Monday, February 25, 2013

Value-Based Pricing is a Process, not a Project

In my last post, I talked about what Value-Based Pricing is, why companies are adopting it, and why advertising agencies run the risk of “commoditisation hell” by not adopting it. But it would be remiss of me not to tell you how to start your Value-Based Pricing journey.

A couple of years ago, I went on a ride-along with a Sales Rep from one of Australia’s biggest online advertising portals. During the sales pitch, the rep told the advertiser about all the value they were receiving from their advertising: unlimited listings, preferential pricing on enhancement products, page impressions, click-thrus, email enquiries, phone calls, and so on.

The advertiser silently took all of this in, and then replied, “I hate phone calls!” The sales rep was taken aback. “What do you mean, you hate phone calls? That's the most qualified lead to your business that we provide”, she said. “I don’t want to be answering my phone at all hours of the day or night. I value email enquiries because I can respond to them when it suits me.”

This (true) story epitomises why the adverting industry has been a laggard in adopting Value-Based Pricing: they haven’t worked out the real value they are offering. Value-Based Pricing starts with understanding value from the customers’ perspective. The Sales Rep thought that phone calls were the most valuable ROI metric. She was wrong, because value is in the eyes of the beholder (the advertiser).

As I mentioned in my last post, there are three ways a vendor can provide value to a client, either by increasing their revenue, reducing their costs, or minimising their risk. The table below provides just a couple of examples in each category for the advertising industry (there are many more):

Increase Revenue
The advertised products command a higher selling price
New or incremental sales (via new channels or new markets)
Reduce Costs
Creative campaigns foster greater customer awareness and loyalty, which…
Reduces the Cost-to-Serve
Minimise Risk
Campaigns are optimised in (next to) real time
PR & Reputation Management

Sometimes, finding sources of value to monetise requires “out-of-the-box” thinking. Over Thanksgiving last year, Facebook sent a “swat team” to Wal-Mart’s headquarters in Bentonville with the specific objective of optimising 50 million mobile ads that Facebook users would see for toys, televisions and other discounted products. According to MarketingWeek, “…Wal-Mart’s senior team were apparently won over by the service they received and the results”.

So how do you monetise advertising services on the basis of value? Here are just three alternatives:

Option 1: Upfront Pricing
One of the best ways to align the price paid with the value received is to ask the advertiser upfront how much they think the solution you offer is worth. Not convinced that pay-what-you-want (PWYW) will work? Ask the owners of, a website that has generated $23mill in payments since launch, utilising a PWYW pricing model.

Option 2: Contingency Pricing
If the advertising solution delivered achieves a satisfactory outcome, the agency’s fee is significantly higher than what it would earn under a normal fee arrangement. But in the case of a below par result, the agency gets paid less, costs only, or in the worst case, nothing.

Like PWYW, this pricing model may appear scary too, something that must have crossed Google’s mind when they realised that if a user doesn’t click on an ad, they wouldn’t get paid.

Option 3: Guaranteed Pricing
This is not a Value-Based Pricing model that agencies should jump to from the go-get, but where an agency has the knowledge and experience to offer an iron-clad guarantee around a satisfactory outcome for a campaign, it can be a highly differentiated, premium priced alternative.

Value-Based Pricing is a process, not a project. Careful consideration needs to be given to which clients it is applied to, and in what magnitude. It won’t happen in the advertising industry overnight…but it will happen!

This is the second of two articles written for the TrinityP3 blog, where it was originally published on the 18th February 2013

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