Agency Compensation - Variables that Impact Pricing

It's tough to make predictions - especially about the future.
                                                                    - Yogi Berra

How much will it cost to build an x for us? Where x stands for Website, Microsite, Facebook Page, Mobile App (or even a House, a Bridge, an Aircraft Carrier). Tough question, right? The answer is, "It depends". What kind of x do you want?

Unfortunately, this question is asked by clients of their agencies every day. Given the recession hangover, fortunately it is still being asked. I find that a little education helps either avoid this overly, simplistic question or more productively, it helps point to a method for finding an answer. The approach pretty much has to do with helping your client (as well as your team) understand the variables that impact pricing.

While on the topic, in the spirit of precision, I like to define terms. In general, the price of services and/or deliverables is made of two components: fees (pretty much labor) and costs (usually pass-throughs, such as travel, licenses, equipment, etc.).

Below is a list of some of the variables impact the price of a project. As I hope you can see this list will generate some pretty interesting discussions that, if handled, properly will result in a level of professional empathy that should elevate all involved

• objectives’ clarity / validity
• strategy integrity / clarity
• project duration
• time of year   -   for info on an ugly confluence of factors, see Use It or Lose It
• program complexity
• state / quality of assets, briefing, brand and style guides
• 3rd party involvement (e.g. other agencies, technology vendors, email / sweeps vendors, client-internal parties [legal, IT, etc], client-external partners [other marketers])
• scale & volume (planned scale decreases pricing)
• review / approval process – including: cycle duration, feedback quality / consolidation, and number of stakeholders (e.g. marketing, legal, compliance, branding, etc.)
• specification quality / stability
• production value
• costs (e.g. photos, video, locations, research, technology, travel needs, etc.)

The old Triple Constraint is also a valuable concept to help frame an agency compensation discussion with clients and your team.

There's a wide range of things on the agency side that also impact pricing, such as available staff, their skills, their rates, etc. Is it fair to charge a client an Art Director's rate to do a Production Artist's tasks? Same answer, "It depends".


Let us know your thoughts or if you have some other major variables that drive pricing.

Pricing Wars - Agency/Client Dialog

This one, "The Vendor Client relationship - in real world situations", has been making the rounds. I've already heard from several colleagues that they've seen it and have even used it as part of internal, agency meetings. If you haven't viewed this, it will make you laugh and cry.



For any clients reading this: Please keep in mind that on the agency-side, we realize these are caricatures. And further, a spoof that could be produced on the many agency-side foibles related to pricing would similarly generate laughter and tears - (e.g. 2 weeks to generate a $10,000 high-level estimate).

However, determining pricing and managing expectations and scope as it relates to pricing are some of the most charged areas of agency/client relationships.

Like so much else in a partnership, clear communication up front and some organizational empathy can help avoid scenes like the ones depicted in this clip. Often issues surrounding pricing have more to do with poor communication and expectation-management than one party trying to pull something over on or unduly squeeze another - although there's certainly a bit of that floating around, especially in this pressured, economic environment.

A few things for all to keep in mind surrounding pricing include:

• It is impossible to tell how much time and money it will take to develop even a modestly complex project prior to receiving a proper brief. For a long range/complex project, even once the brief has been given and a broad solution determined, time & money can't necessarily be accurately predicted - and yes coming up with a viable, broad solution also takes time and money.
  
  
• The most accurate way to price a project is through sequential estimates that gain fidelity as insight is uncovered and actual phases of development approach. (See my posting: Letter of Agreement (LOA) - Getting paid from the beginning for more on this topic.)
  
  
• All parties need to understand that there are both activities and deliverable that need to be funded and that sometimes seemingly simple features and functions are very interconnected to other issues and take a lot of thought to execute effectively and efficiently - Right, like one of those Tiger Woods ads: 75% Preparation / 25% Execution.
  
  
• There is a wide range of variables that affect pricing of a seemingly simple scope of work, including: quality of briefing, state of assets, state of brand/style guidelines, condition of technical environment, timing pressure, client's internal structure/relationships and 3rd party involvement.
  
  
• Any agency worth its salt should be able to clearly articulate what is known and what is not known and the basis for their pricing.
  
  
• When bids come in with gaping discrepancies, more often than not, there are not shared assumptions about the scope of the project.
  

So, here's to hoping that collectively agencies and clients can bring "getting what you pay for" and "paying for what you get" a bit closer.

Letter of Agreement (LOA) - Getting paid from the beginning

"Is there a signed Scope of Work (SOW)?" is one of the most frequently asked and important questions that comes up in an agency.

The competing needs listed below are among the most vexing, catch-22 components of a project's initiation phase:

• agencies need to have a signed SOW before starting work and committing resources
• the substantial amount of work and information required to develop a proper SOW
• clients need to know what they are buying before they sign off
  
• projects need to start quickly lest they go away or will not be finished on time
• client-side vetting and delays in getting a full-blown SOW approved

Enter the Letter of Agreement (LOA). This short document can be enough to satisfy both agency execs and clients alike that there is value on its way. The goal of the LOA is to quickly and painlessly establish that the agency, under the direction of the client, will carry out a preliminary set of activities and deliverables and will be compensated for all substantiated fees and costs incurred.

Additional parameters such as upper fee limits, general timing and deliverables can also be included if necessary. However, it's preferable to avoid these details or you will find yourself on the road to developing a bad SOW. Once you get sucked into this, it is easy to slip into project kick-off with no agreement signed.

To help move LOA approval along, it's worth pointing out to the client and that the agreement protects them with phrases like, "directed by the client" and "substantiated fees and costs". Including a statement in the LOA that a subsequent agreement, such as an SOW, will govern the final compensation terms, activities and deliverables, also helps mollify clients and agency execs.

I've been advised that these letters really don't have much legal bite, but that's not the point. The LOA is simply a tool to break through the typical project initiation impasse and prevent projects from starting with nothing in writing and ending without the agency being paid for all their efforts.

Issuing an LOA is the lesser of many evils. However, standing firm by not allowing a project to begin unless there is a signed SOW, when there is a hard deadline that can't move, isn't so great either. Just make sure you get around to issuing a proper SOW.

Advertising Agency Compensation - Exploring Alternatives

The premise here is simple: aligning agencies and clients around results, rather than squabbling about costs and time, which further drives the commoditization of agency services, is a win/win situation. Ad agencies are in a fight for survival. The opportunity for the brave and innovative to flourish has never been greater than right now. For those who don't/can't start thinking differently, look out for the tar pits.

This post takes up on some of themes introduced in the December 5th post, Achieving Balance in an Agency, where the value of certain agency activities and deliverables (e.g. a breakthrough idea) was examined.

Value-based pricing is not a new idea, but it's a good one that has been in place for a long time in the consulting and pharmaceutical manufacturing arenas among others. Many agencies and clients are stuck in the familiar worlds of commission-based or hours/labor-based compensation. At their worst, these approaches encourage reach-oriented (i.e. tonnage) marketing programs, support running up the clock to justify billable hours and perhaps worst, crush innovation and performance.

The barriers and risks to adopting this approach are not insignificant and include:

• Agency and client comfort/momentum in doing things the way they've always been done.
• Having enough influence on an overall program so that the value you envision and agree upon with a client can actually be created.
• Clearly defining success and therefore value (raise your hand if you've been part of a view-through debate)
• Determining pricing so that nobody loses their shirt and the agency doesn't miss out on the upside.
  

There are various individuals and groups that are promoting this approach. Ignition Consulting Group and The Verasage Institue spring to the top of searches on the topic. Ignition even has a presentation on the topic posted on slideshare.net that is quite informative: Burying the Billable Hour.

So, what does this have to do with Project Management? In a study that Ignition and VeraSage conducted on behalf of the American Association of Advertising Agencies (AAAA) and the Association of National Advertiser's (ANA), the 2, top-rated agency value-drivers according to marketers were:

1. Working in a collaborative way with the client by creating an environment of mutual respect.
2. Ensuring that agency functions are integrated and agency divisions collaborate on behalf of the client

Along with the fact that Project Managers are often at the heart of conversations around pricing, these two tidbits should help give you voice on important discussions about evolving your agency's relationship with its clients. On the business development front, RFP's almost always allow responses for alternative means of compensation beyond the cost+ calculations they require. Putting a value-based option in front of a prospect isn't likely to get taken up at the outset, but at least it will show that your agency has some life.

Speak up. Watch out for the tar pits!