Agency Projects and Profitability, with Ron Baker.

Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Build a Better Agency, where we show you how to build an agency that can scale and grow with better clients, invested employees and best of all, more money to the bottom line. Bringing his 25 plus years of expertise as both an agency owner and agency consultant to you, please welcome your host, Drew McLellan.

Drew McLellan:

Hey everybody, thanks for joining us for another episode of Build a Better Agency. Today we are going to talk about a topic that I know is near and dear to all of your hearts, the idea of pricing and making sure you don’t leave a lot of money on the table. So our guest today is going to be all about that. Ron Baker started his CPA firm, and don’t freak out, he’s very different than the normal CPA that you’re used to. So, started his career in 1984, and today he is the founder of VeraSage Institute, the leading think tank dedicated to educating professionals internationally.

He also does a radio talk show on voiceamerica.com called The Soul of Enterprise: Business in the Knowledge Economy. Ron is the author of seven bestselling books, including titles like The Firm of the Future, Pricing on Purpose, Implementing Value Pricing: A Radical Business Model for Professional Firms, and he just recently launched a book called The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, which he co-authored with his co-host, Ed Kless. Ron, welcome to the podcast.

Ron Baker:

Thanks, Drew, thrilled to be here. Thanks for having me.

Drew McLellan:

You bet. I know that because we have interacted many times before I know that agencies react one of two ways to what we’re going to talk about today, which is they either get very excited and start taking copious notes, or they start to Twitch. So, let’s just dive in, give the listeners an idea of the whole notion of value pricing and how you view that from a professional services firm point of view.

Ron Baker:

Yeah. This started after I left the Big 8 Accounting Firm and started my own practice, which of course, as you know, when you run a professional firm, you’re responsible for everything. And I learned really quickly, Drew, that the billable hour was a lousy customer experience. So, I got into this whole value pricing from the customer service side of the business, not so much the profitability or the marketing side, but just to try and create a better customer experience to give the customer certainty in price.

We all want to know, just as human beings, what something costs before we buy it, that’s a better customer experience. It leads to less write downs, less hassles, less getting fired by the customer because you surprise them with a bill. So I just started doing this in my practice and it worked tremendously, and I got so excited. I started teaching it to my colleagues and I wrote a book about it, and then I started teaching it to other professionals, including advertisers, beginning in around 2001, 2002. So that’s the short bio of how I got into this.

Drew McLellan:

So talk about, again, from the customer experience, because I think this is not how agencies think about pricing. One of the things I’ve always said is, agencies lose clients over the $50 FedEx bill, not the $50,000 project price, and that this nickel and diamond and billing by the hour invites scrutiny and it immediately invites the … it took you two hours to do that, blah, blah, blah, blah. Right?

Ron Baker:

Oh, yeah. Not only does it invite scrutiny, but as you know, it’s created a whole industry of search consultants and compensation … I should say compensation consultants, you have the same thing in the legal field. You have legal auditors who go in as a middle man to audit the bill, and usually they can get a 25% to one third reduction. So they pay for themselves. This is insane, we don’t have a middleman in any other market where there’s transparency in prices.

And so I think the billable hours, the big cause of this, and of course, I believe the real cancer is the time sheet because it’s the time sheet that keeps us mired in the billable hour mentality. So when I made this transition to my firm, I got rid of both the billable hour and the time sheet, and that just took my eyes off the clock and put my focus and attention on value and on the relationship, because I really believe you can’t develop relationships or strengthen them by staring at clocks.

Drew McLellan:

Now you’ve got all the owners ears perked up because there is no greater bane to everyone’s existence other than time sheets. So, I will tell you right up front, I kind of disagree with you on the time sheet so we can talk about that. But from your perspective, why do time sheets not make sense?

Ron Baker:

Time sheets don’t make sense because they measure the wrong things. They measure inputs, not outputs. They also do something that’s very, very, I think pernicious, they don’t help us improve future performance. If I know how many hours down to the six minute increment you spent on something and it doesn’t tell me how to do it better next time, it gives me no further knowledge, and we’re knowledge workers, especially those in advertising agencies. I mean, advertising agencies are all about knowledge, creativity, imagination, ideation, and that can’t be measured in time. It’s like plunging a ruler into the oven to determine its temperature.

So, rather than recording time historically, I always say, we’re trying to manage your agency based on running time sheets as the equivalent of timing your cookies with your smoke alarm. By the time you see it on a time sheet, it is, by definition, no longer manageable. So, what I prefer instead is after action reviews, because if you do after action reviews, after big campaigns, then that will help you actually improve future performance, and I think that’s a better investment of time.

The problem is, AARs are not billable and therefore, we sell time business model, they don’t get done, and I think that comes at the expense of creativity and better value creation for our future customers. So, I believe the time sheet absolutely has to go, and it’s gone in agencies around the world. I mean, agencies are getting rid of it left and right.

Drew McLellan:

And how are they managing efficiency and knowing if they’re staffed appropriately and all that sort of stuff? Those things are typically tied to time sheets and all of that. So how are they getting that done?

Ron Baker:

They’re getting that done through better project management, because as you know, project management has to look forward, it has to project capacity and resources going forward. It doesn’t look backwards. So project managers make a big distinction between effort, meaning the amount of time they estimate something to take and duration. What matters to a project manager is, are we going to get the work out by the deliver date to the client? And that’s called duration, same as FedEx. Right?

What we care about at FedEx is it plops on our doorstep at 8:30 in the morning, not how long it sat on the truck or in the airplane or at the hub sort, whatever, and it’s the same thing. So I think what you’re seeing in a lot of agencies is agile, agiles coming in, and that’s a form of project management’s also, some other things that help agencies project future capacity, and I think that’s a much more compatible type of project management for a knowledge environment rather than recording backwards time.

Let’s not forget that the time sheets came into play in the 1880s in the industrial sector, by a guy named Frederick Winslow Taylor. Advertising agencies aren’t steel mills. They deal with knowledge workers where things take place in your head, not on an assembly line, and therefore, the metrics we use don’t really say anything about the effectiveness or the efficiency even of a knowledge worker.

Drew McLellan:

So in terms of project management and all of that, I think one of the things that I’m seeing as agencies are evolving away from the billable hour, but instead they’re going to a project price, which seems like a hybrid between billable hour and value pricing. Talk about the spectrum.

Ron Baker:

Right. There’s many different types of pricing. I mean, certainly the hourly billing, there’s fixed prices. A lot of agencies will just take estimated hours and try and fix that upfront. Now, I think that’s a big improvement over billable hours, at least because there’s a fixed price involved, and I know a lot of agencies do offer fixed prices. But what makes value pricing different is, you have to have a conversation with the customer to determine the value that you’re creating for that particular customer.

So, you’re pricing the customer, you’re not pricing the services or the scope of work. You’re actually pricing the customer because different customers have different value propositions. And the work that we do for them creates various levels of value. So to the extent that you can customize it per customer and offer them a fixed price, and the other big suggestion I have, Drew, and I think this is something that agencies can do right out of the gate is rather than just offering one price, take it or leave it, give them options, offer the customer three options like American Express, a Green Card, a Gold Card, a Platinum Card.

Most businesses, if you look at any business out there, they all offer options. Every one of them, go to a Starbucks, look at the menu. Right? Tall, Grande, Venti. So, offering options allows the agency to become a price searcher rather than merely a price taker, and that can dramatically increase profits.

Drew McLellan:

Well, I think the other thing it does is, it allows you to say to a client, we can do this work for you in these range of prices, but you can see that something has to come or go off the list of deliverables to achieve your price point. So, it also avoids the problem, which many agencies get into where the agencies says, “Well, this fill in the blank, this website’s going to be $25,000.” And the client goes, “Well, I only have 20.” And the agency often is beholden and saying, “Well, all right, we’ll do it for 20.”

And now they’re already playing ketchup as opposed to saying, “Well, if you only have 20, then let’s look at the middle model, which is at 18, and we can add some things or you can just buy the middle model as opposed to having to compromise the price without also changing the deliverable list.”

Ron Baker:

Right. Too many agencies make unilateral price cuts without having the client sacrifice any value, be it scope of work or timing of that work. Right? They want to pay a cheaper price, great. You have to wait longer. It’s going to take six months to build your website, not three or two. So timing can be part of this, payment terms can also be part of your option differentiation. But you’re right, what it does do is it forces the customer and also gives them the choice to make the appropriate value price, trade off that they’d like to make. And that’s why we humans love choice.

Drew McLellan:

Right. We talk a lot at AMI about create the three options and build out the deliverables. So you can plus or minus those deliverables to get to any price point in between the lowest and the highest. But I think the other thing that it does is it often automatically upsells folks in to at least the middle tier rather than buying the lowest priced option.

Ron Baker:

Right. I mean, we have, the behavioral economists have proved this really well. There’s a heuristic, a mental shortcut that we all use when we look at three options of anything, could be a bread making machine herb, a lawn mower, whatever. We gravitate towards the middle option because our brain says, “Well, the cheapest one’s probably not that great quality, it’s probably going to break, the most expensive ones probably have too many bells and whistles, so I’ll be safe and pick the middle option.” I mean, this is so well documented. It’s called the Goldilocks effect. Right?

We pick the middle option. But the other thing that’s really interesting about the options is offering them, especially in RFPs or tenders, gives you, I think, enormous competitive advantage rather than just giving the client one price, take it or leave it, now you’re giving them options, but you can also have that cheapest priced option be very competitive, and like you said, most customers will trade up, and that additional revenue, a lot of it drops right to the bottom line because it’s not really differentiated so much on cost as it is, maybe on other things like payment terms, turnaround time, things that really don’t cost us much, but the customer values it.

Drew McLellan:

Yeah. I think sometimes we forget that there’s other things in the value proposition besides the stuff that we do. So you’ve talked about payment terms, you’ve talked about delivery time, turnaround time. I know you talk about A team versus a different team. What are some of the other ways you recommend to clients that they add different values inside their proposals that aren’t necessarily more stuff?

Ron Baker:

Yeah, you could do it based on technology. Right? What type of technology are you going to use? I think even project management itself can be one of the differentiators because who’s going to take care of the project management? Because I know a lot of agencies rely on the clients’ team members to do certain things. Who’s going to control all that? And a higher price should be charged if the agency’s going to do it.

Also, how are you going to deliver the work, educational events could be put in there as well if you hold various … a lot of agencies hold lunches and learn, or they have a CEO round table or something like, maybe you make access to those other things that you can do that basically allow the customer to get value, even though they don’t cost … Those things don’t cost very much, and I think this is only limited by our imagination.

Drew McLellan:

Yeah. I think all too often agencies as they’re putting together proposals are too literal. And so there really, it’s just a … Well, your website has 20 pages, 30 pages or 50 pages, and it’s priced accordingly, and don’t think outside the box in terms of other ways that they can add value, that they also can take off the table to reduce the price that really don’t mean that they’re getting less money per se for what they’re actually doing.

Ron Baker:

Right.

Drew McLellan:

Yeah.

Ron Baker:

Right. They’re just making the client sacrifice some value, which is really important.

Drew McLellan:

Yeah. So you talked about the difference between project pricing and value pricing is really the conversation you have with the client upfront. Give us an idea of what that conversation looks like and how does an agency who’s never had that kind of … How do you wade into that conversation?

Ron Baker:

Yeah. There’s some really good strategies and I’ll give you what we think is the best opening line to start that value conversation. Because in my book, Implementing Value Pricing, I lay out an eight step process, and the first step is having the value conversation. And any agency, any firm that does this will tell you it’s the most important step in the process. We’ve got to step back, Drew, and really ask the client, what are they trying to accomplish? What is the end objective here? Not just dive into the scope of work, not just dive into the solution, really take the time to diagnose what the customer’s trying to achieve, because sometimes maybe we can’t help them and we should back away.

I don’t think professionals for the most part, spend enough time on diagnostics. And so, really the value conversation is like a physician. It’s a diagnostic procedure. They’re listening to you, they’re running tests. Because any physician that prescribed without first diagnosing would be engaging in malpractice. And I’m not saying that we engage in malpractice, but I am saying we tend to jump to the prescription rather than first having that diagnostic process.

So I think the best opening line, something to the effect Mr. or Mrs. Customer, we will only undertake this engagement if we agree to our mutual satisfaction that the value we are creating is more than the price we are charging you. Is that acceptable? Now that’s the opening line that McKinsey & Company, probably one of the most successful professional firms on the planet uses on every single client engagement, new or old, doesn’t matter. That’s how they start every client engagement, and I find it to be a very effective opening statement.

Drew McLellan:

Yeah. Who’s going to say no to that? Right?

Ron Baker:

Right. In fact, when we shared that with CMOs, because I’ve talked to the client side of the agency business, and the client would go, “I’d love that, because a lot of times I have to justify the agency’s prices to my boss, CEO, VP, whatever, and it would help me clarify why exactly are we paying this price? Because then I could document it based on value.” So the CMOs and others in the organization welcome these types of conversations, but we don’t have them enough.

Drew McLellan:

Well, and my guess is that a lot of listeners are going, “Oh, I know how that conversation’s going to go. They’re going to want a $50,000 website for $20,000.” So, how do you respond to that?

Ron Baker:

Well, if that’s really the case, then we can’t do it. But I’d rather know that upfront than start to dive into the work and learn that later. I mean, I’d rather find out that the client doesn’t like my price before we do the work, rather than after, because maybe there’s some things we can do. Right? We could chop down the scope, we could push back the go live date on the website, maybe you could do it for 20. There’s lots of options before you start to work. But once the work has already been started or worse yet completed, there’s not many options. You’re on your knees begging to get paid whatever the client wants to pay you, and that’s not a good predicament to be in from a pricing standpoint.

Drew McLellan:

So when a client says, I don’t know how to value this, whatever it is, how does an agency help a client assign a value to the work that they’re asking you to do?

Ron Baker:

Yeah. And this is really an art because value is subjective. So it’s not a formula, it’s a feeling. I know I freak people, especially as an accountant, I freak people [crosstalk 00:18:05]

Drew McLellan:

I was going to say this, this is what I said, “You’re not a normal CPA.”

Ron Baker:

Well, because value is completely subjective. Right? A bottle of water in the desert, if I’m about to die, is priceless to me. But if I’m flooded in my basement with water, now it’s got a negative value. Well, we didn’t change the water, it’s still H2O, but it’s value depending on the context and the job I’m trying to perform is radically different, which is why we advocate you price the customer. So, you got to have that conversation because you got to understand the value.

Let me just give you what I think is a great example of how to effectively help the customer, see the value, comprehend the value and for the agency to communicate it. If you were in the market for a landscaper and the first one came out, looked around your place said, “Yeah, okay, we do all this, we trim your lawn, mow it, take care of the tree bushes, whatever, 40 bucks an hour.” Second one comes out and says, “Yeah, we’ll do all that, we’re a 100 bucks fixed price.”

The third one comes out and goes, “Ron, you’re probably not Martha Stewart, so that’s why you’re hiring a landscaper in the first place. You probably don’t want to think about your yard. We promise to give you the best curbside appeal in the neighborhood, you’re not going to even think about your yard. We will take care of everything. We’ll even plant different bushes, different seasons, whatever. You won’t even have to think about your yard, but you’ll have the best curbside appeal, we’re 150 bucks a month.” Now who am I going to hire? Who did the best job communicating their value to me?

The first guy just talked about inputs, 40 bucks an hour. The second guy did a little bit better. He at least gave me a fixed price. But the third guy told me what it meant to me. He told the outcome I was going to achieve as a customer. I’m going to get the best curbside appeal. That resonates. We need to do a better job communicating that outcome to the customer.

Drew McLellan:

And for clients who are more linear and want to attach a dollar value to it, how do you get from best curbside appeal that’s worth X to my company or whatever, because again, part of that is helping them sell up the food chain and they may need dollars and cents. So is there a way to attach those two?

Ron Baker:

Yeah. The way I think about it is, I split, and this is technically incorrect because you can’t split value because it’s kind of a holistic concept, but you can certainly look at things that are measurable, what we call materialist value, things you can measure, brand awareness, impact on profit, revenue market share, whatever. Certain things can certainly be measured. To the extent they can be measured, measure them, and better yet use the customer’s numbers. But there’s also enormous component of spiritual value in what agencies do or what even brands do. I mean, think of why people pay a huge brand price premium for Apple. It’s the spiritual side. It’s, “I know they’re going to take care of me if it fails, I’m going to be able to go to the Genius Bar or use AppleCare to get a new machine or whatever.”

So you can’t ignore that spiritual side, and I think, Drew, this is where options come in really well, because you can quantify value, you can create that low price option and still be relatively competitive. But then you’re taking into account the spiritual side as well for your higher priced options. And like you said, most people will trade up and therefore you’re capturing more value.

Drew McLellan:

Yeah. When you talk to agency owners, what about all of this freaks them out? What objections do you hear around this idea, and how do you help them get over those objections?

Ron Baker:

Oh boy. How much time do you have? I’ve heard every objection in the book, probably you have two. In fact, I haven’t heard a new one in the 20 years I’ve been teaching this, except one guy did tell me the Lord doesn’t want him to do this, which I didn’t have a response to. But the typical objections are, well look, what we do as a commodity, and the price is just a given in the marketplace and we have no control over it. This is actually a fairly common lament from agency owners. In fact, all firm owners, we hear this from in all markets and it’s complete nonsense. I mean, there’s tons of empirical evidence that defy this.

Because if that was true, if the market really dictated the price and you had no control over it, then why would you need time sheets? I mean, just go do the work. I mean, the price is fixed. You got to keep your costs under that price. Otherwise, you’re not going to be in business very long. So, obviously agencies have some control. They’re not just price takers, they’re price searchers, and I think that’s the beauty of offering options-

Drew McLellan:

And in fact, they don’t charge the same amount of money to every client for doing the same thing. Right?

Ron Baker:

Absolutely.

Drew McLellan:

I mean, part of it is, again, so they’re accidentally defining some value based on the client, but the way they look at it is, here’s what I think the client will bear or the budget will bear as opposed to thinking about it in terms of value. Correct?

Ron Baker:

Right, right. They tend to look at the budget. I mean, I think budgets are very, very elastic, they’re former rain dancing in the client organization. And if the client sees the value, even if it’s over their budget, they’ll find room in the budget to pay for it if they want it. So I always think you need one or two options above the budget if you know what that number is, because budgets are just … they’re very elastic.

The other thing we hear is clients will never go for this, which I also think is nonsense. Because if you look at big advertisers like Coke and Procter & Gamble, they’ve already got value pricing models in place that they implemented and force the agencies to work, who work with them to use, my problem and I’ve looked at these models and they’re quite innovative. But the thing that scares me about it is, I don’t want the clients driving this change. I want agencies to drive this change. I want the agencies to Uberize themselves, if you will, to innovate themselves, it should come from the supply side, not the demand side.

Drew McLellan:

But I do think it’s telling that a lot of the big brands are defining that they don’t want to … Well, it’s interesting, because I have clients in AMI who work with big brands who are … they have to work with the procurement officer and they’re having to submit what their employees salaries are and they get up percentage of profit they’re allowed and they’re told what they can bill for that client. So on the one hand you have that and on the other hand, you do have the big brands like Coke, who are saying, “No, we don’t want to do it this way anymore, we want to do this all based on a shared agreement of value.”

Ron Baker:

Right.

Drew McLellan:

Yeah.

Ron Baker:

And Coke’s been quite successful with it, and I know P&G has as well. And you’re right, that’s another objection we hear, is the procurement. I’ve got to deal with procurement. They come in and they just force the price down. And of course, that is their job. However, I would say that, the best the procurement officer can do, their entire job is to try and get their company the best deal. That doesn’t mean that they have any veto power over the agency that the client hires if the CMO, CEO wants a particular agency, they’ll pay for it. They’ll still send procurement and to try and get the best deal.

But I think, again, this is where options can do one but can work wonders because if the agency wants to force you down, you just look at them and go, “Great, pick the cheapest option. That’s why it’s there.” And that’s the option that the agency should never go below. I think agencies need to be better at setting a walk away price. At what price will you just walk away from this business? Because I think it’s insane to believe that any business is better than no business. I don’t think that’s true at all. I think no business is better than bad business.

Drew McLellan:

Yeah, I agree. I often say that, every dollar is not equal and there are bad dollars on the table that you should just leave on the table.

Ron Baker:

Absolutely.

Drew McLellan:

Yep. Yep. So as you watch agencies step into the waters of this, what are some of the mistakes you’ve seen them make and what are some things that agency owners listening to us today should be conscious of and try to avoid?

Ron Baker:

I think one of the biggest mistakes I see in not just agencies, but in across all professional firms that really do, let’s say you buy into this concept and you really want to do it, that you don’t commit strongly enough to it, and I have found the firms that set up a value council, maybe even appoint a chief value officer, are the ones that succeed with this transition, because I believe that you need people in charge of this. It can’t just be, we’re going to leave it up to everybody who does pricing now to move to this method. It’s not going to happen. Somebody’s got to own it. I want one throat to choke, which is the chief value officer.

And then that person would work with a value council below them, and I think pricing needs to be centralized in agencies. And part of that is because we want to take pricing authority away from people and agencies who aren’t good at it. I mean, let’s face it. Not everybody can do this. It is an art, but it’s also a skill. Some people aren’t interested in it, some people it scares them. Well, I don’t want those people pricing. If I wasn’t good at certain agency scope of work, you wouldn’t give me that type of work, you’d put me where my strengths are, but we tend to put people in pricing who aren’t good at it.

That’s got to stop, and that’s why most businesses that have set up pricing have centralized it. They’ve turned it over to a group of pricers who do it over and over across the entire firm, and that is one of the most successful things I think you can do, is give ownership of this to somebody.

Drew McLellan:

So what does that look like? So I’m an AE, I come back from a client meeting and client wants an X, how does that work in a centralized environment like that?

Ron Baker:

Right. Sometimes the value council, some members of the value council might be present at that meeting. So it might be a team sale approach. If you have a leader, the client rep or whatever, that’s out there and he’s not on the value council, then maybe send somebody from the value council out there because it’s amazing if somebody’s clued in to picking up value clues from the client, they’ll get them if they’re … but it’s got to be on their radar screen. It’s like buying the red Volkswagen you never noticed before, but now that you own one, you see it everywhere. It’s the same thing with value. Once you’re in tuned for it, once your antenna is up for it, you’re going to pick up clues that other people don’t.

So, having the value council out there at those meetings, but part of the reason for the value council is to slow down the pricing. I think one of the biggest mistakes made with pricing is, we price too fast, meaning we don’t take enough time to do diagnostics, we don’t have a thorough enough value conversation, we haven’t really thought about the outcomes that the client wants to achieve. We just haven’t done enough due diligence upfront. And I think that’s a big problem. So the value council’s going to slow that down and make sure that we do all those things. So the price is better aligned with the value that we’re creating.

Drew McLellan:

Yeah. I think one of the mistakes a lot of agencies make is they create a sense of urgency that actually is not required by the client.

Ron Baker:

I agree. And it’s the same in accounting and even in law, we’re not ER rooms, we’re not dealing with life and death. You can take time to stew on this and think about it. I just don’t think we do that because I think part of it is we want to dive into the work. We’re excited, it’s a rush to get a new client and all of that. But boy, you’re bringing the new client in at wrong price and you’re just adding layers of mediocrity to your agency.

Drew McLellan:

Well, and I think the other thing, I think agencies, especially coming out the recession were under such pressure to bring more money in and cash flow was king. And so, moving work through quickly became a badge of courage or a badge of honor, and so, I think we’ve gotten into this bad habit of everything is urgent. I think not only do I not think it benefits the client, but I think it puts incredible pressure on the staff when it’s not necessary. We’re under enough pressure. We don’t need to add more pressure when it’s not called for.

Ron Baker:

Right. I also think partly too, with a billable hour model, there is a whole growth for the sake of growth, I’ve never met a dollar I didn’t like, or I never met a billable hour I didn’t like, and growth for the sake of growth is the ideology of