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
HumbleBundle.com, 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.
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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