Streamline Training & Documentation: Business Acumen XVII: Value Pricing

Wednesday, June 13, 2007

Business Acumen XVII: Value Pricing

There was an excellent article in the June 11 edition of Advertising Age discussing the increasing attention in the marketing communications world to the proposition that agency compensation should switch from cost-based to value-based.

Tim Williams and Ronald Baker of the marketing consultancy Ignition, outline the results of a survey, conducted on behalf of the Association of National Advertisers and the American Association of Advertising Agencies, seeking to pin down how agencies and clients (aka marketers) define value.

Clients, offered 24 possible areas in which agencies could create value, picked the following as their top five:

Working in a collaborative way with the client by creating an environment of mutual respect.

Ensuring that agency functions are integrated and agency divisions collaborate on behalf of the client.

Developing and producing creative ideas that are fresh and unexpected.

Developing ideas and programs that can be integrated into multiple communications channels.

Developing solutions that go beyond traditional approaches and reach consumers in new ways.

Out of 16 possibilities, the top five ways in which agencies believe marketers create value were:

Giving the agency the necessary time and resources to do its best work.

Working with the agency in a collaborative manner that puts a premium on mutual respect.

Identifying and articulating the outcomes the agency's work is expected to produce.

Providing clear, complete direction to the agency.

Providing constructive, timely feedback to the agency.

Having identified the most important (perceived) value drivers on both sides of the marketing communications equation, Williams and Baker address how to get from the cost-based present to a value-based future. Drawing on their work with clients and agencies, they have concluded that

an effective approach to value-based compensation must include characteristics such as shared risk and shared reward; evaluation of both parties (not just the agency); and, perhaps most important, the use of leading (not lagging) indicators as metrics of success.

Leading indicators are what the client's customers care about. Williams and Baker cite the airline industry as an example. For airlines, leading indicators are measures of on-time arrival, lost luggage, and customer complaints because these are the things passengers are most concerned with when they judge their experience with particular carriers.

Correctly chosen leading indicators predict lagging indicators, such as market share, sales volume, stock price appreciation, and market penetration.

Moving one step farther back along the causal chain, agencies and clients influence leading indicators through their behaviors, skills and activities. Agency influencers include project management, collaboration, and unconventional thinking. Client influencers include clear and consistent communication, direction, and approval processes.

To arrive at fair value-based compensation for the agency, both the agency and the client grade, for a specified period of time, the influencers they have agreed are most important for achieving agreed objectives. In sum:

Once the indicators and influencers have been identified, the expected outcomes are benchmarked and the financial impact of achieving the objectives is quantified. This quantification answers the question, "If we accomplished these goals, what would be the value to the client?" The answer to that question will form the basis for a value-based price and a value-based compensation agreement.

Williams and Baker recognize that there is no single right answer to the question, "What price should the agency get for the value it creates?" What their model does is provide a framework for good faith negotiation.

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Labels: Business acumen, Respect

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