Pricing: an art or a science?
In reality, pricing is a combination of confidence and fact.
Getting it right is critical to the health and profitability of your business. By taking a good look at the behaviour of your agency, both in the way you engage with clients and the way you manage your finances, you’ll be able to better understand the value of your work and what price to charge.
In order to do this effectively the key areas you need to get to grips with are:
- Understanding your service and positioning
- Learn how to sell better – take a course, attend events, get informed
- Learn how to price your business
- Control your costs and be realistic about what they are
1. Getting started
Put aside the myths about agency pricing – believing that clients only pay the lowest price and never exceed budgets; thinking that lowering prices will increase sales or could be your point of differentiation – and ask yourself these questions:
Are we applying the 4Ps to our business?
Agencies that are excellent at marketing clients’ businesses often don’t understand the four principles of Product, Price, Promotion and Place applied to their own business. What does the client really want? What will they really pay and why? Is your offer clearly differentiated from your competitors? Will your processes and communications enable an effective working relationship?
What are we selling?
Pricing should be appropriate – is it a cheap and cheerful, specific product, almost at a commodity level or an expensive, complex service?
Who is the client?
Understanding your target market, the client profile and their goals is critical. Expertise within a sector sets you apart from competitors and will command greater fees and confidence.
A manager level client is more likely to be cost driven, whereas an MD or Marketing Director will be likely looking to solve a problem and will entertain some risk and adaption to the budget. If you encounter a ‘sales driven’ client, then start at a higher price and allow them to feel they have reduced the price – massage the ego.
Understanding whom you are dealing with will influence how you project yourself and your agency and in the end the prices you charge. This is often also encapsulated in the perception of your brand.
What are the financial dynamics of our business?
To price properly you must understand the financial dynamics of your agency. Be clear on your business model – the turnover, costs and profit. Get a thorough and current fix on your costs (salaries and overheads) and establish what profit you want to make.
2. How to price
- Work it out for yourselves
- Use resources like the latest DBA Charge Out Rates and Salary Levels Survey*
- Charge what you think the market is charging
- Bring your pricing in line with current market rates
- Decide what your solutions are worth
*The DBA’s charge out rates and salary levels Annual Survey is available free of charge and exclusively to DBA members and is a valuable resource for referencing what your peers charge. Email firstname.lastname@example.org for details.
Working out your own pricing structure
Start by calculating your annual working days: from 365 total days deduct weekends, holidays (statutory and contracted) and estimated sickness and training days.
Factor in the utilisation rate taking into account that roles and responsibilities affect the hours you can work: an MD might only get recharged for 10% of their time but a junior designer for 95% or theirs, and new business and admin hours worked can’t be recharged. Remember that inexperienced, lazy or less efficient staff may take longer than experienced staff, but this is not a reason to charge clients less.
|Days to work
|@ 7.5 hours
|Underutilised say 25%
||418 un-billable hours
|| 1,253 hours
So if your charge-out-rates have to cover a two person agency then:
|Total to be recovered
£110,000/2 x 1,253 billable hours = £43 per hour or £322 per day
But, this example produces a very low hourly rate (See DBA Survey*). This would occur if you underestimated your overheads or overestimated the number of hours you could recharge. Both of these factors would impact on your hourly rate. As an example it demonstrates that you must be careful not to underprice yourself.
3. Setting a price
Pricing speaks volumes to your market. High prices make the statement: “We’re good at what we do and we know it.” Low prices say: “I’m uncertain about my abilities, so will take what I can get.”
Everyday low pricing puts you at a disadvantage, affecting your credibility and profitability and creating unexpected difficulties in the process. Consider carefully the benefits to your business of losing low value unprofitable clients.
If you want to move up the value chain, understand that clients want solutions to problems, delivered by experts. The charge for your wisdom, creativity and knowledge needs to be associated by value to the client, not the hourly cost.
When value pricing:
- Price by the service, not by the hour
- Slow down the sales process so you can engage with your client
- Break it down into clear amounts to help the client understand what you are doing and where the value is
- Inject value into your clients’ experiences with your service – you may need to educate them before they understand what you are doing and why and where the value is
- Charge what you’re worth
- Use, anecdotes, personal experiences and fact-based case studies quoting ROI
4. What really stops you charging more?
Lacking confidence. With timid body language, a quavering voice or lack of eye contact you are projecting “I’m not worthy of this price”. Confident people are more often believed and appear more knowledgeable than those with low confidence traits.
So, how do you gain confidence? Get informed by attending events, talk to your peers, research the markets, speak to experts, milk new employees, establish your own and your agency’s longer term goals – it puts the risks into perspective or create your own case studies demonstrating ROI (even better win a DBA Design Effectiveness Award).
And practice, practice, practice. Say it to your boss. “Our fee is £50,000 for this project.” Say it to your partner. Say it to your mirror. Keep saying it until you no longer feel embarrassed about saying it and practice how you will respond to any challenges.
Be Brave. Be confident. Always remember confident people are more often believed than those who are not.