My Concerns about Value Pricing | February 5, 2015

While I think the argument for value pricing has a logical constancy, and sounds great in theory, I worry how it will end up being applied in practice. My main concern is the effect this approach will have on the practice of design and our relationship with clients, although I have a number of practical concerns as well.

The ultimate goal of value pricing is to tie the amount you charge to the value you deliver, rather than the time you’ve spent. After all, the argument goes, the client only really cares about achieving their goals, and not the time you spent getting there. Clients aren’t buying time, they’re buying results.

On first inspection this feels like a perfectly reasonable argument. After all, if your car breaks down you really just want it working again, irrespective of how long it’s going to take. In fact what you really want is a fixed price, rather than the fear that your mechanic will present you with an ever expanding bill you have no choice but to pay. So from the customers perspective, value pricing feels like a good deal.

Value pricing advocates will often say that fixed pricing take the risk away from the customer and put it in the hands of the supplier. So in our car example, the mechanic quickly determines that the problem is most likely a broken exhaust, and gives the customer a fixed price based on all the times they’ve done similar projects in the past. If this job ends up being especially tricky, it’s not really the fault of the client so why should they pay extra? While if the mechanic finishes the job quicker, they can squeeze in an extra job that day and make a bit of money.

Of course this also means that the customer won’t get any benefit if the mechanics realises they can patch the exhaust rather than fitting a whole new system. The customer may also feel a little hard done by if they thought they were getting a new exhaust, only to find that the car breaks down again a few months later. However that’s part of the risk of a fixed price contract that focusses on results rather than approach or methodology. As such I suspect there are ways to structure a value priced contract that helps mitigate this issue.

The problems with fixed price contracts are fairly well known in our industry, so I won’t go into too much detail. However there is a tendency for value-pricing advocates to pick relatively simple examples like that of a mechanic to illustrate the benefits of their approach. Now I don’t think this is a surprise, as I believe value pricing works best for problems that are relatively simple and replicable, like fixing a car or doing a tax return for a small company. Sure there will always be some variance, but it’s usually not that great, and is likely to even out over time.

Design and development services aren’t like fixing a car. Often we’re dealing with very complex problems, the full scope of which only comes to light when we’re half-way through the project. In fact a big part of the project is usually figuring out what the problem is in the first place, making accurate estimation almost impossible. We’re also dealing with problems that vary immensely depending on the companies involved. So the same problem in a large and bureaucratic business could take five times as long as with a small and highly engaged team.

It’s issues like these that prompted the agile movement, and especially agile pricing. While I’m sure it’s possible to blend the two, most of the value pricing advocates I’ve spoke to still adopt a relatively traditional approach to contract negotiation, locking down the scope in order to prevent scope creep. As such this feels like a bit of a backwards step to me.

Up to this point we’ve talked a lot about the fixed nature of value pricing, but we haven’t tackled the issue of price setting. Going back to our car example, our value-pricing mechanic would start by asking the owner a range of questions to determine how important the car was to the driver. So they may ask how much the car was worth, what sort of job the owner had, whether there was a second car in the family, whether the driver had any important meetings coming up, or any commitments they needed the car for that week. If it turned out that the driver needed their car for a big meeting tomorrow the mechanics would price the job higher than if the person was going on holiday for a week and was happy to wait.

This all seems fairly reasonable so far. The fat cat executive gets charged a bit more while the family man has to pay less. However what happens when the mechanise decides that they only want to work for fat-cat business men and women who can afford to pay more?

This is my main worry about value pricing. It used to be that agencies would choose projects based largely on the design or technical challenge. Sure the clients would still need to pay, but a metered rate provided some level of fairness and democracy. Like hopping into a taxi, as long as you could afford to pay the fair, the taxi driver doesn’t mind whether you’re on the way to a business meeting or just seeing the sights. Everybody is treated equally. However with value pricing the driver will ask you a bunch of probing questions to decide whether they can make more money off of you, or wait for somebody more profitable to come along.

As such, there seems something inherently unfair and mean-spirited about value-pricing. Like when a hotel charges you five times more for something from the mini-bar than you’d pay at the corner store. You understand that you’re paying extra for the convenience of not having to leave your room, but it doesn’t feel especially nice being taken advantage of that way.

This brings up one of the big issues of value pricing, which is transparency. If you’re a customer buying digital services, you’re probably dealing with other agencies who charge by time and publish their day rates. As such you probably have a pretty good understanding of what the market rates are and what different agencies of differing abilities, experiences and reputations charge. This allows you to compare one proposal to another, based on how much they charge and how much time they are proposing to spend.

By comparison, companies who engage in value pricing typically refuse to give a day rate or detail how much time they will spend or how the proposal was put together As such you simply have to believe that they will do as good a job as the other companies who are more transparent with their approach. Because of this I can definitely see why some clients would struggle with the concept of value pricing and fear they may be being taken advantage of.

The main approach to value pricing is to figure out what the client values and charge accordingly. So some clients may value a quick delivery while others may value deep engagement. Some may value an immediate spike in traffic while others may value the lasting power of good design. Putting a figure on esoteric values like brand or engagement is difficult, if not impossible, so I worry that value-based agencies will priorities easy to track metrics like profitability. This may encourage them to chase projects that offer quick wins and big payoffs, over projects than deliver harder to track but no-less meaningful value.

I’d hate to live in a world where the best design and development agencies priorities working with banks, oil companies and large retailers, over arts institutions, charities and local government, purely because it’s easier to quantify the value you deliver to these types of organisations, and charge them more. As such this new interest in value pricing does somewhat worry me and I hope it doesn’t signal a slide into a more money focussed and less caring era of design.

Posted at February 5, 2015 4:55 PM

Comments

Erika Hall said on February 5, 2015 7:44 PM

We already live in a world where plenty of high-profile agencies prioritize working with “big brands” with deep pockets over “arts institutions, charities and local government”. The upside of moving towards value pricing is that it rewards rather than penalizes speed and expertise. Clients truly benefit if the designers are thinking “how can my work bring the most value to my client’s business” rather than “how can I justify this fee.” And that is a different mindset rather than “how can I charge more for the thing the client personally values”, which is what it sounds like you are implying above. Part of a designer’s expertise is a perspective on what the client should value. This makes value pricing much more meaningful. And I will also say that it doesn’t make sense for all types of work. Anything towards the production end of the scale should continue to be based on time/rate.

Tomasz Maciag said on February 6, 2015 9:15 AM

To continue our twitter conversation from yesterday.
I feel that you’re describing bad case of value pricing, and that’s why it’s not resonating with me. If that was your point, fine. But just to point out, same concerns can be made against hourly rate (among others) when it’s executed poorly (as Erica stated).

IMHO your mechanic example don’t really makes a good point. Part of a good value pricing practice should be discovery process, which helps understand what the problem is, and how we can fix it. This phase has a value in itself, therefore can be priced. Client can decide what to do with that knowledge (they can engage further to fix problem or not).
I agree that design and development services aren’t like fixing a car. But complex projects especially require good understanding of the problem. This understanding certainly has a value to the client. Kirk Bowman (https://twitter.com/artofvalue) hits this point very well in his podcasts.
Regarding transparency, comparing one proposal to another, based on how much they charge and how much time is not really objective, because hourly rates are subjective. It’s a cost+ model. The “+” is a subjective part.
I agree that putting a figure on esoteric values like brand or engagement is difficult. Value is subjective. It is a feeling, not a number. Client has to feel that value exceeds the price. It’s the only way it works.

Andy Rutledge said on February 10, 2015 1:18 PM

Thanks for examining these issues surrounding value pricing, Andy. While I agree with you that there are potential pitfalls for both clients and agencies, I think you were getting more to the heart of the matter toward the end of your piece, where you talked about how what the client values may be things other than simply the resultant artefacts. What the client does with what they’ve purchased will determine the ultimate value of it. We cannot control that as much as the client can. It’s their business, and rightly so.

I suggest, however, that in order to wisely work with value pricing, we need not imagine that the process of working with a given client to be some sort of unfathomable black box; one that we’ll only come to understand once we are deep into the project (and therefore problematic with regards to cost/price). That approach is, I believe, irresponsible and discounts the responsible practice of pre-bid discussions with the potential client. In those discussions, it is our responsibility to discover 1) what the client values, and 2) what sort of process they’re expecting and how they intend to invest and participate in it (and much more, besides)—and then all come to mutual agreement as to how things will be “scripted.” What we learn in those discussions should greatly affect the price we offer that particular client.

I also believe that value pricing works only (or perhaps, best) if the clients you’re attracting are coming to you because of what they know about you, your work, your reputation, etc. rather than because of pure marketing. Experience has taught me that only when your clients are selecting you deliberately—and not because of mere financial economy—can you have the proper value-based relationship with them.

Of course, I don’t believe you hold these issues to be irrelevant, but bring them up here because you didn’t necessarily express them fully in your piece. I believe these issues are fundamental and not just ancillary to value pricing.