At Owner Summit 2017, titans of the industry, Dan “The Value Man” Mall and Rob “Mr. T (and M)” Harr, squared off in the most friendly and professional way to make the case for their preferred style of pricing. Moderated by Carl "The Truth" Smith, Rob and Dan present compelling arguments for both Time & Materials and Value Pricing that could help you decide which method is right for your agency.
You can experience all the action yourself by watching the full video below or scroll down for the play-by-play.
Ding-ding. Let’s get it on!
In their opening statements, the participants briefly summarized their positions on the issue of pricing philosophy. Rob Harr of Sparkbox kicked things off by making the case for Time & Materials, the tried-and-true standard of many a digital agency when it comes to pricing a new project. For Rob, the goal is optimizing his business for sustainability and providing a predictable work week for himself and his team. The benefit of such is happy, healthy, well-adjusted employees who suffer from less burnout and sleep better at night. Time, after all, is a universal constant. It’s fixed, and try as you may, you can’t make more of it.
Dan Mall, founder of SuperFriendly, countered with the argument for value-based pricing. In response to Rob, Dan points out that focusing on value instead of hours allows you to become agnostic of time which he considers an artificial constraint. He then debunks the common myth that value pricing merely sets out to charge the client as much as you possibly can. Instead, it is about searching for creative ways to provide the highest possible value to the client. In Dan’s model, you aren’t an employee of the client getting paid to put in hours, you are being paid to solve their problems to which that client can ascribe value. The more help you provide, the more the client should be willing to pay to solve those problems.
As a seasoned professional, Rob sincerely believes that it is impossible to accurately estimate the number of hours it will take to complete a complex job. He tells his clients that his team wants to “lean into learning,” gaining knowledge and experience about the work more and more each day rather than peering into a crystal ball on day one. Rob would have us all admit that our crystal balls are in fact, fundamentally broken, and our most optimistic estimates often miss the mark. Billing for time and materials, in his mind, is the only logical solution.
In his rebuttal, Dan evokes Parkinson’s Law which states that “work expands so as to fill the time available for its completion.” Agencies make their money in the margins and when making estimations using T&M, those margins tend to be razor thin. The slightest misestimation eats into those margins. Dan’s solution is to simply ask the client, “how much is this worth to you?” then use your creative problem solving to create a solution that affords you the greatest possible margin while still satisfying the client’s needs.
Here, Carl steps in to ask the all-important question - how exactly do you get the client to put a value on what a project is worth to them?
In value pricing, Dan explains that discovering the value is part of the admittedly longer sales process. Many clients don’t know exactly just how beneficial the right solution can be to the bottom line. It’s on you to coach the client to understand what’s important and how it can positively affect their business. Find out what keeps them up at night and expose the value to them. As the expert, you can quantify how streamlining or even eliminating processes can save them time and money. By demonstrating this you can justify your fee as a percentage of that savings or additional revenue.
According to Rob, T&M accomplishes the exact same thing but starts with the constraints of the problem and the budget. Rob and his team then work to create a solution that fits within those constraints. T&M carries with it concrete value. An hour is worth x, therefore y hours is worth z. Rob doesn’t take a cost-plus approach but rather sets the value of his team’s hours based on research and the market. This in turn protects both the client and the agency. If a solution is reached sooner, there’s a savings. But if the problem turns out to be uglier than anticipated, the expectation is already set that it may cost more to resolve. The agency’s job is to enable the client to make decisions that react to changes in the environment because the future is impossible to predict.
Budgets on the Fly
Carl again serves up a real world scenario - the client who needs a budget in three days.
Rob’s answer? “We sell discovery. Always.” Most clients don’t know what they need but rather have a list of problems that need to be explored. A well-prepared discovery process may take as long as a month in some cases to come up with a good place to start. Many managers don’t have the authority to sign off on the budget for a big project but they likely have some freedom to initiate the cost of the discovery. During this time, his team is getting paid to do the work that someone like Dan is ultimately doing for free. What happens more often than not, is that the client enjoys the process, recognizes the value, and signs on for the long haul. If not, they walk away with the work that’s been done thus far.
The Fixed Bid - No Meet Scenario
Leave it to Carl, to serve up yet another dose of reality. He brings up those instances when large companies (like the NFL) demand a fixed bid proposal and refuse to meet first. What do you do?!
Rob says “break the process, RFPs stink!” He’ll submit, but not without attempting to shake things up. First, try and secure the meet anyway as a personal connection always helps. If that doesn’t work, he sends an email that describes the discovery process and its benefit to properly estimating the cost and overall success of the project. Send something that’s different than what everyone else is submitting and you’ll not only get their attention, you might get that phone call after all.
Dan’s approach is similar. “If you want to work with us, work with us our way,” he explains. Chances are if they reached out to you it’s because they like what you do. Explain to them that in order to deliver that level of service you can’t just pull a number out of a hat. Dan has a templated email ready to go for just such occasions that takes back control of the conversation with an ultimatum. The results are 50/50 as many clients reach out to specific agencies for a specific reason and want what they can deliver. Break down the difference between you and your competitors because when companies employ this approach it’s to create a situation that allows them to compare apples to apples. This should raise the red flag that they are likely price shopping which backs you into a corner where someone can always submit a lower price. When this happens, show them that you are an orange and oranges are way better than apples, right?
Back to Estimating
Congrats, you won the gig! Now you actually do have to provide an estimate.
What Dan loves about value pricing is that it allows you to explain how you arrive at a price but is flexible enough to align with your client’s interests. Dan’s strategy is to provide multiple options in the proposal. One might be giving them exactly what they asked for in the first place, another could be a retainer situation that delivers value. There could be a fixed price based on value or a more flexible hourly rate. This demonstrates above all else, that you are a creative problem solver who isn’t confined to one way of doing things. You are prepared and equipped to deliver value in ways the client may never have even considered.
One of Sparkbox’s core competencies is actually transparency. Rob sends the invoice in the form of an editable Google Doc with line-by-line descriptions of the available services. While this might provide an opportunity for the price tag to drop, Rob finds that more often than not, it goes up, as the client recognizes the value proposed. The client becomes a partner in the process and appreciates the transparency you provide them. This approach benefits from long term relationships rather than one-time engagements, leaving both parties better off in the end.
When is Time & Materials not the answer?
Rob believes Value Pricing is the answer when you know what you are building. When you are intimately familiar with the process and know exactly what the scope will look like, value pricing can work in your favor. However, those typically aren’t the kinds of projects Sparkbox takes on.
When is Value Pricing not the answer?
Dan admits that Value Pricing isn’t the answer when you simply can’t ascertain the value. At some point all the discovery and digging of a drawn out sales process just isn’t worth it at which point it may just be a good idea to start the clock using a weekly rate. This is an easy alternative that allows you to get started sooner but it forces you to cap your revenue and profits.
The debate continues...
What follows next is an insightful Q&A from the audience that we won’t transcribe here but may shed further light on your decision to adopt either Time & Materials or Value Based Pricing. If we’ve learned anything from this ongoing debate, it’s that there is no one-size-fits-all solution. Take careful inventory of you or your agency’s core competencies, values, and goals as you weigh the pros and cons of both methods and decide which is the best for your business.