Media Page - Fees and Pricing Benchmark Report: Marketing, Advertising, and PR Industry 2008

5. Brand, Market Conditions, and Costs are Driving the Price Increases

We asked marketing, advertising, and PR firms to write-in the top three factors that influenced their fee increase and found the top factors to be:

1. Company Improvement/Experience/Reputation – or brand
2. Competition/Market Conditions
3. Clients' Perceived Value

Don’t take our word for it, the respondents themselves said:

"Brand, reputation, and value of the work."

“As our firm becomes more established, we can increase prices based on internal sense of our own value."

6. Premium-Price Firm: What Do They do Differently?

When it comes to premium-price firms and what sets them apart, it is not the amount of repeat business they are able to get, or the region of the country in which they are located. As a matter of fact, these firm demographics do not correlate with a firm's ability to charge premium prices.

What is different is their view on pricing – it’s all about profit and value.

The factors that matter most to premium price firms are:

1. Their firm's profit targets (and its progress toward achieving them) - 68% find this "extremely/very important"
2. How valuable the work will be to your client upon completion - 91% find this "somewhat important"

• Break Out of the Going Rates Spiral
  
  While many see using going rates as a strategy as a necessary evil of getting new clients in a competitive marketplace, it also feeds into the lament “we are becoming a commodity.” If you cannot articulate the distinctness of what you offer, of course you are forced to charge what everyone else is charging.
  
  Marketing, PR, and advertising firms should know better than any service firm about creating a distinct position in the marketplace, yet they often lack focus themselves. This results in the no distinction, commodity, going rates spiral.
  
  We think of friend in this regard whose PR firm was barely staying above water despite the fact that the clients she had loved her work. After much soul-searching she decided to focus on smaller A/E/C firms where she knew she had made a big impact.
  
  Her firm is now the go-to PR firm in her area. Her fees have gone way up.
  
  
• "The Billable Hour" vs. "Value-Based Pricing" - No Clear Winner
  
  There is much talk about value-based pricing and the idea that this will replace the old thinking of billing by the hour for services. We see a lot of intrigue around value-based pricing not only in this survey, but in the industry in general. Two respondents noted:
  
  “I haven't completely figured out how to do this [value based pricing], but think there is merit in this approach, as long as reasonable profit goals are met.”
  
  “We talk about value-based pricing all the time, but we never seem to bill that way. We certainly would like to. I think there is a fear.”
  
  According to the data, marketing, advertising, and PR firms are just as likely to use either tactic.
  
  Later in this report you will see that value-based pricing is used more often by premium-price firms and price-increasers. While hourly and daily fees are used more often by profit and brand leaders. There is no clear winner.
  
  
• It's All About the Relationship
  
  Seemingly subtle but very important differences can be found in the data. The least important factor was whether a client has worked with the firm in the past (27% “very” or “extremely” important), whereas the firm’s relationship with the prospective client mattered more than twice as much (59% “very” or “extremely” important). While these two factors may seem similar on their face, they’re not.
  
  For most firms, it’s less important that it worked with a client in the past, and it’s more important how well it went and where it is now in the relationship. Perhaps the prospect has never worked with the firm in the past, but has been an amazing referral source for years. This may be essential to how the firm wants to deal with them going forward as a client. In another instance, a client has worked with you in the past, but since then the firm has evolved and is no longer focused on that particular type of company or need.
  
  Whether the firm has worked with the client in the past doesn’t have as much bearing as the current relationship and ability to deliver value on the next engagement.
  
  
• Value-Based Pricing Used More by Premium-Price Firms
  
  Regarding pricing strategies employed, premium-price firms, equivalent price firms, and bargain price firms are a little different here and a little different here. In terms of their differences, not much was significant or comment worthy…except value-based pricing.
  
  As noted in the “Employ value-based pricing” recommendation on page 9, the concept of value-based pricing often leads to thinking, discussion, and action to create more value.
  
  It’s true: you can be a premium-price firm without employing value-based pricing. But if you engage the concept of value pricing – and you take an open minded approach as to where your services can improve – you may find yourself making changes in your firm that make you more valuable to the market…and help you earn higher fees.
  
  
• Most-Profitable Firms Have Least Price Pressure
  
  Price pressure from clients often comes:
  • During times of economic distress
  • When a client does not see value in a particular solution or firm
  • When clients are open to or are entertaining discussions from other providers in the market

According to How Clients Buy: The Benchmark Report on Professional Services Marketing and Selling from the Client Perspective, clients that are the most satisfied with their service providers are much less likely to even consider switching to other providers. And, of course, repeat business is often the most profitable.

While it might not be new or novel to say so, focusing on client satisfaction and client delivery will help your firm to become a profit leader, as well as a price leader.

• Making the Financial Case for Branding
  
  Arguments about brand are common. Brand advocates tout the need for, and the value of, brand. Skeptics decry the value of branding, with calls of “show me the data,” “prove the case,” and the occasional “branding is fluff and puffery and doesn’t do anything.”
  
  Lest there be any further argument about the value of brand, our research shows:
  • Brand leaders receive up to 33% higher actual/realized fees as measured on an hourly basis
  • 79% of brand leaders grew versus 65% of lesser-known firms
  • 69% of brand leaders were profitable vs. 56% of lesser-known firms

This is not to say that lesser-known firms can’t generate premium fees, grow, and profit. They can and do. But it seems the brand leaders have a better chance of doing so and have an easier time of it.

Pricing Strategies:

“Learning the right prices to charge will always be a trial-and error process; but it gets easier as you work toward a standardized fee structure. You also learn where you can afford to be flexible in pricing, in order to squeeze to most value out of a job, for both you AND the client.”

“Don't be afraid — if you offer value, you are worth it. And, sometimes, raising your price is the best approach to take.”

On using Value-Based Pricing:

“If we can determine the value to the client, we charge accordingly. The difference can be thousands of dollars.”

“People tell me I'm the ‘guru’ in my industry. They also say I should raise my prices because I'm well-known. When I hear this, I raise my fees.”

“We prepare estimates that cannot be compared to the competition and are focused on how much the client values the service we'll provide.”

“When we scope a project, we calculate what it costs for the client to continue having the problem or what they've spent in the past on the problem. It's pretty easy to match up your fees to fixing it. Once they realize that they have a $100K problem that will take $20K to fix, they're very interested.”

“With input from the client, we estimate the amount of time that will be required. We do a monthly and quarterly follow up to show where things are in relation to the fee so we are in a position to ask for an increase if needed or bill for any overage.”

Standard and Realized Fees:

“75% of fees are based on day rates for term contracts. 99% of all fees billed during the past 27 years have been paid in full.”

“Actual pricing for highest level turns out higher than estimated because of experience and insight. Actual pricing for entry-level professionals often turns out lower than estimated because of inexperience, mentoring, repair and such.”

“As a rule we do not publish our fees, however, the project scope and statement of work identify time estimates and personnel involved in the project completion from beginning to end.”

Brand Leaders:

“Our services are strongly branded, so people already believe that we are  expensive’.  We tell every prospect that we don't charge by the hour and why.”

Price-Increasers: Respondents with the Highest Price Increases Tell Us Why They Were Able to Increase:

“Company growth, we are looking for higher end clients, and improving our sales technique to remove the cost from the equation and present our company as an expert in our field.”

“Growing expertise we can demonstrate, plus commitment to specific results.”

“Experience and resulting credibility, quality of clients, and ability to refuse work due to being too busy.”

“Perception of our business' value. We were undercharging. We increased our knowledge and experience in our field.”