Unlock the Secret to 50% Margins: Pricing Strategies Every Agency Needs!

It's tough out there at the moment, isn't it? I know in my world a lot of my clients are really struggling to get prospects over the line and get those projects signed up and are also having a downward pressure on their pricing. So in today's episode I want to reflect back to an episode that I recorded with Rory Spence from the wow Company, talking about how to make sure that your pricing really reflects the true value that your agency offers, whilst of course staying competitive and and getting clients to sign on the dotted line. Now I know many agencies are facing that tough task of balancing fair pricing, downward pressure from the market and meeting client expectations. And of course they need to do all of that whilst being profitable, which means creating sustainable growth. So it might be that you're trying to overcome the legacy of outdated pricing models or you're navigating the intricacies of introducing value based pricing into your agency and that means that typically your prices will be higher. You're aligning your prices with the outcomes that clients are looking for and ultimately that means happier clients as well. So in this episode we are going to dig into all things pricing. We're going to talk about how to use anchoring to shift your pricing strategy, we're going to talk about the importance of measuring gross profit and tracking your time. And we're also going to talk about transitioning from perhaps a time based model or a fixed price based model that you're at today to value based pricing pricing. So lots to cover and let's jump into today's episode.

I'm Rob Da Costa and this is the Agency Accelerator podcast. As someone who has stood in your shoes, having started, grown and sold my own agency, I know just how it feels in the ups and downs of agency life. So this podcast aims to ease your journey just a little by sharing mine and my guests experiences and advice as you navigate your way to growing a profitable, sustainability, sustainable and enjoyable business. So if you are in the agency world then no doubt you have heard of the WoW company and particularly the bench press reports that they produce. So in this two part special I am super excited to be joined by Rory Spence. Now Rory loves helping ambitious agency owners who want to grow more profitably and sustainably. And he's helped thousands of agencies across the UK advising them on pricing strategies, project management and final financial processes, all focused on helping them increase their profits. Which is music to my ears and will be music to yours as well. So I'm super excited to jump in all things pricing and profits with Rory today. So welcome Rory, how was that for an introduction? And how has your life been in this past strange year?

Oh, thanks, Rob. Thanks so much for having me on. I've. Yeah, I've been very well, thank you. And it's great to be here. Yeah, it's been obviously a roller coaster of an 18 months, but it really feels like positivity is, is pretty high right now. It feels like people are excited about the opportunities that await next year. I guess Boris has tried to pour cold water on that a little bit in the last couple of weeks, unfortunately, without, without going too, too political. But, you know, hopefully, hopefully this will all pass quickly and yeah, we'll have a really positive 2022.

And how have your agency clients typically fared throughout this crazy kind of last 18 months?

Yeah, I think as everybody can probably relate to back in. When was it March 2020 when everything kind of kicked off and we were forced to work from home and, and you know, go into that first lockdown. At that point there was a bit of panic, there was a lot of worry. It was really difficult. And I think the positive news is, I think for a lot of people it was nowhere near as bad as actually what they were maybe expecting. We certainly had fewer agencies have to close down than, well, than we were expecting. Slash that they were kind of maybe thinking as well. I think although people were able to take on things like the bounce back loans and a lot of the funding that was available, we've seen a huge number of them actually not need that money or they've used it, but in ways to really gain an advantage rather than just to survive. And so that's been great to see. And I think a lot of people now, after the lessons that we've learned in the last 18 months, certainly I think a lot of clients are feeling like they're in a better position than they've ever been. The team are more united than they've ever been. And there's also a feeling that, well, you know what, if we can get through this, we can get through anything. And I think that's, that's, that's really nice. I completely agree with that as well.

Yeah, yeah, me too. And I think I've seen a similar thing. I think those people who didn't panic and who kept trying to serve their audience, even if their audience was cutting back on all of their marketing costs, have come out the other side of it in a much stronger position. So it's good to hear that that's a common, a common theme. So in this episode, we are really going to focus on pricing. And this episode is actually going out at the beginning of the year. So that is a fantastic time for agencies to be thinking about reviewing their prices. And I'm always encouraging my clients to put up their prices when they can. So let's start with that question. Should we be reviewing our prices every year? And if we should be increasing our prices, how on earth do we go about doing it without fear of losing all our clients?

Yeah, great, great question, great question. Well, to answer the first part of that, should we be reviewing prices? I think the answer without doubt is yes, without doubt. Now, what a lot of agencies have done is not increase their prices in the last 18 months. And I can see why. I'm not necessarily saying I agree 100% with that. However, I can absolutely see why. And I think there was certainly a sensitivity around the timing of that. Obviously, for some agenc those that, for example, worked in E Commerce, well, actually their clients were booming and hopefully they did see that as an opportunity to increase prices. However, other agencies who have had it tough and have had to sort of stick by their clients. Well, actually, I would completely understand why you would decide against increasing prices. What I'd add to that, though, and what I'd say, not just in the 18 months we've had, but really in business in general, everything is getting more expensive, right? Your staff don't turn around at the end of the year and say, you know what, actually, I think I might take a pay cut this year. Do you think we could organize that? They're all asking for pay rises. Rent is going up, general costs of business are going up, cost of living is going up. And therefore, if you're not increasing your prices, you are squeezing your own profit margin. It is. It is quite simple that that's what's going to happen because your costs will be going up 100%. You should be thinking about doing that. I completely agree. Ro job this January is the perfect time to be doing that. You know, start of the year, people take that as a fresh approach. Right. Fresh year. What should we be doing? I think it's a great opportunity to do that. And it's interesting what you said, because a lot of agencies do always say, oh, yeah, I'm really worried about increasing prices. I don't want to lose my clients. I'm a really big believer that there is a way you can craft this conversation where it is almost impossible for you to lose from it and to really dive into that. I think it's in this specific phrase that you can use. So when thinking about increasing your prices, and I'm sure we'll come back to this, Rob, maybe in more detail, but the logical place is often to start with your new clients. You know, when you're pitching for new work, that's a great opportunity to increase prices. But don't forget about those existing clients. What you can do, how you can structure this conversation, is you can actually go back to them and say, hey, look, wanted to have a conversation with you. Because when we first started working with you, you were down at this level in terms of an hourly rate or a day rate. You know, actually, this is what we charged you, and we still charge you that at this point now as well. Whereas actually, we're now taking on clients and they're up at this level, you know, we're charging them a much higher hourly fee or day rate or however you charge it. And this is the interesting phrase, you can say, you can just ask them, how would you feel about bridging that gap? That's a really interesting phrase because, like I mentioned, I'm a big believer that it's really difficult to lose from this. There's kind of three possible outcomes from you asking this question. One is that they turn around and they say, absolutely not. We cannot increase our hourly rate by even a pound. If we do, we're going to have to go out and find another agency, and at least then you know where they stand and you can react to that. And your reaction might be, okay, well, you know what? That's what you're going to have to do then. Unfortunately, we've made the decision that we're not going to be able to carry on with clients at this level. Or you might turn around and say, well, actually, look, we really love working with you, so you know what? Let's keep it at that level. It's really good to have this conversation. We'll review it again. Six months time, years time, whatever. But you're in control of that decision, crucially, so you're able to make that decision. Of course, another reaction from your client's perspective might be, hey, look, actually, we love working with you. You do a great job. We were expecting this call. You know, actually, we thought you might have called us six months ago, and you didn't. But you know what? Actually, we're really happy to go to those new rates because we love working with you. We value everything that you do, and you'd be amazed how often that will genuinely happen. But then the third option is the most common, I would say, is where they're going to turn around and say, okay, yeah, not too surprised to be hon. I'm not sure if we can really justify getting to that level, but could we meet somewhere in the middle and then you can just have a nice negotiation and a nice conversation with that client and just try and find a happy medium?

Yeah, Such good advice. It's interesting that I totally agree and believe that the third answer is the one that most people will get. But I also think in their heads they think they're going to get the first answer and that's what stops people doing it. And it's interesting. I'm just interested your view on this. So when I've spoken to a few of my clients about this, they often say, Rob, you don't understand. My market won't bear it. Or we're at the limit of what we can charge. And I think, I believe rarely that is true, but I'm interested to know your thought on that.

Yeah, so sorry, the question, Rob, being around.

Yeah, so for example, I have a client that works in the education space and when I talk about pricing and I say, look, you need to review your pricing, they'll say, yeah, but Rob, you don't understand because in the education space, this is as much as an establishment will pay. And I'm often thinking, is that really true or is that because they're comfortable charging that fee?

I see, yeah. 100. I think it's, I think it's a confidence game, without a doubt. Talking about pricing, talking about money in general, I think is a confidence game. And, and the word game being, being a key part of this. Right. Pricing, I'm a big believer is an art, not a science. There is no set fee which is the correct fee if you're getting pushback. Like that example you gave Rob, from a client in a particular sector saying, no, no, this is, this is the level. Well, actually, maybe they've not worked with you before, you know, maybe they've not got the sort of value that you can provide for them. You know, it is, it's a game and you can, you can have a little play around with that and actually see, look, what, what do we feel like is the, is the right level. So although we've got a load of stats around what those hourly rates might look like, I, where, and I know you're keen to come back to this, Rob, as well, but that, that conversation around value based pricing.

Yeah, it's a, it's a perfect segue, I think, because you were talking about hourly rates and daily Rates just now. And you know, I totally believe. And get that internally we need to figure that stuff out, but externally we shouldn't be selling that to our clients. So let's jump into that thorny topic of value pricing, value selling, because it's one that, you know, I know you've had a lot and I've had a lot. And let's start with a really simple question which is what is it exactly? So could you, I don't know if you can give a really good sort of simple definition of what value pricing is.

Great question, great question. So I guess an interesting way to answer this question is to share some, some stats taken directly from our bench press report. And we ask, we've asked every year for the last few years actually, how do agencies price? And just to share some, some percentages statistics with you, 80, 87% of agencies will use a fixed fee pricing model where someone will come to you with a brief and you'll say, right, we will deliver on that. And this is the fee for it, you know, fixed fee, fairly straightforward. So 87% of agencies, 60% of agencies will still use time and materials. Now I think luckily that figure is decreasing. I think that needs to decrease further. I think if you are literally just selling time for money, there's a risk that you're just going to be a commodity. And in the sector that hopefully the audience is in, in that marketing sector, there are so many agencies, there are thousands of agencies out there. If you're not able to differentiate and if you're just selling time for money, it's going to be, it's going to be tough, it's going to be really, really difficult for you then value based pricing. And I will answer the question of what exactly it is, but just for some context, 23% of agencies are using value based pricing. And that number has actually remained pretty constant. I thought it would have increased because there's more and more talk about it, but it's remained fairly steady. But value based pricing, well, it is effectively the opposite of selling that time for money. It's taking that out of the picture entirely and it's working out what is the thing you offer? What is the service that you provide? What's the, what is your sort of secret sauce as an agency that probably is very unique to you? It might be very unique to a particular sector that you're selling it to, but what is that unique and high value proposition that you provide that people will pay disproportionately for? And that's where value Based pricing can come in and be really, really powerful.

Yeah, great, great definition. I always, you know, when we talk selling time and materials, we're selling inputs and outputs. When we're selling value based. When we're selling on a value based approach, we're selling outcomes and impacts, and that's what the client's buying. I think that fundamentally clients are never, ever, ever buying time. They might think they are. And there's a couple of flaws with that. One is that when you sell time, it assumes that the client has some expertise in what you do. Because if you sell time, especially if you report, they start questioning, why did it take, you know, half a day to write this press release or to set up this digital campaign? And it assumes that they understand how long something should take. And you've probably heard me say this because I've said it many times on the podcast, but I always liken this to the dentist. If you've got toothache and you go to the dentist and they get rid of and you're in agony and they get rid of your toothache in 15 minutes and they say, that's 300 pounds, you would never say, that is a lot of money for 15 minutes of work. Because if you did, the dentist could turn around and say, well, okay, If I took three hours, £100 an hour to get rid of your pain, would that make it more valuable? And of course, the answer is no. And we are getting rid of pain for our clients. And that's that secret sauce thing. It's like working out what's the pain that you're getting rid of. That's the outcome, the transformation from being in pain to not being in pain. You know, we have no leads to. We have lots of leads. Our brand is terrible to. Our brand is really strong. That transformation is what the client is buying. And if we can price on that, then, you know, why wouldn't you pay for it? If I said to you, hey, Rory, I can get rid of your pain in 15 minutes or I can get rid of it in three hours, which would you prefer? Well, of course you're going to go for the 15 minutes.

Yeah, it's a great analogy. I love that. I love that, Rob.

It's just a really good way of making people have that kind of. Yeah, I get it now. I think those stats are kind of interesting and slightly depressing that you said. I think people understand intellectually the concepts of value pricing, but I don't think they know how to implement it in a real way. So if I were a Client that had traditionally reported on tasks and time. And I totally bought into this moving to a value based approach. And I wanted to transition a client or even quote a new prospect. How would I go about it? How, what would the proposal look like and how would you know, how would you put the scope of work and the timelines and all that stuff together if you're just focusing on the value approach?

Yeah, great, great question. So I think there's two parts to. If you are an agency owner and you're thinking of moving into value based pricing, the very first thing that you need to do is ask yourself two questions. And those two questions are, what can I be the best in the world at? And who can I be the best in the world at providing it for? So obviously the idea being here, how much can you specialize in terms of the services that you provide or specific service that you provide? Okay, so it doesn't necessarily have to be we're the best in the world at all. Five of these services that we offer. You might go that thing there. And it's often going to be more on the strategy side of things, you know, going back to that sort of term, you know, like commodity, you know, if you're providing a sort of straightforward service, that that's not going to quite be it, it's going to be that strategy, it's going to be that advisory element. So what could you be the best in the world out there? And then like I said, who could you be the best in the world at providing it to? So is there a particular sector that you could sell into? You know, are you specialist in healthcare or in travel, you know, or in E commerce, you know, work, work that out. And I think if you can answer both those questions, or even just one to begin with, to be perfectly honest, I mean, both is the ideal. But if you can answer one of those questions, that at least gives you a direction to go in. And that's where your focus should be when looking at value based pricing. So that without doubt is the best place to start and then what I'd encourage you to do, what will really help to transition you towards this idea of value based pricing is in introducing three pricing options. Now this is something that gets spoken about a lot across agencies and service based businesses that they should be doing. Yet surprisingly still huge number of agencies, well, 50% of agencies might be, 49% of agencies are still only giving one pricing option when they have pitches, you know, or they're quoting for work. And I guess just to talk initially about the cons of doing it that way, if you're just, if a client is coming to you with a brief and they're asking for a quote and you just put one fee in front of them and they're getting three other quotes from other agencies, you are just directly competing on price with those other agencies right now. They might like you more than another. You know, they might value this piece of work that you've done in the past, they might have a good relationship here. But ultimately like a huge part of that comparison is going to be on price. You are either going to be more expensive or less expensive or as expensive. However, if you can move towards this model of offering three pricing options for every quote, for every piece of client work that you ever do, it will really, really leave you in good shape. And it, and it affects so many different things. It's great for so many reasons. One is of course the value based pricing side of things, which we'll come back to. But what it also means, just to use that example we were just giving there, where you're competing on price. Well, actually suddenly if you were to put three prices in front of this client and they decide that they like you the most, they've got the best relationship with you, they trust you the most, you've got great content, then you've won and then you're almost competing with yourself on price because they'll then go, right, well, we want to work with these guys, but at what level? Because they've given me these three options here and therefore it will massively help with your conversion rate. Now the kind of science behind these three options, always offer your most expensive service or quote first and that should be anchored high. So if you, if you're moving from offering one pricing option to three, whatever your one would be, basically treat that as your middle option if in these three. And your first option should be considerably higher than that. So let's say you'd normally quote 25k for this particular project. Well, your first option might be 60, you know, it might be 100. Like you, you work out what's right for you. But, but it's a gen, it's a genuine quote, it's a genuine breakdown of, hey look, well this is one level that we can work at. We can provide a service at this level, you know, at 60K. And this is what you would get from us at that level. You can then say, right, your second option here is this 25k option which would have been the only one that you'd put in front of them, hey, look, it directly answers your brief. It does everything that you need from us. However, you wouldn't get this additional extra that you didn't mention that I kind of put in that first question. And also you'd have to sacrifice this. And you're just mentioning a couple of things that they wouldn't get at that top choice. And then you're able to offer a third option as well. This one might be 15k, so it's a little bit lower. And hey, look, well, it may be just about answers the brief. There might be a couple of things that are missing, but at least you're giving them that kind of option. What you will find is most clients will go for that second choice. That's going to be the standard. But what you'll be really fascinated by is actually there'll be people that are really intrigued by this top option. Now this again, just to go back to the science of that. The reason people are lost and go for that second option is you've anchored the price high by giving that first quote at 60k. They've had 60k and go, wow, okay, it's more than we thought. And then, well, if you only take these few bits out, actually you could work with us at 25k. That suddenly feels like really good value. Value. And that, and that's the, the logic behind it. But what it will also. And, and that, like I said, I guess to go back to answering your question directly, Rob, in terms of value based pricing, I think that's a really good way to start looking at this. So these three options are not going to be based on 60Ks worth of time, 25Ks worth of time and 15Ks worth of time. It's going to be based on this is what we will deliver at those levels. You know, this is the service that you're going to get from us. This is what we can try and deliver for you at each of those levels. So it's a really good way of engaging that conversation.

Love that. And I use that story a lot. And in fact I read just to kind of highlight how anchoring really works. I read this article years ago that I often cite. I'm sure I've kind of got it slightly wrong, but there was this group that was a workshop and they were split into two separate. They were put into two separate rooms and the first room they were said, you've got 15 minutes. What do you think the typical hourly rate of an agency is? And in the second room the tutor said ABC Design Limited charges an hourly rate of 150 pounds an hour. What do you think the typical average hourly rate is of agencies in the uk? And the first group came back at, I don't know, £80 an hour and the second group came back at £120 an hour. And that is a perfect example of anchoring to set that height high point and then come up with an average. So I think that sort of highlights the point and I can't really understand why people wouldn't use this.3 pricing price, something I tell my clients to do all the time. It's a great, a great piece of advice. And actually, listeners, if you take nothing away else away from today's episode, then that piece of advice from Rory is a really good, really easy to implement and just think that the middle price is the price you really want them to pay. And the anchor point is they're all singing or dancing. What would be the most perfect sort of. Of offer that you could give them? Just talk. So. So the clients bought into that. Do you agree with me that internally we still have to break those projects down into hours and assign, you know, assign work to different people?

It can be useful, I think, I think there's, there's no right and wrong way here. Yeah. So I think internally you work off of how your team will operate best. Some of them, if they've always tracked time and tracked hours, like, we'll, we'll need that, you know, we'll need that gauge of, hey, look, by the way, we're estimating you're going to be spending 10 hours on this and that gives them a good gauge to work towards. But I think ultimately there's a world where we can move away from that and longer term it can be the team are also focused on the output and the, and the deliverable. And this is, this is what we need to achieve. And when we've achieved it, we've achieved it. You know, going back to your dentist example is a really good one. So I think. Yeah, I think certainly, I guess my, my strong view on this is we've had clients before come to us saying, well, we've stopped charging by time, but now my team is struggling. Well, there's definitely. That's two separate things. Charging by time externally and then tracking time internally, completely unrelated. In my opinion, you can definitely do one, not the other.

And if. So I put you on the spot here a bit if. Because I'm a total believer in that. I think in order to evaluate efficiency and capacity. Well, let me ask you, let me ask the question. Rather than me saying, if you don't use time tracking internally, how do you measure efficiency and capacity of your team? How do you square the circle of a team member saying, oh my God, I'm really stressed. But then you look at the amount of billable, billable work they're doing and it doesn't really equate to the fact that they should be stressed. So how do you monitor and measure that?

Yeah, it's a really good question and it's a really tricky one. So that is obviously a huge benefit of time tracking. Actually, you can see this in black and white, as long as the team are engaged in doing it accurately, of course. And so, yeah, if this is something you're concerned about, time tracking is definitely the way to go, I guess to give like a counter to that. If you in a position where you're thinking, no, I definitely don't want to be using time tracking, we've tried it before, team can't get on board with it. It's not an option for us. I think a really powerful way to track the performance of the agency, but also to get a gauge for are we over or underutilized, is to track your gross profit margin and specifically tracking gross profit margin in the correct and the most powerful way. So a lot of agencies will still not track gross profit in the most meaningful way. And to quickly explain why I think that is, a lot of agencies will put their staff costs, you know, their salaries, pensions in the overheads of the business. Well, actually your service based businesses. So the greatest cost to you delivering on a project or for a client is in the cost of that team. And therefore I'm a big believer you should be having those costs, including any freelancers that you're working with, above your gross profit line in your direct costs or cost of goods sold, as they're often referred to as well. And if you can calculate it in that way, so still got all of your turnover income, take away any direct costs you've got, including billable staff, salaries, billable freelancers, that's going to give you a really meaningful gross profit figure. And then crucially, you can take that gross profit figure, you can divide it by your turnover and it will give you a margin. If you are struggling with that calculation, please reach out to me and give me a shout because I can, I can help you with this really easily. But basically that, that should kick out something around probably the 45% mark. The average in the UK, to give you context, is 44%. The, I think 50% is the place to really be aiming for. However, those top performing agencies, those to go back to our earlier point around those that are the best in the world at providing something, you know, are really niche in terms of who they provide it for, they will be up at around the 60% plus mark. And so I think that can be a really good measure to be able to look at actually. How am I performing against other agencies? Am I overall underutilized? Am I overall under pricing as well? That's an interesting stat to look at.

Yeah, that is so good. I mean, you've kind of answered my last question, which is what was the typical kind of margins that people should be working towards? And I know quite a few of my clients are not at that number. They're more in the 35, even some at 30. And you know, we're always saying that the smart thing here is to get more efficient, not to increase your costs and increase your revenue without increasing your, your profit, your GP margin. So I think everyone should take stock of that. And it's interesting personally for me, the converse this conversation because I'm working with a client on this at the moment and they, they work out their GP in a really strange way. They put their staff costs in one area and their freelance costs in another and like they really should be in the same category and they should be considered the same because, you know, otherwise you're getting a kind of false reading of what your costs are in the agency. I just want to touch one last thing to kind of circle back to the point you were talking about where you were saying, you know, ask those two questions about what can you be the best at the world at and who can you do it for? It's an, it's a really big cheerleading message for having a clear niche, which is, I guess sort of two of my big hobby horses are value pricing and having a clear niche. And sometimes people are resistant about both of those. But you know, when you have a clear niche, it becomes so much easier to understand who you are doing the work for, understand why you can be better and get your GP margins up towards that 45, 50% goal, which would be a great target to hit.

Yeah, yeah, completely agree.

Do you have any other sort of final words of wisdom around this whole pricing topic? I know we can could talk for hours, but I'm always conscious of trying to keep these to 30 minutes. But any other final words of wisdom for our listeners?

Of course, I think, I mean, I think like, like you alluded to earlier, Rob, my number one tip, if you took one thing away from this session would be the encouragement to moving towards offering three pricing options. The difference that that has made to clients is just immense. Again, I think to reiterate something I did mention earlier, like, pricing is an art, not a science. So as much as there's dozens and dozens of stats that we've got from various benchmarking reports over the years, actually don't get too obsessed with the numbers and how you compare to an average. I think it's a nice gauge to have. Have a look at that and go, are we massively undercharging? Okay, well, there's an encouragement to actually increase prices or. Oh, are we about right. Okay, great. But that doesn't mean to sit back. That means. Okay, it feels like we're good where we are. However, as with every year, we should be reviewing this. We should be having these conversations with our clients. We should be looking at where are there opportunities to increase fees and therefore increase margins.

Great, good advice. And I will make sure that we include the links to the benchmark reference reports in the show notes. And interestingly enough, in our part two of this interview series, Rory and I are going to be talking about regional differences. And I know that the wow. Agency has just started producing some reports about different regions. So we'll be sharing that in the next episode. So make sure that you look out for that. But, Rory, thanks so much for joining me today. I know that our listeners will have got a ton of useful insights from this, because I have, and I've made a bunch of notes of things I need to do. And I really like that way you talked about bridging the gap on pricing, because I'm going through the same thing myself. I'm, you know, I've got some legacy clients that I haven't increased my prices for, for a long time. And when I do, I'm sure they're going to say, rob, we've been waiting for you to do this. Even though I run that fear of them, you know, saying they don't want to work with me, but so we're all there. I found that really useful. I know our listeners. So thanks so much for joining me me today.

Absolute pleasure. Thank you for having me, Rob.