a points-based system, you’re really commoditizing the work that you’re doing. Right. Right. And so it’s typically better for occasions where you’re, you’re really dealing with something like content production, right.
That’s the most common place that I’ve seen points-based, and web maintenance. Those would be the kinds of services where it can be very difficult to describe exactly all the options you want to stay out of the pure hourly billing thing so you don’t get into a debate over, you know, is this a 15 minute thing or a 30 minute thing?
So, so points can have a role there. But what you really need to understand is that once you’ve done that, you’re, you’re now turning it into more of a unit cost discussion, as opposed to what’s the value that you’re creating for the client. And so that is, and that may be fine, right? You don’t always need to be in a position where, you know, you make all the work that you do as an agency sound all highfalutin and, and fancy and strategic because sometimes agencies are hired to be arms and legs and that’s okay.
Right. There’s no reason – there’s a lot of folks out there in the agency community that preach you shouldn’t be arms and legs for your client. Why not? If they’ll pay you for it and you can generate good profit doing it. By all means do it. That’s what they need. Yes. We need to be in the business of serving the client with what they need, not with necessarily what we would like to do.
Yes. Hopefully there’s some overlap. Hopefully the Venn diagram, you know, intersects there. But, you know, and so once you’ve done that, you are now much more of a service provider as opposed to a strategic ally of the client, right? Because once you get into those points things, it’s really just a, I’ll have one of these I’ll have one of those and one of these, right?
It’s the difference between going to a fast food restaurant and having a tasting menu from a five-star chef. That’s really the difference that you’re talking about.
Gini Dietrich: That’s a great analogy.
Chip Griffin: And both can be profitable. Right? I mean.
Gini Dietrich: Both can be very profitable. Yeah.
Chip Griffin: I know there are plenty of five-star chefs making tons of money. Plenty not doing too well, too. And fast food restaurants – some do great, some don’t. It’s not the, the method of delivery that matters. It’s how you execute.
Gini Dietrich: Yeah. I mean, I think there are lots of different ways. There are lots of experts out there saying different things you should do. And even in the conversation in the Spin Sucks community, there was some debate over how to handle it and what to do.
And, you know, one person, as a client said, I really liked the points based system, but he’s also a communicator and he knows by trade and he knows how that works. I think that, that there is a difference too, if you’re, direct client contact, does the work, or has done the work that you’re doing that they’re hiring you to do, that’s different than the CEO hiring you to do the work who has no marketing experience. So there is, there are lots of things that you should be thinking about. There are lots of things to take into account, but I think you’re right. Get the basics down first and get it really, really right. Figure out how to make a profit.
And then you can start looking at this kind of stuff.
Chip Griffin: Yeah. And I think that the last point that I would make is that if you’re going to get creative, you need to understand what the reasonable worst case scenario is. And so, you know, whether that’s performance pricing and you, you assume that that no sales happen or, or no conversions or whatever it is that you’re tracking, if it’s, you know, points based, you know, that it takes you twice as long to execute on something, you know, what does that mean for you?
Right. You need to look at what the reasonable, worst case scenarios are so that you say, okay, I’m comfortable with the risk that I’m taking of this creative approach to pricing. And those are the things that are very difficult to do before you have some real track record of good pricing and a normal pricing model.
And I should put normal in quotation marks, let’s call them traditional pricing models for agencies. Right? If you can, if you can nail those now you’ve got the information and the inputs that will help you figure out what’s the likelihood of success. And what’s the likely consequence of failure of this new pricing model that I’m trying.
Gini Dietrich: Yeah. And have people poke holes in it for you, call, drop into the Spin Sucks community, drop into the SAGA community, ask people to poke holes into it. There are lots of people who have lots of different experience that can help you think this through.
Chip Griffin: Yeah. And, and that’s one of the benefits is that, you know, we end every show with it depends and that’s because everybody does have a different experience.
Gini Dietrich: It truly does depend.
Chip Griffin: It truly does depend. And if you can take all of these inputs and process them and understand, you know, how they’re likely to work for you and what you’re doing, you’ll be in a much stronger position. And there’s certainly room to, to experiment, right? I mean, I am a big proponent of experimenting, trying new things.
Maybe try them on one prospect at a time, as opposed to making a wholesale change pricing model all at once. Right? Cause I’ve seen that too. Someone gets a new idea and they’re like, we’re going to change everything. Tell you, what, how about you try that with the next prospect that comes along, see how it works for them.
If it works out, great. Now maybe you start trying it with some additional prospects and prove it, right? I mean, because it’s, these things are really essentially scientific experiments if you do them correctly. Right? So you, you test your theory. You get your data, your inputs, and then you evaluate it. You make adjustments and you kind of keep tweaking it.
And then maybe after you’d been doing it for six months or a year, you say, yes, this is the approach that that’s going to work for us. And so now we’re going to pivot and try to do most of our engagements with this new pricing approach that we’ve come up with. But don’t do it overnight just because you read some guru’s article.
Gini Dietrich: Wasn’t it Thomas Edison, who said you can try something 10,000 times and it may only work once. Same kind of idea there.
Chip Griffin: And, is that one time? Can you replicate that ever again?
Gini Dietrich: Right. Right. So if you try something 9,999 times, and the light doesn’t the light bulb doesn’t work, but on the ten thousandth time it works? Figure out if you can replicate that and actually build the light bulbs.
Chip Griffin: Exactly.
So hopefully this has caused a light bulb to go off for you listening to this episode of the Agency Leadership Podcast. I’m Chip Griffin,
Gini Dietrich: And I’m Gini Dietrich.
Chip Griffin: And it depends.