The first 5 mistakes in pricing

Cost, price and budget are three different things.

• The cost is the money the agency spends to deliver the service (typically in the form of labour, software and overheads);
• The price is the amount that the client agrees to pay the agency;
• The budget is how much money the client had set aside to buy what they’re buying from the agency.

The price should be more than the cost in almost every deal (or you’ll go bankrupt). The client needs to know the price but the client does not need to know the cost.

(When the client insists that they want to know the cost, you can either a) walk away because 🚩, or b) play their game and massively inflate your costs on paper.)

The agency thinks it needs to know the budget, but it doesn’t. It needs to know the price that the client is willing to pay which, sometimes, is more than the budget they’ve allocated.

While the agency is trying to establish the budget (which it doesn’t actually need to know), it makes a series of costly mistakes in the first phone call with a prospective client:

1. The agency insists that the client says the budget before it’s willing to give a price: the client might have an incumbent agency which, at best, means that this person has bought comparable agency services once in the past year or two (assuming that they were the decision maker or, in fact, involved in the decision at all). The incumbent clearly hasn’t been delivering, or they wouldn’t be changing, which probably means that they’ve underbought (unless they’re cost cutting, which is even more reason not to let them tell you their budget, because it’ll be less than what they’re currently paying). You, on the other hand, have delivered a comparable service to many comparable clients over the last couple of years so you, unlike the client, know what the client should be spending on the service. So tell them.
2. The agency states its lowest price: changing this one thing has probably made more money for my agencies than anything else. Don’t tell the client “our prices start at X” because the client’s immediate response is “great, my budget is more than X, I can save some cash.” When suggesting an initial budget, anchor high and move down to an acceptable starting price: “our clients pay us between [really big price] and [starting price], where do you think your company is likely to land?” I guarantee that the next words you hear will be higher than [starting price] (or you’ll know that this client might not be able to afford your agency).
3. The agency talks about price before it talks about objectives: if you establish a price before establishing a brief, the client can crowbar more and more work into the scope without increasing the price. The brief doesn’t need to (and probably shouldn’t) consist of a list of deliverables, but it does need to state the objectives. To oversimplify: “what are you trying to achieve? …great, we’ve done similar things for similar clients and we’ve charged between [high number] and [low number] to make it happen. Let’s talk through the variables and I’ll be able to give you something more concrete.”(I’m a big fan, by the way, of: “where are you trying to get to? …and how far off that target are you? …and how much are you currently paying to get what you’re getting?” because I’m able to establish that the current fee is less than I’m going to charge, even before I know what the current fee is.)
4. The agency sets price based on cost: the objectives have been agreed without an indicative price and the new business person goes to speak to the relevant people to scope out a solution; they run it through the spreadsheet/project management software/series of coin flips and determine that the cost is £X; the new business person calls the client back and tells the client that it costs £X; the client tells the new business person that the other agency/the incumbent/the boss’s nephew will do the same thing for £X-£Y and the agency now has a loss-making client in front of them. If the new business person had agreed the objectives and an acceptable price then the solution can be costed with some margin in it: the new business person just has to start with a high enough price that the agency has somewhere to go with it.(If you’re using an outbound sales agency, ask yourself if they know enough/you’ve told them enough about your pricing to set that expectation properly.)
5. The agency doesn’t confirm price before the client gets the decision makers in the room: regardless of whether we follow the clues or not, we should be building a relationship with that client during the sales process, which means we should be showing them that we have their backs. When the time comes for us to close - and the client pulls the rest of their buying team into a room with us - we want them to know everything in advance, which includes price. We don’t want them to look like they’ve briefed us poorly; or they’ve selected an agency that doesn’t deal with challenges like theirs all the time; so we need to give them a call a week before the pitch and confirm the prices we’ll been presenting even if we don’t know the cost. Again, oversimplifying: “the team is super excited about the pitch and we’ve come up with a few different directions we could go in…one costs [high number] and one costs [low number], are you happy for us to present them both?”

Assuming you close the deal and deliver the project, why not ask the client what they originally budgeted for the work? If it was less than you got paid then you’ll feel good about yourself; you’ll know it works; you’ll have more confidence to do it again in future. If it was more than you got paid then you can use that information to set pricing guidance for future projects (and you know there’s potentially some unused budget that may be reallocated to the next priority - maybe you should ask what that is?)