Truth is ... pricing confounds even the most experienced small-agency principals. Of the many I've spoken to and compared notes with, most just give an exasperated shrug. Because small-agency pricing is its own strange domain, in which few of the old rules apply and every move we make is fraught with lose-lose equations: price too high and the client could balk or even walk; price too low and suffer in silence.
It's a moment I ran into just a few weeks ago. The good news is we won a key pitch. The bad news is I genuinely, truly, did not have even the slightest clue how to price it -- despite nearly a decade of doing so at much larger firms. Pricing at a Top 25 agency is fairly easy using several proven formulas. Just figure out the staffing plan and multiply each salary by % time. Then add up the allocated salaries and multiply the total base by 2.5 or 3.0 or whatever you can get. While there may be some haggling, you'll at least be in the ballpark because scale and precedent are on your side.
That just isn't the case with many smaller firms. We can't justify price on the basis of scale, because we're throwing 5 to 10 people at the business, not 20 or 50. Precedent is difficult too, since smaller firms generally have fewer accounts and fewer historical analogs. And small agencies seldom have the chutzpa to just walk away. We're far too good at rationalizing bad deals on the basis of gaining credentials or credibility or just underwriting the staff on some other, shaky account.
Making matters worse, the supposedly objective calibrator of costs -- the deliverables list or scope of work -- is just as subjective and mystifying as it is defining. What, for example, does strategic consulting or creative development actually mean? And what are they worth?
The problem is just as acute through the client's eyes. I recently spoke with a search consultant who fielded our bid and three others for a fairly robust online enterprise. Each of the agencies received the same scope of work and deliverables. Of the five proposals, one came in at $30,000 and another at $3 million. Ours and one other came in around $350,000 and it turns out that we two were the only finalists.
So with that randomness and agita in mind, here are my four immutable laws of pricing fairly for all parties.
- Small, independent agencies offer a built-in savings of about 40% over the big guys. The factors driving this efficiency are lower general agency overhead, streamlined processes, less dead wood and no publicly traded parents eating 20% of the cake. But that's where the savings should end. Don't discount the value of your ideas. Great ideas should be reasonably expensive, whether they come from a midtown tower or a downtown loft.
- Don't be afraid to ask the client what its budget is. It seldom works, but there are clients out there who will simply tell you what they've got. It's so much better than the pointless dance of putting out a bid and then learning what their limit was all along. I understand clients' hesitancy to reveal the limits of their budgets, but -- in truth -- it's usually less than what things should cost, not more.
- Chances are someone in your agency or a close advisor has a real gut feeling for these things. My executive producer is like that. I once ran numbers through three different formulas for days to arrive at a proposal. Then I went into his office and asked him what he thought the whole thing was worth. The number he pulled from his derriere was within 10% of mine, and he's pulled that trick more than a few times. So figure out who that is in your own sphere and use them as a check and balance of sorts. If your numbers are way off, try and sort through the reasons.
- Never let a Client pay you by the hour -- unless it's the government or a straightforward studio job. One of the few clients I've nearly lost over pricing came down to that central issue. He was demanding hourly compensation, and I just wouldn't budge. When he asked why, I just told him straight up: Agencies shouldn't be rewarded for mediocrity or penalized for brilliance. He never did grasp the fact that great ideas, to paraphrase Paul McCartney, can come in a minute, or never at all. But we did agree on a project fee.