Understanding Customer Value-Based Pricing as a Pricing Strategy with Ron Baker

  • Customer Value-Based Pricing - Ron Baker

Everyone in the agency business has a deep hatred for two aspects of your business. The billable hour and the timesheet. My podcast guest, Ron Baker, believes agencies should do away with both. (I disagree with him on the timesheet and you’ll hear why in our conversation).

Ron’s philosophy is built around the concept of customer value-based pricing. He’s a huge value-based pricing advocate and a CPA but he’s no ordinary CPA. He and his team are committed to price certainty in all professions, including agencies.  He wants to help you have a conversation with your customer to determine the value of what you’re creating, so that you’re pricing the customer, not your services or the scope of work.

Ron and I help you understand what your customers are trying to achieve and how to assign a value to the work you do to help them get there.  We answer many customer value-based pricing questions like:  

  • Why Ron believes that the billable hour and the timesheet need to go
  • Customer value-based pricing: the differences between different pricing plans
  • Ways to add in additional value that isn’t more “stuff”
  • How to start a value conversation
  • The typical agency objections of value-based pricing and why they’re false
  • How to succeed at the transition to value-based pricing
  • Other kinds of mistakes agencies make when shifting towards value-based pricing
  • The major benefits for focusing on value and the customer
  • Action steps that agencies can take when deciding whether or not to utilize customer value-based pricing

Ron Baker is the founder of VeraSage Institute, a leading think tank dedicated to educating professionals internationally, and a radio talk-show host called The Soul of Enterprise: Business in the Knowledge Economy. Ron is the author of seven best-selling books, including “The Firm of the Future,” “Pricing on Purpose,” and “The Soul of Enterprise: Dialogues on Business in the Knowledge Economy,” co-authored with Ed Kless.

To listen – you can visit the Build A Better Agency site (http://buildabetteragency.com/ron-baker/) and grab either the iTunes or Stitcher files or just listen to it from the web.

If you’d rather just read the conversation, the transcript is below:

If you’re gonna take the risk of running an agency, shouldn’t 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: Hey everybody. Thanks for joining us for another episode of Build a Better Agency. Today, we are gonna 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 gonna 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 he 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: Thanks Drew. Thrilled to be here, thanks for having me.  

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

Ron: Yeah. You know 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-based pricing from the customer service side of the business, not so much the profitability or the marketing side but just trying to create a better customer experience to give the customer certainty in price.  

We all wanna 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 with other professionals including advertisers beginning in around 2001, 2002. So that’s kind of the short bio of how I got into this.  

Drew: 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 sort of nickel-and-diming and billing by the hour invites scrutiny and invites…you know, it immediately invites that it took you two hours to do that, blah, blah, blah. Right?  

Ron: Oh, yeah. Not only does it invite scrutiny, but as you know, it’s created a whole industry of search consultants and compensation or I should say compensation consultants. You have the same thing in the legal field, you have legal auditors who go in as a middleman to audit the bill. And usually, they can get 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 is the big cause of this, and of course, I believe the real cancer is the timesheet because it’s the timesheet that keeps us mired in the billable hour mentality.  

So when I made this transition in my firm, I got rid of both the billable hours and the timesheet. 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: So now you’ve got all the owner’s ears perked up because there is no greater bane to everyone’s existence other than the timesheet. So I will tell you right upfront I kind of disagree with you on the timesheet.  So, we can talk about that, but from your perspective, why do timesheets not make sense?

Ron: Timesheets don’t make sense because they measure the wrong things. They measure inputs, not outputs. They 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, that 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, you know, I always say, “We’re trying to manage our agency based on running timesheets is the equivalent of timing your cookies with your smoke alarm.” By the time you see it on the timesheet, 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, in the “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 timesheet 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: And how are they managing efficiency in knowing if they’re staffed appropriately and all that sort of stuff? Those things are typically tied to timesheets and all of that, so how are they getting that done?

Ron: They’re getting it 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 gonna get the work out by the delivery date to the client and that’s called duration, same as FedEx. What we care about FedEx is it pops on our doorstep at 8:30 in the morning, not how long it sat on the truck or in the airplane or the hub sort, whatever. And it’s the same thing.  

So I think what you’re seeing in a lot of agencies is agile. Agile is coming in and that’s a form of project management, so 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 timesheets 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: So in terms of project management and all of that, I think one of the things that I’m seeing is agencies are evolving away from the billable hour, but instead they’re gonna a project price would seem sort of like a hybrid between billable hour and customer value-based pricing, talk about sort of the spectrum.  

Ron: Right. There’s many different types of pricing. I mean, there’s 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 value-based pricing is, what makes value-based 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.  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, 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: Well, I think the other thing it does it allows you to say to a client, “You know, we can do this work for you and 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 agency says, “Well, this fill in the blank, this website is gonna be $25,000. And the client goes, ‘I only have 20.’” And the agency often is beholden, then saying, “Well all right we’ll do it for 20.” And now they’re already playing catch up 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: 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. They wanna pay a cheaper price, great, you have to wait longer.  It’s gonna take six months to build your website, not three or two. You know, 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 tradeoff that they’d like to make, and that’s why we, humans, love choice.  

Drew: Right. So, you know, we talk a lot at AMI about sort of this create the three options and all about the deliverables so you can sort of 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 into at least the middle tier rather than buying the lowest priced option.

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

Drew: Yeah.  

Ron: We pick the middle option. But the other thing is really interesting about the options is offering them especially in RFPs or tenders gives you, I think, an enormous competitive advantage rather than just giving a 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 as much but the customer values it.

Drew: Yeah. I think sometimes we forget that there’s other things in the value proposition besides the stuff that we do. So I know you talk a lot about, so you’ve talked about payment terms, you’ve talked about delivery time, turnaround time. I know you talk about, you know, 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: You could do it based on technology. What type of technology are you going to use? I think even project management itself can be one of the differentiators because who’s gonna take care of the project management? Because I know a lot of agencies rely on the client’s team members to do certain things.  Who’s gonna control all that? And a higher price should be charged that the agency is gonna do it.  

Also, how are you gonna deliver the work? Educational events could be put in there as well if you hold various…you know, a lot of agencies hold lunches and learns or they have a CEO roundtable or something. 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: Yeah. I think all too often agencies, as they’re putting together proposals, are too literal. And so they really it’s just write a website, it 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: Right, right. They’re just making the client sacrifice some value, which is really important.  

Drew: Yeah. So you talk about the difference between project pricing and customer value-based 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: There are 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 about 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 is 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 is 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, it doesn’t matter, that’s how they start every client engagement. And I find it to be a very effective opening statement.

Drew: Who’s gonna say no to that, right?  

Ron: Right. In fact, when we’ve shared that with CMOs, because I’ve talked to the client side of the agency business and the clients 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: Well, my guess is that a lot of listeners are going, “Oh, I know how that conversation is gonna go. They’re gonna want to a $50,000 website for $20,000.” So how do you respond to that?  

Ron: Well, if that’s really the case then we can’t do it. But I rather know that upfront than start to dive into the work and learn that later. I mean, I 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. 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, had completed, there’s not many options. You’re on your knees begging to get paid whatever the client, you know, wants to pay you. And that’s not a good option, a good predicament to be in from a pricing standpoint.  

Drew: 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: And this is really an art because, you know, value is subjective. So it’s not a formula, it’s a feeling. I know I freak people out especially as an accountant. I freak people out when I say that.

Drew: I was gonna say that this is why I said you’re not a normal CPA.  

Ron: Well, because value is completely subjective, right?  

Drew: Right.  

Ron: I love water in the desert, and if I’m about to die, is priceless to me. But if I’m, you know, flooded my basement with water, now it’s got a negative value. Well, we didn’t change the water, it’s still H2O, but its 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 gotta have that conversation because you gotta 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 that.  

If you’re 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, you know, mow it, take care of the tree, bushes, whatever.  $40 bucks an hour.” Second one comes out and says, “Yeah, I will do all that with $100 bucks, fixed price.” The third one comes out and goes, “Ron, you know, you probably don’t…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 gonna even think about your yard. We will take care of everything. We’ll even plant different bushes, different seasons. You know, whatever, you won’t even have to think about your yard but you’ll have the best curbside appeal with $150 bucks a month.”

Now, whom I can hire? Who did the best job communicating their value to me? The first guy just talked about inputs, you know, 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 me the outcome I was going to achieve as a customer. I’m gonna get the best curbside appeal. That resonates. We need to do a better job communicating that outcome to the customer.  

Drew: And for clients who are more linear and want to attach a dollar value to it, how do you get from best curbside appeal to 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 sort of attach those two?

Ron: 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. You know, brand awareness, impact on profit revenue, market share, whatever. Certain things can certainly be measured. To the extent they can be measured, measure them. You know, and better yet, use the customer’s numbers, but there’s also an enormous component of spiritual value in what agencies do or what even brands do. I mean, think of why people pay a huge price premium for Apple.  

It’s the spiritual side.  It’s, you know, I know they’re gonna take care of me if it fails. I’m gonna be able go to the Genius Bar or use Apple Care 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 priced 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: So 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 sort of help them get over those objections?  

Ron: Oh, boy. How much time you have? I’ve heard every objection in the book, as probably you have, too. 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 is a commodity and the price is just kind of a given in the marketplace and we have no control over it.  

This is actually a fairly common, you know, 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 defies this. But because if that was true, if the market really dictated the price and you had no control over it, then why would you need timesheets? I mean, we just go do the work. I mean, the price is fixed. You’ve got to keep your cost under that price, otherwise you’re not gonna 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: Well, and in fact, they don’t charge the same amount of money to every client for doing the same thing. Right?

Ron: Absolutely.

Drew: I mean part of it is…again, so they’re sort of 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: Right. They tend to look at the budget. I mean, I think budgets are very, very elastic. You know, they’re a form of 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, you know, 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 customer value-based pricing models in place. They implemented and forced the agencies who work with them to use. My problem, you know, 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: But I do think it’s telling that a lot of the big brands are defining that they don’t wanna…well, it’s interesting because I have clients in AMI who work with big brands who are…you know, they have to work with the procurement officer and they’re having to submit what their employee’s salaries are. And they get a percentage of profit they’re allowed and they’re told what they can bill for that client. So on 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 wanna do it this way anymore, we wanna do this all based on a shared agreement of value.”

Ron: Right. 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, you know, that is their job. However, I would say that, you know, procurement…the best the procurement officer can do, their entire job is trying to 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 try and get the best deal, but I think again this is where options 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. 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: Yeah, I agree. I often say that, you know, every dollar is not equal, and there are bad dollars on the table that you should just leave on the table.  

Ron: Absolutely.  

Drew: Yes, yes. So as you watch agencies sort of 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: I think one of the biggest mistakes I see and not just agencies but across all professional firms that really do. Let’s say you buy into this concept and you really wanna 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 gonna leave it up to everybody who kind of does pricing now to, you know, move to this method.” t’s not gonna happen, somebody has got to own it.  

I want one throat to choke which is the Chief Value Officer. And then that person would work with the 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 in 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. And some people aren’t interested in it, some people, it scares them.  

Well, I don’t want those people pricing. You know, if I wasn’t good at certain agency scope of work, you know, you wouldn’t give me that type of work. You 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.  They turn 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: So what does that look like? So I’m an AE, I come back from a client meeting and the client wants an X.  How does that work in a centralized environment like that?

Ron: Right. Sometimes the Value Council, some members of the Value Council might be present at that meeting. So, there might be a team sale approach.  If you have a leader, you know, 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 is clued in to picking up value clues from the client, they’ll get them, but it’s gotta be on their radar screen. You know, it’s kind of like buying the red Volkswagen, you never noticed it before, but now that you own one, you see it everywhere. It’s the same thing with value. Once you’re in tune for, once your antenna is up for it, you’re gonna 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 is gonna 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: 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: I agree. I mean, you know, and it’s the same in accounting and even in law. You know, 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. And I just don’t think we do that because I think part of it is we wanna dive into the work. We’re excited.  It’s a rush to get a new client and all of that. But boy, you bring in a new client and at the wrong price and you’re just adding layers of mediocrity to your agency.  

Drew: Well. I think the other thing I think agencies especially coming out of the recession were under such pressure to bring more money in and cash flow is king.  So moving work through quickly became sort of a badge of courage or a badge of honor. And so I think we’ve got into this bad habit of everything is urgent and 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: Right. I also think hardly too with the billable hour model, there is a whole, you know, 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, you know, growth for the sake of growth is the ideology of the cancer cell. It’s not the ideology of a sustainable profitable business.

Drew: Yeah, absolutely. So what other mistakes do you see agencies making as they wade into these waters?

Ron: Timidity. Not being willing to experiment, being risk-averse or a loss-averse, not being willing to provide options. For example, not being willing to trigger change orders. I think when the scope of work changes, you know, we live in an uncertain world and if scope changes, the client wants to do something different that we didn’t anticipate, why not trigger a change order? I mean, that’s what my mechanic does, that’s what my contractor does, why can’t agencies do change orders? So that’s, I think, another integral part of this and I also think this is kind of like…you know, there’s a great video out there if you Google this. Just type in backwards bicycle and it’s about a guy who rides a backwards bicycle.  

But the neuroplasticity in our brains has been taught one way, you know, the billable hour and all of that. And it’s very hard to rewire that and it takes a lot of time. And I think it’s the unlearning sometimes that is harder than the learning. You know, there’s nothing about this customer value-based pricing thing that’s rocket science. You don’t have to be an economist to understand it. The concepts are simple, because it’s how you behave every day in your life as a consumer. But when it comes to doing this in the business setting, we’ve all been taught a certain way for a generation or two and it’s really hard to unlearn those things. So I would throw unlearning in there as a very difficult transition process as well.

Drew: You know, it’s interesting when I look across all the agencies that I work with, some of the most innovative ones are run by people who’ve never worked in an agency. So to your point, they don’t have a lot of stuff to unlearn in terms of sort of this is how it’s always been done in our business.  

Ron: Yeah. That’s exactly true, and Drew, let me just…you know, because I don’t want to sound like I’m bashing on agencies here, I’m not part of the agency world. I mean, I grew up as a CPA but I will say this.  I think the advertising agency industry or profession has made more strides in value-based pricing moving to this new model that we’re advocating than CPAs, lawyers or other professions. And I think part of the reason is because they’re not a profession that was taught the same orthodoxy. We even see this among bookkeepers.  Bookkeepers are also not a “profession” but because they have a more diverse background, they are more able to quickly embrace this and change, make the changes necessary. And I think that’s quite positive for the advertising agencies going forward.  So, I’m very optimistic about the advertising agency future.  

Drew: Yeah, me too. Absolutely. And I think they’re innovative by nature and so I think sometimes they just have to get out of their own way.

Ron: Right. I think the only people that you might take exception to they’re innovative by nature is maybe some of the finance people. I’ve run across my share of CPAs imbedded as the controller or the CFO of ad agencies who resist these ideas. And that’s because they were taught the same thing I was.  

Drew: Right, right. Absolutely. Okay, so this feels risky to a lot of agencies.  It feels very different. What’s in it for them, what’s the upside? So when you look at the agencies who are doing this well, what are the upsides for them that make putting together a Value Council or assigning a person or centralizing and doing all of these things that sound scary and hard, what’s the payoff?

Ron: I think the payoff, the big payoff is better client relationships. You’re not gonna have this mistrust. It opens up avenues of communication.  There’s not gonna be this automatic out of the gate conflict of interest that we have with the billable hour. And so it’s gonna align the interests between you and the client. And I’m not just talking about skin in the game. I mean, that’s kind of an overused phrase. I’m actually talking about, you know, putting a price on something, letting the client decide what value price alternative they want and then sticking to your agreements, delivering on time.  

So I think you’re gonna have better client relationships if you go as far as we’re advocating, getting rid of the timesheet, I think you’re gonna become a lightning rod for great talent. Because as you said, you know, this is the bane of our existence, it was the bane of my existence for many years doing this timesheet. I don’t think smart knowledge workers want to track every six minutes of their day, so I think it becomes a better work environment. It takes the pressure off, it takes the anxiety, it lowers the stress level. So it creates a better environment, a more creative environment. Certainly it adds to the bottom line profit because pricing is the number one driver of profitability in any business.  

And therefore, we need to give it the attention it deserves. But I also think it leads to a better quality of life.  So I think there are lots of advantages. Now, I’m not trying to be pie in the sky here and say all this…you know, this is a panacea and everything is gonna be hunky-dory and we’ve all arrived in utopia. But I do think your agency, the entire agency, the DNA is gonna be focused on value in outcomes to the customer. And at the end of the day, that’s what really matters and that’s what keeps us relevant.  

Drew: One of the things and I’ve heard you speak many times, one of the things that you talk about is sort of the client’s perception of the agency and how that changes with this change in pricing model. Can you talk a little bit about that? How clients view agencies when they bill by the hour versus how clients view agencies when they have this sort of customer value-based pricing model.  

Ron: Yeah. I think it kind of goes back to some of the things we were saying earlier about they don’t wanna call or they get skeptical about the bill, so they scrutinize the bill more. All of that goes away and I think all of that is non-value added anyway. Another reason I don’t like timesheets is because I think agencies have better things to do, which is create value, which is to do better project management. So they can get the work out on promised deadlines. All of those types of things, and I think in those ways, you’re strengthening that relationship. There are so  many ways that this impacts the way an agency works.  

It’s very hard to quantify and it’s very hard to even articulate it until you live through it. But if you read some of the agencies that have made this transition, you can find some trailblazer case studies, we call them, on my website at verasage.com. You can search under advertising agencies and you can…many agencies have submitted case studies to us about how they’ve made this transition. And they all say that we just work differently now, we’re more and more focused on the outcome and we’re not concerned about the clock. We don’t have this Sword of Damocles hanging over our head that, oh, we’ve got too much time on this client or over budget. All of that goes away and we’re focused on the outcome.

Drew: Which changes the way the clients and the agencies interact with each other, right?

Ron: I believe so. And I think it increases trust too, Drew. I mean, you’ve seen the ANA studies, you’ve seen the 4A’s studies. Trust seems to be very, very low and I think part of the reason is the billable hour model. That’s just not a trustworthy environment. Again, I think it’s a lousy client experience.

Drew: I can remember being in college back in the dark ages and an advertising professor was talking about trust in business. And he put up a study that showed the least trusted professions. And the only thing that was higher on that list than advertising people were used car salesmen.  

Ron: Used car salesmen and Congressman, right?  

Drew: Back then that wasn’t the case, but today, it certainly would. And I can remember sitting in class going, “What am I doing?” But I think there is a different way to build your business, so that you do…you know, and we all spout off the no like…excuse me, the no like trust model. But I do think there is a way to build your business so that there’s great trust and transparency between you and your clients which, you know, not only keeps them around longer but it also encourages their referrals and all those sort of good things that every agency wants.

Ron: Absolutely.  

Drew: Yeah. So okay, so we have, certainly, I’m sure picked the listener’s interest and again, they’re probably half of them, clutching at their chest and half of them are taking copious notes. So if they want to walk away from the podcast and start exploring this idea, it’s certainly your website and your books which I will say wholeheartedly are great resources in terms of really getting your head around the idea and your book, particularly, Implementing Value Pricing, is really like a step by step guide for how to sort of explore this. But beyond your own resources, are there some action steps that you would suggest that agency owners begin to either explore or implement as they decide whether or not they wanna walk this out?

Ron: Right. I would say even if you don’t go down the road of setting up a Value Council and appointing a Chief Value Officer, at least spend more time upfront with the customer, engage in that value conversation. The 4A’s has a dialogue process on this.  They have a whole set of questions that you can ask either new customers or existing customers. Spend more time really trying to understand your customer’s value proposition, what are they trying to achieve?  

And I would also, you know, urge agencies to start experimenting with offering three options, don’t just do two. If you do two, if you put two options in front of a human brain, we’ll tend to pick the cheapest price. But if you put three we’ll tend to go gravitate towards that one in the middle, so offer options. Another piece, a low hanging fruit, I think agencies can do if they’re already giving say fixed prices now but maybe not options, is at least trigger some change orders when things change. And try and get some additional price if unexpected events happen, and I think just those three things can have a pretty dramatic effect and can give you confidence to go to the next level.  

Because this is done one customer at a time, one client at a time, Drew. It’s not, I don’t want agencies to think they have to go back and cannonball into the pool and change everything at once.  It’s done one customer at a time, which means it’s a gradual evolutionary process, may take a year or may take six months, may take two years, but eventually, you’ll get there. And the more you do it, the better you’ll get. It’s like golf or tennis, it’s a skill.  

Drew: So about that in terms of the one at a time, do you think it’s easier to start with new clients or is it better to practice this on existing clients?  

Ron: You know, if you talk to agencies that have made this transition, they all have pretty strong opinions and whatever they think is best is what they did. So if they started with new clients, that’s the best strategy.  And then I’ve got the other half who say, “No, we started with existing customers and that’s the way to do it.” I think both ways are fine. And when I did this in my firm, I started with existing customers, not new customers. However, I think we can walk and chew gum at the same time.  

So as you’re doing this with new customers, for instance, why not start to dialogue with some existing customers? I think you can do both. But certainly new customers seem to be more comfortable to people because maybe they’re not so loss-averse. They might not necessarily care if they get the work or not. So they might be more willing to experiment wherever you’re gonna be less risk-averse and less loss-averse I say is where to start.  

Drew: Well, I would guess for a lot of agencies, they don’t wanna rock the boat with existing clients, but with a new client, the client doesn’t know what your pricing model is and they don’t know that you never used to offer three options or whatever those things are. So, it probably appears less risky. I can see the flip side of that equation though to, which is your current clients already trust you and so to be able to go to them and say, “Hey, you know what? We’ve discovered a better way to do pricing and we wanna share it with you first because we obviously…you know, we already know and trust each other. And so we’d really like your opinion about this.”  

Ron: That was my logic, Drew, when I started this. I started with my top tier customers and because they were loyal, because I’d been working with them for many years, because they knew me, I just felt more comfortable and at ease having a candid discussion. And what I learned from that was everyone I talked to about this looked at me and said, “It’s about time, Baker. It’s about time you give me certainty in price.”

Because, you know, they equated it to their fixed rate mortgage versus a variable rate mortgage or whatever.  But they really kind of said, “You know, yeah, we’ve been waiting for this, we’ve been wishing you would do this.” Because it’s not really their job, this is what such an anomalous behavior out of Coke and P&G. It’s really not the buyer’s job to do this, it’s the agency’s job. And I want them to do it before the clients force it down our throat or procurement or search consultants, or comp consultants or whatever.

Drew: Yeah, very true. So any last words or thoughts that you wanna share with the agency owners who are listening to us?

Ron: Just know that there are lots of agencies out there that made this transition. You know, my colleague, Tim Williams, his firm, Ignition Consulting, has helped many, many dozens and dozens of agencies make this transition. And I know he’s written a lot of really useful things so you can subscribe to his blog.  

You can certainly check out VeraSage. I you want, you can email me. Drew, I’m happy to take emails from your listeners and I will send them the appendix from my book, Implementing Value Pricing.  And I will send them the appendix specifically for advertising agencies and included in that appendix is the 4A’s compensation dialogue, some information from Tim Williams about how to make this transition. There’s even some information in there about the Coke and P&G models. So I think your listeners will find that really useful and I’m happy to send that to them for free if they email me.  

Drew: Okay, sounds great. If folks want to get a hold of you, Ron, how can they track you down? I know you’ve given them your website, but how else can they reach you?  

Ron: They can reach me at ron@verasage.com which is V, as in Victor, E-R-A-S-A-G-E.com. They can follow me on LinkedIn, I’m one of the influencer bloggers so I’ve got many blogs on this topic and many others on this as well. They can get me on Twitter @Ronaldbaker. I’m on Facebook obviously. And you can also learn more about me at thesoulofenterprise.com which is our radio show. And we have full show notes. We’ve even interviewed, Drew, people like Rory Sutherland. A great interview with Rory. Oh jeez, it was August last year and it was one of our highest rated shows. I mean, you know, the guy is just a font of ideas.

Drew: Yeah, absolutely.

Ron: And it was just incredible. And he is a full-hearted believer in the customer value-based pricing. He just thinks for the large agencies like Ogilvy where he works that it’s gonna take decades, if you see it at all, to happen. He’s not very optimistic about this change happening at the larger agency level.  

Drew: Well, and I guess that’s one of the messages for the listeners too, is that, you know, this is one of the places where being a small and mid-sized agency is actually of an advantage. And it is easier to be nimble and to make change. And because you’re own the joint and you don’t have a big board of directors and all the stuff that some of the big box agencies have to deal with, you have the opportunity to evolve your business faster.  

Ron: Absolutely. And I think that’s an enormous advantage, is that smaller or middle-sized agency should take advantage of. Because, again, I think it’s enormous competitive differentiation in the marketplace and they can turn faster and respond to the market much quicker than these larger firms. It’s the same with law and accounting. I mean the big firms will be the last dog hanged at this party.  

Drew: Absolutely. So I know that your life is crazy. I know you’ve been traveling like a banshee, so I really appreciate you carving out the time to do this.  I have always found your generosity of spirit in terms of sharing these ideas openly and freely, really refreshing. And I know lots of agencies have benefited over the years from that and I just wanna thank you for taking the time out to do this today and share your knowledge with our listeners. Thank you.  

Ron: Oh, it’s my pleasure, Drew. And, you know, we are committed to this so we really do wanna help agencies bury this billable hour and the timesheet. And my other goal is to convince you that we’re right about the timesheet as well. So thank you for having me, I really had a great time.  

Drew: Well, we’ll keep talking about the timesheet because, boy, I would be a hero to all my agency clients if I told them that they didn’t have to do that anymore. So we’ll keep talking.  

Ron: Excellent, excellent.  

Drew: All right, thanks much.

Ron: Thanks, Drew.  

That’s all for this episode of Build a Better Agency. Be sure to visit agencymanagementinstitute.com to learn more about our workshops and other ways we serve small to mid-sized agencies. While you’re there sign up for our e-newsletter or grab out our free e-book and check out the blog. Growing up bigger, better agency that makes more money, attracts bigger clients and doesn’t consume your life is possible here on Build a Better Agency.