Question

Topic: Advertising/PR

Pricing. How Does One Go About Doing It?

Posted by Anonymous on 7/22/2005 at 4:01 PM ET 250 Points
My history:
I have previously worked at a traditional above-the-line ad agency in Europe; where I never had to set prices for the agency’s jobs. Most European agencies use standard rate cards (I call them menus) to help guide them through their pricing structure.
That means a certain percentage, or ad fee of 15%, is added on top of the agency’s cost price which is then invoiced to the client.
This seems to me quite a meaningless and haphazard attempt at pricing. 15% of anything does not reflect the final worth of a job well done. I believe that if a job is well done its price should reflect this. And if not then the price should be low. For me prices are like grades in school.
In Europe I just did my work, the client just paid the invoice and everyone was just happy, where I am now-in the Middle East-I do the work and maybe the client will pay maybe not, or maybe they will even refuse the job from the gitgo, or more likely constantly nag me for a better price.

Today:
I am now an account executive at a below-the-line ad agency in the Middle East. Here, as opposed to Europe, we executives have to set our own prices for the jobs that we do. We seldom use the across the board 15% rate hike on top of the cost price of the goods that we paid for. Sometimes we add 20% or 30% or more depending on the client, their account, the job done and frankly our mood.
Truth be told, I am petrified at the notion that I have the responsibility to set agency prices. Also, since I am new at this agency I am not familiar with the pricing philosophy that the client is used to.
I think it's too complicated and difficult for me to set prices quickly and efficiently, as opposed to performing my job at the agency. I am good at what I do, but I can not do pricing.
My manager tells me that I need to look up similar jobs that were previously done and then use that as a benchmark to charge the client accordingly.
What if the executive before me charged lunatic prices, should I keep following their example?
I am also not used to constantly hearing, “It’s too expensive, give me a better price” from the client- in Europe we say “if you want it you pay for it, if not there’s the door”- maybe not in those words but pretty close.

Questions:
1) Should pricing be left exclusively to senior managers? After all they are paying bills and signing my payroll, and deciding on my pay raise. So they are in a better position to know what price to set, right?
2) An account executive should just get on with their job, and not spend time worrying about price. Is this statement true? If so, why? And if not, why not?
3) How can one learn how to price a service as opposed to a tangible product? Product prices are based on perceived quality, the competition and inflation- correct?
4) Are there any books, web sites, or courses that I can use to learn pricing? How long will it take me to master pricing?
5) How accurate are previous pricing structures for current or future works done at the agency?
6) What tells me those previous pricing levels where correct then, and are correct now?
7) What is a correct or good price- both from the perspective of the client or the agency?
8) Once I master pricing is there anything else that I should do which can help me be a better account executive in the Middle East?
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RESPONSES

  • Posted on 7/22/2005 at 5:30 PM Member
    Hi patrickardahalian,

    If this is your job description then I would encourage you not to look at it as an issue but part of your duty. I know you are concern with ethics. You are ruled by your conscience. I would suggest you do a research of the different pricing in the advertising field. Do a spread sheet in excel so you can have a graph to show your clients the different pricing of different companies and then make your price. It is that easy.

    Don't look at the job as a task you are unable to tackle. Look at it as a challenge that you can do and do it well.
    Best of luck and kick... :)
  • Posted by adammjw on 7/22/2005 at 5:35 PM Member
    Patrick,

    You got an excellent piece from blanalytics.I personally also believe in that sort of pricing policy- fair&honest moreover brings customers real& tangible value and good service providers can enjoy the benefits of well-deserved sound margins.However the case is that you are not and cannot be the addressee as that's not you who set the pricing philosophy in your company.

    As to your questions:

    1&2. I do not agree as you have to and should be involved personally in the pricing process.You have to take responsibility as well, the more so as knowing the customer and what value your service is to bring them are even in better position to do it right.

    3. Most of all pricing has got to be based on the value it brings your customer and has to be fair.You have to be aware of what your competition charges but it should not in any way affect your price even if you are higher than your next door rival.You have to exceed the expectations of your customer and that's your price for it.
    4.You will find hundreds of articles and books on pricing but they will finally bring you to 3 solutions:
    - hourly rate
    - retainer
    -performance basis.
    Of course, the last one is the best

    5.You should ask that question internally, though it seems that unless per-performance basis is adopted you could treat them as company guidelines

    6.Nothing.If the agency is still alive and active it means it's not that bad, though a good look at EBIT, retention rate,LTV would be more helpful.

    7.It's a fair price for service which brings real value and fully satisfy the customer.

    8.Pricing is of course important but the most important thing is to really identify your customers' needs and keep on improving ways to solve their problems, whatever they might be.

    Regards

    Adam
  • Posted on 7/22/2005 at 10:03 PM Member
    Good advice so far. Here are my responses to your questions. Some will be repetitive, of course.

    1) Should pricing be left exclusively to senior managers? After all they are paying bills and signing my payroll, and deciding on my pay raise. So they are in a better position to know what price to set, right?

    Wrong. Pricing is more about assessing the value to the customer than it about covering your costs. If you're not providing a good value to the customer, you're not going to get the job. And you won't have to worry about a pay raise.


    2) An account executive should just get on with their job, and not spend time worrying about price. Is this statement true? If so, why? And if not, why not?

    Not true. An account executive should understand the client's needs so well that he/she is in the perfect position to place a value on what the agency's services should be worth to the customer. That's part of the job, and the account executive is in the perfect position to be the in-house expert on pricing.


    3) How can one learn how to price a service as opposed to a tangible product? Product prices are based on perceived quality, the competition and inflation- correct?

    You learn by experience, mostly. Prices are based on what the customer is willing to pay -- not on what they SAY they are willing to pay, but on what they really will pay when they fully understand the value of what they are getting. It's your job to make sure they understand, and then to deliver beyond their expectations.


    4) Are there any books, web sites, or courses that I can use to learn pricing? How long will it take me to master pricing?

    I'm not aware of any courses that will really achieve your objective. I work with clients all the time on pricing issues, and I've been able to "train" executives over the course of 4-6 months ... depending on how complex their product/pricing needs were. To really master pricing will probably take at least 50-75 iterations. That means that if you're quoting two jobs a week, it will take you 6-9 months.


    5) How accurate are previous pricing structures for current or future works done at the agency?

    Worth looking at, but not the most important thing. Who knows how accurate they are? (That's a rhetorical question.) If the people who were setting the prices were doing it based on an in-depth understanding of the value to the customer, then the structures are probably reasonably accurate. If not, then they probably aren't.


    6) What tells me those previous pricing levels where correct then, and are correct now?

    If the agency has been profitable and busy over the last few years, then it's a pretty good guess that the pricing has been in the right ballpark. Pricing is still as much art as science, so don't expect perfect answers. Whenever you get an assignment there's a possibility it's underpriced, and when you lose out to someone else there's a chance you overpriced it. That will never change.


    7) What is a correct or good price- both from the perspective of the client or the agency?

    A correct or good price is one which the customer finds to be a good value, and you shouldn't propose it if you don't think you can make money at that price. The challenge, of course, is to understand the client's needs so well that you propose a project that he/she perceives to be of VERY high value, so that your price seems like a fair one.

    8) Once I master pricing is there anything else that I should do which can help me be a better account executive in the Middle East?

    Research each client's needs before you make a presentation, so that you KNOW what they need, where their hot-buttons are, how they make decisions, etc. Give them a "free sample" of how you think and work by walking in the shoes of their customers, talking to their salespeople/reps, checking out what their competitors are doing, etc.

    Focus your presentations on the customer and his situation, not on your agency's brilliant work. Bring up what you've done for others only to demonstrate how well suited you are to address the client's most important and pressing need.


    Sure hope this helps.
  • Posted on 7/22/2005 at 10:17 PM Accepted
    One more thing: adamcustom suggested that there are three ways to price your services. There's a fourth one.

    You can price based on value to the client. That's actually better than the perfomance-based pricing because:

    (a) you don't always have control over actual performance in the marketplace (when there are other variables that impact it), and

    (b) you don't have to spend time and money trying to measure the performance in a precise way. Often the cost of measurement exceeds its value, and if your compensation depends on it you certainly don't want to compromise on the quality of the metric.


    There is a fairly detailed discussion of pricing alternatives in Rasputin For Hire : An inside look at management consulting between jobs or as a second career. It's directed mostly at management consultants, but the principles apply equally well to other service businesses (like advertising agencies, for example). In fact, a few of the experts who were interviewed for the book are former advertising agency executives, and others are former clients of agencies.

    You can get the book through Amazon.com, and you can preview the table of contents, introduction and chapter 1 at www.rasputinforhire.com . (You can also buy the book directly from the publisher at that website.)
  • Posted on 7/23/2005 at 3:11 PM Author
    Dear Mr. Michael Goodman (mgoodman),

    I have to begin by thanking you so much for
    taking the time to write such a detailed
    and helpful and practical answer. The way that
    you answered my questiosn makes it very
    easy for me to apply your pointers in real life situations.
    The balance that your answers strike between
    theory and real life application is spot on, I believe.
    And, all my questions were answered in that manner.

    I plan to implement your action points.
    I will do research and then see how my job
    adds value to the client’s activities.
    After all there must be a reason we are their below-the-line agency.

    I am extremely privileged to have the
    power and expertise of people with your caliber,
    who are so helpful and who are just a click away.

    Thank you very much for your help.
    Best regards,

    Patrick Ardahalian
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