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....

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