Value pricing – great in theory, tough in practice

The design industry has long relied on a ‘time and materials’ approach — charging for hours or days worked, plus materials and services, marked up by a suitable profit margin.

Otherwise known as the ‘cost-plus’ or ‘time/cost’ model.

Nowadays we’re encouraged to transition to a value-based model. I don’t disagree.

A client service colleague at my company once came to me explaining that a client had baulked at our proposed fee and tried to negotiate by saying:

“We only have half of that time to complete the work, so can you bring your fees down?”

I instructed my colleague to tell the client that if we can reach the same goal in half the time, our work is worth more, not less.

My colleague thought I was joking. I wasn’t.

I’m showing my age now, but in that situation we used to apply ‘rush charges’. Aah, the good old days…

Now we constantly hear that AI is reducing time taken, so charging for our time represents a threat to our revenue.

As Sir Martin Sorrell of S4 Capital put it:

“There’ll be a reduction in time [due to AI], and therefore you have to now start to develop models that are based on outputs”.

But hang on — as my earlier story illustrates, when the time to complete work is reduced, the value of that work increases, not decreases, right?

Funny how clients don’t see it that way.

Many design companies appear to have adopted an output-based model. This shows up in a proposal, where a project is broken down into stages, each resulting in a set of outputs (deliverables) for a set fee. 

This ‘fixed-price’ model works well for projects with clearly defined requirements and stable timelines.

I say design companies have ‘appeared’ to have adopted this model, because almost always, the fixed price is calculated by multiplying the time taken to complete the outputs, by hourly or daily rates. And clients often want to understand the breakdown of this.

So we find ourselves back at time/cost again. But with cost certainty and budget control for the client, and cost overrun risk sitting with designers. Ouch.

Outcomes, not outputs

Perhaps what Sir Martin should have said was that we should be charging for outcomes, not just outputs. In other words, linking our remuneration in some way to the positive change our work brings about. The results of our work – which are very different from outputs.

But it’s hard to transition away from charging for time. Whether it’s presented as time/cost, or fixed-price.

To attain a true outcome-based model, it’s critical to understand the value your work is intended to deliver up front. And to establish metrics that can be easily measured. Not always impossible, but not usually easy.

Is it even possible to tie design to results? In almost every case, lots of other factors impact the success of our work: sourcing, production, distribution, pricing, marketing, advertising, etc. Many of which we have little, or no control over.

It’s extremely difficult to isolate and measure the ROI of design alone. Many have tried.

And good luck trying to sell design work using a true value-based model to a big corporate procurement team – they’ll never sign it off.

Time/cost – not all bad – when used correctly

For all its critics, the time/cost model is still a useful tool to ensure we remain profitable. Here’s why.

The vast majority of a design consultancy or agency’s costs are time based.

When we calculate profitability, it's a pretty simple balance between what we charge (our fees plus expenses) and our costs. The vast majority of the latter are our people.

Yes, people are employed for their experience and expertise, but they’re paid for their time – through their annual salary, which is easily divided into days and hours.

In turn, our people themselves operate their finances using a form of the time/cost model. How much they spend on food, entertainment, or to pay for their home is measured against a unit of time, usually per month.

If we were to truly adopt a value-based model, we’d pay people according to the value they create. Would they accept it? I very much doubt it!

I think the reason so many design companies struggle with adopting a value-based fee model is that we ourselves operate on a time/cost model. And our clients know it.

How to use the time/cost model

I suggest that you use the time/cost model behind the scenes — don’t signal it to clients.

Certainly don’t show the formulae you’ve used, unless you really have to. Wait until it’s demanded.

I hate seeing a figure like £13,635 in a proposal. It screams that it was calculated using an hourly/daily rate. Which makes it much easier to compare to competitors – and negotiate down.

Just round it up to £15,000 (always round up!)

If it helps, think of the extra as contingency. Better still, deliberately build in a percentage of contingency into your prices. Use it to avoid an overrun, cover unanticipated complications, or to complete extra work you’d like to include to build the client relationship. It’ll give you room for manoeuvre in a negotiation too.

You can even be transparent about a contingency fee with the client, particularly when securing budget is a painful process for them. Explain that it’ll avoid the need to issue change orders.

If you underrun, don’t give the money back – unless it’s a huge amount, then you should probably return some of it. Keep it to balance out the times you overran (I’m sure there have been some!)

If challenged by a client, who asks:

“How did you reach that figure?”

Simply explain that it’s based on past experience of doing similar work. And if you’re feeling brave, say:

“That’s what it’s worth.”

If you’re forced to disclose an hourly or daily rate, you can always reverse engineer it.

Moving towards value-based pricing

None of this means you shouldn’t move towards value-based pricing. Here are some practical ways how:

1. Optimise the time/cost model first

• Benchmark — compare your rates to similar competitors
• Keep records and learn from the past
• Understand what causes clients to accept higher rates
• Add contingency fees

2. Use time and costs in planning and reporting

• But keep it behind the scenes
• Use it to inform your pricing, not dictate it

3. Use multiple rate cards as start points

• A standard one that includes your desired profit margin
• One that includes additional margin (for use whenever you can, or to start a negotiation)
• Another with a reduced margin (for use with clients who can’t pay more, or for when you’re quiet, or you get other forms of value from the work).

4. Price the client, not yourself

Based on:

• Their willingness to pay
• Their ability to pay
• The type of work you’re providing - charge differently for different activities
• The comparative value that your work results in

For example – would (or should) you charge a non-profit, or charity the same amount as a global mega corp for the same piece of work?

5. Productise

Identify services that your clients repeatedly ask for, that you’ve become adept at providing. Then bundle them into easily shoppable ‘packages’.

By all means, use the time/cost model to establish a base price. But then pick a set price based on the factors described above in point 4. Make it a nice round number.

6. Mix models

Try mixing fees, perhaps discounted slightly, with some form of performance-based remuneration. For example, something measurable like engagement, conversion, or a royalty on units sold.

That way you take a manageable amount of risk, but get a share in the upside if your work is successful. You’ll have ‘skin in the game’. Some clients love this.

Don't give up

As I said at the top of this piece, I don’t disagree with the ambition to move away from cost-plus, or time/cost pricing. It makes complete sense.

But in design, it can be really difficult. So advice simply saying ‘Move to value-based pricing’ isn’t very useful.

Most of the design agency leaders I’ve spoken to tell me they’ve attempted it, but it didn’t work.

Worse, they don’t even try – saying that their clients won’t accept it.

That doesn’t mean you should give up though. I hope I’ve illustrated that there are several other avenues to try that can help move you in the right direction – and protect your all-important profit margin.

Have you managed to make value-based pricing work in your agency — or does time/cost and fixed-price still rule?

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I built a 100-person international design consultancy, before selling it.

Now I work independently, providing:

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