Hourly Pricing Is Killing Your Profit - Here's How To Switch To Value Pricing
The Comfort Zone of Pricing
“A person’s success in life can usually be determined by the amount of uncomfortable conversations he or she is willing to have”
Tim Ferris
Hourly pricing makes perfect sense.
It is the simplest and easiest way to establish a price for the work an agency produces - the hours it takes to make the work. Better still, it gives agencies a really clear way to work out how profitable a project was, by tallying the hours spent with the hours billed.
Hourly pricing is comfortable, and everyone's a winner.
Except they're not.
In fact, hourly pricing makes sure that no-one actually wins - it's a Lose/Lose and here's why.
The Ethical Dilemma
Every client out there wants the project to be finished quickly. In my 10 years in Agency World, I've never come across a client that said "If you take 3 weeks longer over that project, we'll chuck in another £20k".
And I get that, speed is crucial in business.
Yet, when it comes to hourly based pricing, agencies get paid less the quicker they complete a task. The agency is punished for delivering a better service.
On the flipside, if the agency decides they want to make what they 'deserve to be paid' for the project, they may take a little longer and charge a few more hours. Understandable, but arguably unethical too.
When we bill by the hour, we find ourselves balancing what is deemed fair based on something that has nothing to do with the actual value being delivered.
So here's the new idea:
Let's start basing our agency fees around the final value that the client will be able to extract from your work - this is Value Based Pricing.
The question is how?
Well, that's what we're here for.
Step 1: Know Your Impact & Put A Number On It
Every piece of work you deliver will positively impact your client's business in some way - your job, as an agency owner, is to know exactly what that impact is.
Impact could mean:
- Sales increase
- Inbound lead increase
- Conversion rate increase
- Engagement increase
- Follower count increase
- Traffic increase
- Much more
It's crucial that we know the results that our work has delivered for our clients. The more specific we are here the better. We want numbers on our impact.
Think back to the testimonials you currently have.
If they say things like:
"Agency X are such a delight to work with, always available and very passionate."
That means you're lovely people but says nothing about results.
Here's what a good testimonial sounds like:
"Agency X transformed our marketing. Since they started with us we have grown our inbound leads by 150%."
Specificity in impact is an essential part of transitioning to Value Based Pricing.
We're so obsessed with measuring impact at Authority Agency, that we actually have a Client Value Calculator that helps you work out exactly what the value of your service is. If you'd like a copy, just DM me the words 'Value Calc Please'.
Step 2: Establish A Gap & Become Comfortable Establishing Results
Once you know your impact with past clients, you need to know how to illustrate it to future clients.
Very specific commercial case studies like the one above can help here. However, to truly charge based on value, we need to know what our future client wants from the project we're discussing with them.
The way we do this is by establishing a Gap between where they are now and where they want to be.
For example:
We currently receive 2 inbound leads every month, and we'd love to have 10.
We currently have 100 followers on Insta, and we'd love to have 500.
We currently get next to no engagement on our posts, and we'd love to start to build a community around our content.
Agencies that deal with commercial gains such as leads, revenue and clients, this is really easy.
Agencies that are dealing in non-commercial, creative output, this can be harder, but certainly not impossible. There's one guy you need to follow:
Once you know what your client wants to achieve, your job is to:
- Decide if it's feasible
- If not, propose a more reasonable goal
- If yes, agree that as a goal and hold yourself accountable to hitting it
This isn't necessarily a guarantee that you will hit the result, as there are variables outside of your control that could impact your project. However, it's important to be very clear that you have a goal set and that the project's success will be judged on how close it came to hitting that goal.
This is massively important for you as an agency because it will highlight the amazing work you are doing and the great results you get.
Step 3: Set Your Fee Based On The Value You're Creating
Once you have a set goal that your client sees as success, and you're comfortable you can hit it, then you have a value that your work will be worth.
From here, you can set your fee. You want to find a number that is a win for you and the client:
- From your perspective, it feels good for the work required
- From your client's perspective, it feels like a great deal based on the value they are getting back from the work
There's no science, or percentage, to give you here as it really depends on the market and the results you are getting. As a rule of thumb, aim to be producing at least 5x the amount that you are charging in terms of ROI. If possible, 10x (this is then a No Brainer for the client).
9 times out of 10, you will find that the hourly fee you were considering is far too low compared to the value you're creating.
On the occasion that actually your hourly based calculation is higher than the value based calculation, then you've done the client a great service too - rest assured this won't happen often, and if it does, there's an issue with how much resource you're placing in delivery.
Looking Into The Future
Hourly Pricing falls down because it isn't relevant to the value produced, but also doesn't leave space for a conversation around what success looks like in a project.
This is going to become increasingly important.
The uncomfortable truth is that we're likely to be moving into an economic depression in the next few years - based on the impact of the pandemic, inevitable inflation, war in Europe and many other factors.
When we are in a depression, marketing doesn't stop but marketing budgets do get cut.
When this happens, ROI on agency projects comes hugely into focus.
The agencies that are comfortable assessing realistic outcomes on projects and committing to those will win over the next few years. So start now, and get comfortable with the results you and your agency can get for your clients.
Becoming An Authority Agency
For those of you that don't know me, I'm Oliver Duffy-Lee and I run a company called Authority Agency.
Our mission is simple, we want to help as many scale-up agencies to reach and win high quality international clients as we possibly can, whilst also helping the founders to get more time back in their life at the same time.
If that sounds like you, there are 2 ways we can help you immediately.
Free Training
Firstly we run a free Facebook Group and every week we put new training in there for all of our members.
You can join here: https://www.facebook.com/groups/authority
Agency Growth Audit
If you want to move faster, you can book an Agency Growth Audit with one of our Scale Specialists. It's a super-quick, free call where we'll help outline what's slowing your growth and show you what's possible in the next 90 days.
If that's you, can you book here: https://calendly.com/oliverduffylee/agency-growth-audit-mastermind
I'm very happy to be here on your journey to building the agency of your dreams.
If you ever need any advice, send me a DM.
To your success,
OD-L
