Sunday, 30 November 2014

Value based pricing - Saving digital marketing agencies and helping grow

This post follows my previous post on what is killing the digital marketing agencies? If you remember we found the wrong pricing policy at fault. And this takes us to another expedition where we try to find the secret behind the success of the money minting digital marketing agencies. Money minting...! We all want to be one... deep inside.. no matter what we project outside. Agree? You do... I know! Ha ha..

Let's move on...I will be talking a little about economic theories and maths. Sounds gross??? I find some of you leaving... Hey wait... stop... It isn't boring. Believe me... You will have fun... I did...

So this is how it all started... I was keeping an eye on the growing and prospering agencies to get the secret recipe out. With binoculars and covert cameras, I started keeping an eye on every single move - small or big. A pattern that appears very clearly in the moves of my subjects (here the prospering online marketing firms) is how their defined the business they are in.

None of them would say we create websites or we do content marketing, what they instead reinforce is that they add value to their customers business by doing whatever they can within their domain.
Adding or creating value is the word!

Taking a deeper look at why every subject under observation would swear by creating/generating value for the customer, I was exposed to the fact that the value creation exercise gave power to the agencies to price big and improve margins.

They kept it simple, create value for the customer and capture a small portion of the value created. The client won't mind because that's exactly what they hired the agency for - creating value and increasing the value being created. Simple isn't it?

In essence, this philosophy created a transparent win-win situation for both the agency and the client.

The agencies were determined to create greater value for their client because this process directly affected their margins. A direct relationship between value generated for client and revenue made (value captured) by the agency was established.

You may be wondering, why the other agencies were murdered by the pricing policy. They too created value. Did they not? Well they did but the way they defined value was very old school and agency focused instead of being client focused.

Remember the agencies saying, "This is what it costs me to create a blog and I add a margin of x%, so here is my price." The client was at the end of the value chain.

  Cost for the agency > Price (Cost plus margin) > Value for Customer

While the agencies that prospered turned the table and kept the customer at the bigning of the value chain. They said:

Value for the customer > Price (Value captured) > Cost for the agency

Confused? Thinking what is the difference? The difference is in the approach. The agencies that died prematurely and were murdered by the pricing policy were the once who computed the price of their services/ offerings based on the labour and overhead cost incurred. The agencies' services/offering are NOT valued by the client because it takes x labour hours to deliver them. Value is not the cost incurred. It is not same to everyone. Value is subjective.

This is the second most important thing the prospering agencies understood. They knew they are delivering value and they also knew the value is subjective. Each client associates different value to the agency services.

Image Courtesy: andertoons

An Interesting and Funny Story that teaches the value of value based pricing:

Let me narate a story I read in Huffington post some time back. It was about two men who went door to door offering wall painting services. These guys carried the paints, the brushes, etc. in a van and went all around the suburbs, knocking every door and asking if the household requires any painting job.

The way they priced their services was interesting and intreguing too.. It wasn't based on the no. of walls being painted or the quality/ color of paint being selected. It was based on the car owned by the housefold and whether or not they employed a chauffeur. I mean their prices where based on how fancy the client's car was!

I am not joking. These guys actually did this. One of them when asked about the rationale behind their pricing model said that they don't offer painting services. The actual value they generated for the clients was the time saved.

Simply put, these guys helped their clients save time which otherwise gets wasted on painting job.  The household who has really fancy car naturally values time more than the household who doesn’t.

If you can read between the lines, the story of these 2 wall painters and their pricing policy advocates "Your client has a different value for what you are providing and you definitely can capture some of that value. This will keep both the parties happy"

I wrote a pretty long post... Thanks for patient reading. Initially I said I will be talking maths and economics. Lets leave the maths part for the next post and if you realised I already explain the economic theories of value - Labour theory and subjective theory.

Please share with your friends collegues and let me know if there is something you want me to narate here....

Friday, 7 November 2014

Unfolding the mystery behind the death of digital marketing agencies

With a decent response to my previous post, I am all charged to narrate another story... At the onset let me tell you this is not my story... I am just a silent spectator to the brutal murder of the digital marketing firms... Some of these firms died prematurely while others died with suffocation... Suffocation caused not by dearth of air but by lack of enough funds to keep running.

Although other fellow spectators pitied the firms and blamed the industry... I couldn't help but find fault with the agencies themselves. What killed these agencies is their own policies, their approach. Surprisingly most of them were aware of the fact that... to sustain in the first place and grow in the future, they need oxygen and water... I mean proper talent and enough funds.

If you see it the way I do... These two live savers are related and are affected by the pricing policy of the agency. Let me explain this, the digital marketing agencies are not able to find/ hire good talent because they can't afford to hire and retain them. They can't afford to hire and retain the talented professionals because they don't have enough money.. their margins are small. The small margins and the insufficiency of funds is because of their product/ service pricing. 

So the weapon in the mass murder of digital marketing agencies is the pricing policy. Yes, the pricing policy is only the murder weapon and not the murderer! We can't blame the murder weapon for the killings... I mean we just can't do that.. right? No court will allow you to do so... Reason being...Ummm... Do I have to pen down the reason????

I mean the weapon, in this case pricing policy could have been used for betterment of the agencies. It had the potential...after all pricing can help the agencies outperform competition, improve margins, hire talented individuals and what not? But it was unjustifiably used for slaying the marketing companies, especially the online marketing ones.

These agencies cried, shouted while they were being destroyed and their existence was being wiped out! No one came to their rescue. No one was able to extend a helping hand... No one could for the problem lied within... within the agencies..

"Pricing in essence has the immense power to make or mar your existence and your growth dear agency".. Let me recap those pricing policies you implemented that caused your demise. Initially you would produce a long menu of services offered and the price you would charge for each item. A price tag for each item on the menu and the client had the option of choosing based on their budget and/or taste.

It was't a bad approach since it provided clarity to the clients about what they will be getting for shelling out the said amount. However,  the menu based pricing model is nothing but a form of cost based pricing. And what you were telling to the client was, listen Mr. Client, It takes me a certain amount of effort to do a certain work, it costs me something, I need to add some margin and here is my price. 

This is how you effectively priced your inefficiencies – Your labour cost, your overheads, your pricing, etc. None of which was of interest to the client. The client cared only about the service you offered and the results it generated.. and if the same service was available in the market for lesser price, the client went ahead and replaced you... yes I said REPLACED YOU..! This is how you were thrown out of the market and were ditched by clients.... Shunned by the market and with the fast depleting funds, you took your last breath.

However, some of you managed to deceive the death angel and escape the murderer  for the time being with the re-packaged offerings and pricing. Well, you tried to fool the market with packages named as basic, pro, enterprise or smart smarter, smartest.

All these packages did was segmented you prospects and offered them a bundle of services. You presumed a certain segment needed at-least the basics and a few others (who can afford) will be given the special extras.

The good this pricing policy did was it made your clients pay a certain minimum value. Remember the menu based pricing,  where the client had the option of opting for the least priced dish???? This approach eliminated them. But this approach was also cost based and it also suffered from "one shoes doesn't fit all" phenomena.In a way it did more harm than helped the agencies. Here again the agencies said this my cost, my price so you Mr. Client please adopt.

The only way the agencies could have survived was by burying the billable hours. "Billable hours plus margins" is equal to price of the product. This approach killed numerous marketing agencies, the actual culprit.

Billable hour, time sheets, time tracking.... these are cost-accounting tools and not pricing methods. If you know what I mean.

So, how a lucky few survived and how they escaped the bullet of the murderer??? Were they plain lucky or they had a clever plan to escape death. Let me know if this story interest you and I shall be back unfolding another mystery.... btw I feel like James Bond now.... :P or Charlie's angle

Thursday, 6 November 2014

Perception - My short love story with Metro Rail Project of Hyderabad

It's four months that I am married... Post marriage when I shifted to my in-laws place, my biggest fear was.... unlike others... to be able to learn the directions from my new residence to the workplace!
Born and brought up in Hyderabad.. I am guilty to admit that I am novice when it comes to routes. Not so guilty actually for I am quite used to stopping my  scooty and asking uncles and aunties for the way forward till I finally reach the destination.... So you see I am pretty used to performing such acts of shamelessness!

Yikes! I am going off track now... I am here to narrate my story of change in perception towards metro rail construction. So here it goes... When I joined back office post 15 days wedding leave, my husband accompanied me to and fro the office building at Hi-tech for about a week. Finally left me unattended and advised me to follow the metro rail project so that I don't get lost.

I followed the metro pillars religiously and thankfully reached the office building without any need for stopping and seeking aid! Quite an achievement for a person like me :D I pat my back and was in love with the metro pillars!

But the love story didn't last long. Now that the route is engraved in my mind and I also remember a few landmarks at the spots where I have to take turns.. (sometimes left sometimes right....)  I gradually developed a feeling of irritation towards the metro pillars and the job being done.

Well I agree initially they were of great help to me but now they create nuisance... traffic jam... occupying the road space.. etc.. etc...

And today on my way back I was thinking about love and love lost... And I feel it followed the simple theory of perception... Perception- function of "object being perceived", "Perceiver"  and "surroundings/circumstances". And that my change in perception of metro project was due to change in surrounding/circumstances...

The object being perceived in this case the metro project didn't change neither did I, the perceiver. What changed with time was my need... the circumstance. I think so is the case with any thing else... Love towards people included!

Ok ok.. I am not going to get philosophical..... This was my short love story with the metro rail and my understanding of "perception". Do let me know about your love or hate story related to the metro rail project in Hyderabad in the comments section below.

You can also talk about your perception... or anything you feel like sharing after reading this post.