Getting the Fair Market Value

What's the Best Way to Charge for Your Time?

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Phil Johnson Phil Johnson
I've always been intrigued with how agencies make money -- or don't. After running PJA Advertising for 15 years, I still scratch my head at the inherent contradictions in the agency model. We're selling a service, which is typically priced around the cost of time. We're selling a creative product, the value of which can't be measured by the time it takes to create. We're selling results, which calls for an entirely different set of metrics. Regardless of whether you work on a retainer or on a project basis, you need to navigate the pros and cons of each of these models. Sometimes, one is more advantageous than the other. Quite often, a hybrid approach works best. You could go crazy figuring out this stuff.

Some of my best (or worst) lessons about pricing came during my early twenties as a freelance writer. I remember a chain-smoking, fast-talking creative director asking me what my hourly rate was at the start of an assignment. When I told him, he said, "Fantastic. You've got two hours." A VP of marketing wanted me to write an annual report. When I told him my rate, he asked me to double it so that other people would perceive the value of the work. No problem! I presented a proposal to a CFO who called it outrageous and highway robbery. Leaving the room, my champion within the company happily slapped me on the back and said, "Good job, he likes it." It didn't take long to learn that negotiating agency contracts can be a lot like walking through a hall of mirrors at the carnival.

We all get the fundamentals. You need to charge enough money to pay for the cost of your operations and make a profit at the end of the day. But the path along the way sure can be perilous.

One of the most common conundrums is getting stuck between charging for time and charging a project price. Are we valuing our work on how long it takes to create, or on its inherent worth? If we're not using time, how do we determine and justify the value of what amounts to intellectual property?

There may be nothing more mystifying than placing a value on creative. This can be particularly challenging for small agencies, whose clients may not be well schooled in managing agency relationships. We know that getting to the creative answer can be an unpredictable process with lots of twists and turns along the way. To some clients it just looks like voodoo. That doesn't help the business conversations.

Too often, agencies arrive at their final pricing based on some mysterious brew that mixes what the client thinks it's worth, what the agency thinks it's worth, a little competitive information, and some justification based on how long it will take and the size of the team. You know, it does sound like voodoo.

For better or worse, here are some of the principles that I try to apply to our pricing and business model:
  • Above all else, strive for pricing based on the unique value you deliver such as strategy, proprietary programs, and domain expertise. That's the only way to rise above the fray. Today that value has to go beyond the creative product. As much as we hate to believe it, creative is becoming more of a commodity with new models like NuIdeaExchange using the principles of crowd sourcing to potentially drive down the costs of creative development. It may not happen today or tomorrow, but big changes are around the corner.

  • Consider multiple factors when developing pricing for a proposal. For example, look at both market value and your agency costs. Hopefully, the two intersect. We actively research what the market is willing to pay for specific services and aim to stay within the zone.

  • I believe in project pricing, whether we're developing a program for a client or establishing a yearly retainer. We may all groan, but the best way to develop profitable estimates is to keep accurate time sheets and watch the trends. You can see which types of work and which clients are profitable and adjust accordingly.

  • This is not a business for the low-cost provider. Our pricing should be at least on par with agencies in our competitive set. That way we will be valued for our unique strengths.

  • There's nothing like a recession to drive down pricing. Resist the temptation if at all possible. Having seen at least two recessions, we learned that in tough times, clients are still willing to pay for senior people who are battle tested and can drive business results. No question: if you can tie your work to results, you will make more money
Don't underestimate the relationship. To quote Dave Gerity, who responded to one of my earlier posts, "You can't make a bad deal with a good person and a good deal with a bad person." Truer words were never spoken.
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