Value-Based Pricing.
An agency you’d want to work with is composed of mature people who can deal with risk and responsibility.
I understand how paying a “per hour” bill is the standard in some places but
Humans have always had problems with estimating value.
A bottle of water costs something when you’re living in a well-developed city. If we are to contrast that to the situation of someone who is in a desert, that “something” becomes “close to nothing” — it could be priceless for the person in the desert.
As long as there’s no “index” for value (like in the financial markets), the perceived value will vary.
This variance of perceived value happens because it’s quite a challenge to quantify risk. When agencies charge by the hour, that means risk is on you, the buyer.
However, an agency you’d want to work with understands that it’s a burden for both you and them to price a project by hours. They also understand that it doesn’t make any sense at all — why cause more distress for two groups of people (i.e. the two collaborating companies) and go on a lose-lose route, when we can pivot to a win-win scenario?
That win-win scenario means value-based pricing.
In practical terms…
…it looks like this. Say your company is having a problem with the onboarding process. Stats show you’re losing 1000 users per month (arbitrary number) due to the way the onboarding stage is designed right now.
You’d be needing someone to at least strategize it, not necessarily implement (if you’ve got in-house designers, that’s the case). Someone who’s had experience in this field before.
You say “Cool, we need a design agency”. And off you go — looking for “design work”. Most agencies come back to you and say they can do the “design work” at this hourly price or at this overall project price.
However, eventually you hear this from a specific agency:
“How about instead of having all the risk on your side, we’ll put our skin in the game as well?
We believe in what we do and we think we can handle not only the design work — that’s without a doubt, you can see that for yourself in our case studies — but also the actual problem: the onboarding “leak” situation.”
Fast-forward and what an agency like this is doing is they’re looking to uncover value for you and charge a percentage of that. In other words, “help you, help me”.
In other words, let’s say those 1000 users per month mean £960,000 more towards the ARR figure. After discussions this number would be revealed and then we can put a value to this engagement — that’s how much it’d be worth paying.
How much per cent?
That will vary depending on how risky the situation is — if we can guarantee 100% those extra £960,000 then we’d be able to charge £850,000.
Buying just strategy is going to be riskier than the actual implementation. However, it is going to cost less. As a consequence, ideally you’re looking to trade money for risk (which is what we do every day anyways with most of the stuff we buy).
Sure, not everything can be priced based on value if you want to be cynical and ask whether this works for a glass or for a pretzel.
The bottom line
Without a doubt, the agency you’d want to work with understands that you and your company would be more satisfied (and there would be more good done in the world) if the efforts of the two parties are aligned towards a business goal.
About Ch Daniel
I run Chagency_, an experiences design agency that specialises on helping tech CEOs reduce user churn. We believe experiences are not only the reason why users choose not to leave but also what generates word of mouth. We’re building a credo around this belief.
If I’ve brought you any kind of value, follow me and get in touch here: LinkedIn | Twitter | Email | Quora | YouTube (same content but in video)
I’ve also created an infinitely-valuable app for sneaker/fashion enthusiasts called Legit Check that impacted hundreds of thousands over millions of times – check it out at chdaniel.com/app
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