Ron Baker - Value based Pricing

[Applause] Wow that's the kind of under adduction that your father would believe and your your mother would with also love it's an honor to be here I folks I'm a recovering accountant and I repent everyday and I have to say I'm in awe of what you folks do and I will tell you in fatica Li that you add more value to businesses than accountants lawyers and consultants combined you are the reason businesses exist so I want to talk to you today about being paid for the value that you create rather than the time that you spend I believe there's great nobility in being paid what you're worth and one of my heroes is Peter Drucker Peter Drucker said because its purpose is to create a customer there are only two functions in every Enterprise marketing and innovation why only those two because only those two create results everything else in business is cost and effort and activity the customer doesn't care about any of it only marketing and innovation are what matter a business doesn't exist to be in court a business doesn't exist to close its books or to accounting businesses exists to do marketing and innovation and your big part of that your enormous part of that consultants don't do that Countians certainly don't do it lawyers do it but you guys do so because pricing is obviously part of marketing and I even think pricing can be part of innovation I think one of the worse things that's happened in your space in the last 20 25 years is when the profession went off commissions you actually took five step backwards and went to the billable hour now there's mixed history on this I don't know who's responsible for David Ogilvy claims in his book Confessions of an ad man that he's responsible other people have claimed responsibility for I don't know who did it I do know that everybody kind of looked around at the accountants and the lawyers and said well they do it so it must it must be really good because accountants and lawyers are really smart well they're really not because it's destroying their industry too and it's draining their talent too and it's causing all sorts of problems in their world as well every profession that we work with it builds by the hour has the exact same problems lack of trust with the client note no clue no client is happy with the billable hour the firms aren't happy with the billable hour so why is it stay around well I don't know maybe it's because of this quote from Ben Franklin time is money but this is nonsense time is not money have you ever seen a clock with a checking account you know time is just time time is just time I actually like Oscar Wilde's quote time's waste of money because it can be that - right time is not value time is not value time isn't even cost because you're an ad agency leader you're not paying your people for their time you're paying them for their talent and the outcomes that they can produce time folks is nothing but a constraint and to use time to measure anything is the equivalent of measuring gravity I mean it makes no sense because gravity is a constant and so is time and we can't use time to measure the worth of talent and creativity and innovation because it doesn't work that way it's like plunging a ruler into the oven to determine its temperature it's the wrong measuring stick but yet we're just we're so committed to this and there's so much unlearning I think that has to be done around this whole billable hour time sheet and we need to change the language as well Peter Drucker also said that the customer never buys a product the customer buys value they buy a satisfaction of a wine we buy value prices are ultimately set by value they're not set by your competition otherwise how do you explain Apple if any of you have an apple in front of you eat the product you you paid a fortune for it that's not set by their competition apples prices aren't looking at the competition to set their price they're looking at the value of the product and the brand and everything else they bring to the table and their pricing for it we're making a profit is their customers and they are making a very decent profit for what they do because there's great nobility in that profit allows them to continue R&D and continuous continue to surprise us with great innovations the thing that I love about innovation and creativity and Terry so talks so eloquently about it is innovation and creativity can't be planned by definition it takes us by surprise it grabs us by the throat and delights us and you can't measure innovation and creativity we've gone metric mania in the professions we measure everything well measurements don't make up for crappy advertising and crappy marketing and crappy innovations and bad ideas you can measure all you want but by definition a measurement is about the past trust me I know I'm a former accountant were historians with really crappy memories we come in after the wound of after the battle and bayonet the wounded innovations about something new folks there's no data on something new that's what takes the world by storm is that innovation that that risk-taking that that that it's the leap where we gain the knowledge not the look it's the leap and it's all about value and I know I'm in a room with a with marketing experts and I'm not a marketing expert but I want to give you the first law of pricing and that is that all value is completely subjective now I think you have a better grasp on this than accountants and NBA's because we like numbers we like to carry things out to two decimal places my profession rather be precisely wrong rather than approximately right because we're so hung up on the data everything's got to be objective but when it comes to value it's completely subjective let me prove it to you if you think about a bottle of water we have bean counters that can tell you how much it cost coke to produce a bottle of water it's a it's a guess by the way but that that's a separate issue cost accounting is merely opinion not actual fact but and we can so we know the cost and you can think about the price that you pay for this if you bought it in a store maybe it's you know I don't know 50 Cent's if you bought it in one of those warehouse stores will you buy it by the pallet it might cost you a dime a bottle if you bonded it up at the footy game an AFL game hockey game a rugby game it cost you a lot more if you bought it in a minibar it cost me even more I don't want you to think about the cost or the price I want you to think about the value because there's three components every transaction there's cost price and value and we usually just focus on the cost especially if you're dealing with procurement the customers somewhat focused on the price and of course they want to get that price down but what about the value what's the value of this ah well that's an interesting question because if I'm in the desert and I haven't had water for four or five days this is priceless right I'd give everything I have and even go into debt to get it not infinite but but really really high but if I'm home washing the dog with the same quantity of water now it's worth a lot less right and what if I'm flooded in my basement with water now that's got a negative value I have to pay somebody to pump it out how did the same h2o go from really high value too negative value how did that happen you know cost accountants can't explain that accountants can't explain that nobody can explain that except economists who have a theory of value and that theory is all value is subjective because certainly the cost of getting the water to those three locations doesn't explain how it can be so high and so low at the same time or negative only a cohesive and coherent theory of value can explain that and we have one and that it is all value is completely subjective so we talk about these three components to every transaction there's cost and really the customer doesn't care about the cost of something nobody goes into the Porsche dealership and says ah with an awesome card turns around to the salesman some can't see the time sheets on that I'd like to know how long it took Porsche to make that that's not how humans buy anything it's absurd right so we know that there's a price and of course the difference between the price and the cost is what we be encounters love to call profit and when we talk about profit we talk about only the sellers profit the businesses profit the agency's profit what about the customer where's the customer here well the customer is there because what they're buying is value if you went to a coffee shop this morning you spent $4 for a flat white you only bought it because it was worth more to you than the $4 that you spent now how much more I don't know maybe $4 in the penny maybe four and a quarter maybe $12 because you were hungover last night from drinking too much and you're addicted to coffee it doesn't matter from an economic perspective all I have to observe is the fact that you bought a cup of coffee for $4 that means by definition it's got to be worth more than $4 to you otherwise you would have stayed at home made a cup of coffee in your home for a dime now Australian coffee is wonderful but I think it's pretty hard to argue that it's 40 times better in the cafe at home but yet we spend money on coffee all the time because it's contextual we're on our way to where go into a coffee shop with a friend or to read a book whatever it might be in other words the spread between the value and the price is what I'm gonna call the customers profit we don't have a really good term for this economists call it consumer surplus but nobody knows what that means so we started calling it the customers profit every time the customer engages you to do something they are they are expecting a profit now does it always happen well hey do you ever buy anything that you regret you're a buyer's remorse of course it doesn't always happen but you expect it to happen so there's always an element of risk with any purchase right my my Mac could blow up and I'll have to go down and get a new one but a service has got a higher risk when a customer buys a service what happens if your veterinarian screws up your dog or your accountant screws up your tax return so services are incredibly more risky than products and your services even more so because your services are in art I think you're in the art of persuasion you say rhetoric in the classical sense meaning persuasive communication but the point is that when the customer enters into a transaction they don't really care about the cost they want to lower the price we of course want to raise the price of sellers but what do we both want to do with the value we both want to maximize it shouldn't the conversation start there shouldn't the conversation be about the value that we're bringing to the table that we're creating for the client it shouldn't be about the cost cuz they don't really care about that must their procurement and then their cost obsessed they want to lower the price but they we both want to maximize the value it's where our interests are completely aligned the more you can get the buyers profit up the custom profit the clients profit the higher your price can go value pricing isn't about gouging the client value pricing is about charging a price that's commensurate with the value that you're that you're creating and leaving enough for the client to have a decent profit as well so some rules about some some axioms about value is value from an economic perspective because I think this word has been corrupted is the maximum amount a consumer will pay for an item the problem with it's a useful definition but the problem with it is it doesn't come tattooed on the clients head how much they're willing to pay for your services right some in some cases they don't even know I understand that that's the risk and uncertainty that all businesses are in when Steve Jobs put out the first iPad iPod he had no idea that the market would accept it no idea he doesn't know customer research had no focus groups it was a massive risk of course it paid off because all profit comes from risk the other thing about value is pricing is how we divide up value it's how we divide up the value between us and the customer and I think that's a very useful way of looking at it the other thing according to Michael Munger he says prices reconciled disagreements about value right because we only exchange when there's an unequal value you buy the the water from me for a dollar because you value the water more than your dollar and I value your dollar more than the value of the water that's an unequal exchange exchange is not based on equality exchange is based on inequality of perceptions of value and that's really important to understand I think and here's the ultimate thing and I think this is what you folks understand better than the MBA and the counting types because when you boil all this down when I say the first law of pricing is all value is subjective that means if you follow that logic your value is feeling it is not a number stop trying to quantify it this is something that accountants love to do they think well if we add up the hours that go into something we can quantify its value no you can't that's absurd I can spend my life writing a book that nobody reads and nobody buys is that does that make the book valuable because I spent years and years toiling over it of course not that's not how it works and it's certainly not how it works in an innovative and creative profession such as yours I live in Northern California and Napa's in my back yard one of my favorite wineries is a winery called prong ante it's Italian for do-nothing which is probably why I like it they make a particular Cabernet that I've been buying for years that's reserved the state model that's limited production they don't do it every year and barn NT is like a $300 $400 bottle of wine this particular vintage that I've been buying for special occasions for people is about 250 $300 more than that so you'll spend 600 bucks on this wine I probably bought a dozen bottles over a period of years as special gifts and presents it's got a beautiful label people make a candle out of the bottle I mean then it's lovely wine but I finally took a tour and the tour guide took us down to the sparrow room and he said this is where we make this particular wine then I go the wine I've been buying great he said because of all these complex things that I don't understand they can't bottle the wine using their automated bottling equipment they have to pay people to come down to the barrel room stand there at the barrel and fill it by hand they can't use the automatic corking equipment to have to cork it manually they have to ship it in different packages the tour guide explain this to the 12 of us there and then he looked at us and he said and that's why this wine is more expensive and everybody on that tour nodded their head and I turned to my colleague and I said should I ruin this tour and give this guy an economics lesson or should I just forget about it well folks he's confusing cause and effect but ask yourself this truthfully if you're charging by the hour is his explanation correct yes it is we spent more time we incurred more costs therefore the price is higher but that's false that's not the way the world works and that's not what's happening in this transaction not at all in fact it's quite the opposite let me show you what's really happening with this bottle of wine cost plus pricing which is where hourly billing comes from hourly billing is cost plus pricing ugly cousin okay and it basically says okay we're gonna make this bottle of special wine and it's gonna cost us more than our normal wine because of all these additional costs where it take that cost that the bean-counters compute and we're gonna mark it up with some desired level of profit that's the plus in cost plus pricing the plus is profit how much profit do we want to earn kind of like the world owes us to living and because we incurred cost we automatically get profit but most companies don't make profit or a lot of companies don't and a lot of companies go bankrupt but put that aside for a minute then we sit in our winery with our fingers crossed and we engage in the 50 of value do you know what v P of value is its prayer and we pray that the value of this bottle of wine that we spend all this money producing is greater than the price to people like Baker who buy it where's the customer in the chain at the end who's the ultimate and sole arbiter of value the customer folks this is backwards this is not how the world works now I want to slide in a fact that I know you're gonna be able to grasp because it's it should be glaringly obvious sometimes it is and even to accountants but that this did explain the real world then no business would ever ever ever go bankrupt because it doesn't take a rocket science scientists to put a price above a cost your twelve year old can do it so why do businesses go bankrupt because they don't make things of value take blackberry not picking on blackberry but good pricing wouldn't have helped blackberry blackberry failed because they failed to keep up with innovation they fell off the innovation curve so what's really happening with foreign Entei and if you can grasp this you're you're 2/3 of the way home to understanding value pricing and I'm not kidding when I say that the agencies that have made this transition and there are many there are hundreds there are hundreds of agencies folks that do nothing by the billable hour and they don't do timesheets we are single-handedly at verus agent stitute with the help of my colleagues around the world bearing both the billable hour and the timesheet it's my quest in life and the agencies that have done it and other professional firms law firms accounting firms IT firms consulting firms they follow the bottom chain they start with the customer and say what is the value of the wine to Baker that sets the upper boundary of the price the price is less I'm gonna earn the profit hopefully when I buy it and give it to somebody and make them feel good make me feel good or if I drink it on my own feel even better but then and this is key the price justifies the additional costs that farnetti has to spend to produce that wine it's not that the cost determines the price it's that the price I'm willing to pay because of the value justifies the cost for ninties and gonna incur to produce a wine that I like but the customer comes first in this chain and for financial types getting your head from the top to the bottom requires a lot of unlearning I don't think there's anything complicated about that bottom that bottom chain you know what's hard about this change the unlearning that we have to do as a profession to move away from that which we've been doing for decades and move to this it's not so much learning something new I think it's unlearning the old letting go of the old so we can embrace the new you know Peter Drucker used to say that the body has a natural discharge system for waste but corporate bodies do not it's a good point we kind of hang on to yesterday right we invest we keep investing great talent money into yesterday's products rather than in tomorrow's potentials so he thought we needed to shed things to move forward constantly shed things his famous question if you weren't in this industry today particular sectors say would you enter it and if not what are you going to do about it and that's a really important question to ask yourself now and then from a strategy perspective so I want you to follow the bottom perspective or the bottom chain here and in order to do that we've got got an 8 step framework I obviously don't have time to go through all eight steps but let me just give you the most important one which is having a value conversation with the customer that value conversation does not start with what do you need mr. customer show me the scope of work show me the brief it's not about deliverables it's what are you trying to accomplish in other words we're starting with scope of value why well because that's something we're both trying to maximize but also doesn't scope a value ultimately determine scope of work because there might be different ways to achieve the same end if we start with the end in mind so it's actually scope of value that comes first not scope of work and most professionals love to dive into scope of work first because that's our comfort zone that's where we feel safe right well yeah great we've got a brief we've got deliverables bubble what do we have to do no no we need to step back and be diagnosticians just like doctors and we need to ask questions and we need to ask better questions and this is part of changing the language there's a great book out there called a more beautiful question by a guy named Warren Berger I highly recommend this book because it's all about the art of questioning and questions are in art and the better you are at the value conversation in the art of questioning and that means you talk about 20% of the time the client talks about 80% of the time because you heard Terry say the number one thing they complain about they don't understand my business you know why we don't understand their business for the same reason it's reason accountants and lawyers don't understand their clients business we don't ask enough questions we assume we're geniuses and we know everything you look at a company like McKinsey they send these 24 year old snot-nosed MBAs into these companies and they think they're gonna tell these family companies that have been around for generations how to run better these kids know nothing but they have they can they do something and they have something that we don't because consultants are not paid for answers they don't have the answers the client always has the answers the consultant is paid for the question a great question begs to be answered everybody can identify a great question and the dumbest kid in the room can come up with the greatest question in the world it's questions that spark ideas and creativity and innovations and the book documents that really well we need to get better at questions and spend more time in it the military down here in Australia has a great saying that I learned from a soldier time spent in reconnaissance is never wasted imagine going to a doctor and having him or her prescribe before they diagnose that's called malpractice and it destroys our value when we don't step back and say what are you trying to achieve what's the scope of value my favorite definition of what it means to be a professional is from Michael hammer and he says a professional is someone who is responsible for achieving a result rather than performing a task and my problem with the billable hour and the time shieff one of my problems I have many how much time you have is it turns everything we do into a task it's is it's like you knowing a friend or a loved one has a baby do you want to hear about the labor pains or do you want to see the baby we want to see the baby but think about our business model not only do we focus on the labor pains we build them out in six minute contractions all the while the client cares about the baby we're taking our eye off the ball by what we're measuring inside of eight our measurements should measure the success of the agency the same way the client does and no client cares about how many hours you lie on your timesheet and you do lie on it and I don't mean maliciously I mean because we just can't remember what did you hear for the last two weeks I don't know hell look I was here let me give you a tangible example of this I need a landscaper I find three on Google Yelp or whatever that looked pretty fairly decent I got such a major problem with landscapers you wouldn't believe it I've lived in my house for 20 years I think I fired 12 of them the first guy comes out gets out of his truck he's got his clipboard he's walking around the yard we know what he's doing the scope and the property right how long is this gonna take me how many bushes are there trees what's the backyard looked like just just talk to me really just kind of mumbles and drawn on his clipboard he says Ron no problem we can handle this we're 40 bucks an hour okay well that that generates more questions than it answers Rio you're gonna great you're gonna send your kids out here to do this every week I mean how long you know that's and so he's charging me based on inputs the second guy comes up pulls out gets out of his truck same things got the clipboard walking around coping the work scope of work edging mowing how many bushes blah blah blah he says Ron no problem we can do all this one hundred dollars a month okay a little bit better he's not pricing based on inputs he's pricing based on outputs he's looked at the scope of work and said it's a hundred bucks a month but the third guy pulls up in his truck he gets out of the truck he's got a clipboard too and he's doing the same thing to he's scoping work cuz he's a pro this isn't his first rodeo he's done this before but then he engages me in the conversation so Ron tell me what do you do for a living oh I travel a lot I'm a writer I speak I'm a consultant not home a lot no now either he's casing the place or he's really trying to get to know me but he says and I take it from our phone conversation that you're not Martha Stewart you know really like yard work no I hate yard work this bores me to tears I don't want to think about my yard I didn't want to look at it he said so why are you flying your existing landscaper I said because when I'm here and he's here which happens about once every Halley's Comet passing because I'm not home a lot I said I have to go outside and point out things to him why is this Bush dead why isn't the sprinkler work I said he's out here every week he's the professional shouldn't he be fixing this I'm paying him for a result not a task a result keep things in working order as part of that result in my mind he's doing an unprofessional job this is all I quite understand that can be very frustrating so he engages me and more conversation actually gets to know me and tries to figure out what is my value proposition not only what my pain points are but what I'm looking for he comes to the end he says Ron can handle all this no problem he says not only that but you're not even gonna have to think about your yard everything will be in perfect order we'll even plant different bushes for the different seasons you're not going to worry about your sprinklers not working and we'll take care of all the settings and you know for the different you know sunny and rainy seasons and all of that he says and by the way you'll have the best curbside appeal in the neighborhood I'm three hundred dollars a month who do I hire folks now a lawyer said will you hire the first guy I hired the second guy you know why the third guy is a figment of my imagination I can't find the third guy I would pay the third guy $500 a month but landscapers don't use this language they don't engage in the conversation they don't have the Diagnostics they're too busy scoping the work and not paying a damn attention to the customer at all and that's really really frustrating if you're a customer and here's the rub if I could find this unicorn landscaper and I was in Colombia and they said in some he came up to you says my husband's the third landscape I said great here's my card I will commute him to California with all of his tools and he can take care of my my my-y art by the way this is not my yard here's the rub with this if I did find the unicorn landscaper for 300 a month would I be a happier client yeah gladly I mean I'd be thrilled I would be thrilled my profit would be off the charts because value is subjective now if that landscaper goes next door and talks to my neighbor who loves yard work that neighbor has a completely different value proposition than I do and if the landscaper tries to treat him like he treats me it's not gonna work that's why we have to price the client and not the services stop pricing scope of work start pricing the customer that's where pricing is moving individualized pricing airlines hotels rental car companies even stores to some extent are using dynamic pricing if you go on travel websites and you use a Mac you'll probably pay twenty or thirty percent more for your hotel and airline bookings than if you're using Windows why because people that own Macs are less price sensitive prices know that and they adjust accordingly so we need to focus on the scope of value so let me give you what I think is the best opening line that we shamelessly stole to start your value conversation mr. or mrs. client we will only undertake this engagement this campaign whatever whatever you call it if we can agree to our mutual satisfaction that the value we are creating is greater than the price you are paying us is that acceptable and I've shown this to procurement I've shown that to people who hire lawyers and accountants and agencies and they say we would love if our people spoke to like this to us because I have to justify what we're paying the agencies to my boss and if I understood the you that would be much easier this sets us on a value quest this sets us on uncovering every stone the value and looking for that those pain points and those opportunity points that we all have that all clients have and it also lets you know what the clients and result is what's the desired state of the future you know it's that question that if we were to have coffee in six months or a year you know whatever the timeline is and you were really delighted with our work why would you be so happy I mean that's kind of an inspiring question to think about because it makes the client think about the desired state of the future our job as professionals is to get them there and that's called the transformation and transformations are highly personal highly individualized and they're the top of the value chain in terms of pricing power and differentiation but I think the language needs to change if we don't talk about value trust me procurement will make you talk about hours and overhead and costs and inputs and rate cards and timesheets and all the stuff that doesn't matter they're hiring you to build their brands they're not hiring you to do timesheets or for them to audit your timesheets that's this is a waste of resources and incredible talent when I think of the talent that is wasted on filling out timesheets on the global scale it's staggering to me staggering not to mention how much agencies and firms spend running the beast we call feeding the beast folks we've estimated seriously seven to fourteen percent of the professional firms revenue goes to feeding that beast what's the ROI the ROI is unhappy employees demoralized alcoholism you know all sorts of stuff but it's not a good return on investment by the way that that let me go back here that was shamelessly stolen from McKinsey this is how McKinsey opens up every single engagement whether it's a current client or brand new client this is how they start and by the way if they can't come up with an agreement that they can create more value than the price the customers paying they don't do the engagement we both have to win we both have to walk away with a profit now we can talk about that split it doesn't always have to be 50/50 whatever but the bottom line is both have to win there can't be is this is not a zero-sum game business is not zero something it's not a poker game it's not a sports game one side wins one side loses that's not how business works wealth is created because both parties walk away and you know where you see this Illustrated when you buy that cup of coffee and the barista hands you the coffee and you hand over your four dollars you say thank you and they say thank you it's a double thank you moment you only do that because you're both more pleased than you were before the transaction took place that's what transaction means by the way the action after the transaction what happens after well hopefully you had a great cup of coffee and you'll come back and maybe even refer people so when we talk about creativity not being able to be measured by time this is what I mean I operate very strongly with my instincts and I really either get if I don't get it in the first crack I get it in a second and if I don't get in the second I almost never get it because as I said it's like it's very an intuitive kind of process for me I've never been a refiner like my best worker kind of big bold strokes that came very quickly and it's problematic because my clients like a lot of clients like to buy process and I think they're not getting their money's worth like I solved it too fast I mean Michael Weber told me to shut up in an initial initial meeting I drew the Citibank logo you know after we had the first meeting I drew it on a napkin walked out you know they had a they had a merged travelers and city and travelers had an umbrella and and Citibank is a word you know in the lowercase thing of the t's and umbrellas sticking arc on the top and you got it I mean it didn't take you know it's like it's a second you know it's all over the world like how can it be that you talk to somebody and it's done in a second but it is done in a second it's done in a second in 34 years you know it's done in a second and every experience in every movie and every thing of my life that's in my head profound things in that clip she says clients like to by process no they don't they like to buy outcomes if my landscape or my unicorn landscaper could do my yard in a minute I'd be thrilled his value to me isn't how long he stays out there in fact I same with a plumber plumber can fix it in a heartbeat I'm thrilled value is not measured by time it can't be it's not about process it's about the transformation my favorite philosophers dr. house and he says oh yes a process wouldn't want to disrupt the process with results right we got to follow the process the second profound thing she says in there because no this didn't take me a second it took me a second plus 34 years every book I read every movie I watched every TV show we should be charging for the years not the hours because your wisdom your experience your intelligence gap guided by experience is all part of your value proposition your unique value like Jonathan was talking about being you that's something that nobody else can do that is a differentiator and it can't be measured in time so let me just give you a piece of low-hanging fruit one of the things that you can do with your pricing that's incredibly innovative is offer your clients options so think of the American Express card all right you think about the green card the gold card the platinum card and this leads us to the second law of pricing which is all pricing is contextual what we are willing to pay for something as human beings I just and I just talked about human beings because you know what we're all just human beings IBM buys nothing Apple buys nothing people inside of those companies buy things and they bring their own subjective value judgments and assessments of risk and feelings and all of that to the transaction and yes the CMO will value you different than the CEO and procurement absolutely I can't change that because value is subjective we've already established that what that means is our language needs to change between the CMO and the CEO and procurement we need to change the language but what we're willing to pay for something is highly contextual if I said would you like to buy my unicorn you'd have no idea what to pay cuz my guess is you've never bought a unicorn before right so we're always looking for that comparison my guess is folks where you get your car wash you see something like this is that true Johanns why is it that car wash establishments have better and more sophisticated pricing than professional firms we give one price take it or leave it they give us choices do human beings like choices you ever wondered why every business on the planet gives you three choices tall medium or you know small medium large and first class business class coach and so on it happens everywhere except in professional firms especially those who build by the hour well that's starting to change right because because value is so contextual and this is one of my favorite lines to prove that I mean Homer is another great philosopher it by the way if you go into a restaurant you know expensive one you might see a ten thousand dollar bottle of wine on the menu it's probably not even in their cellar why is it there well because it makes mice $600 Far Niente look like a steal and you're more likely to buy that one and that's proven it's a it's a field known as menu engineering and we know the effects of how humans make decisions we were starting to understand this really really well but you think about this cup of coffee right you think about the context if I were to remove the most the tallest one there and replace it or I'm sorry take out the bottom one and replace it the middle one would still be the most popular because it's not about the quantity that's in the cups it's about their relative position in the lineup and most people will pick the middle because we don't like to go to extremes we've got that extreme adversity cuz we think oh well the the the small ones not enough or it's not going to be good i buy the cheapest version but the most expensive ones probably got too many bells and whistles so I'll be safe and pick the one in the middle so clients usually pick about two-thirds of the time the one in the middle some agencies that have been developing options they look like something like this this is a campaign for an airline web development assignment and you can see the options were 200 grand 400 grand 650 they're all encompassed bundled option this is not like we're not lionizing line item pricing the scope of work we're bundling for three specific different types of outcome it's much much like if the landscape or what it said to me gave me three options it might have been something like we'll do regular yard maintenance the middle option would be we'll bring you up to sniper hood standards the top option might be we'll give you the best curbside appeal now I might not want the best curbside appeal but I would if I was selling my house within six months right if we never offer the client a top option what will never happen we'll never sell one I promise you that so you've got to give the client three options and then that forces them to convince themselves of the appropriate value price trade-off that they want to make it also shuts down negotiation so when procurement comes around you know you really need to sharpen your pencil on this you're the most expensive bidder and of course they tell all the bidders that and you say no we have sharpen the pencil $200,000 is our lowest price if you don't want that price you walk you walk you you wouldn't cut that price a nickel for your own mother that's it that's the walkaway price and we have to get better at saying no especially saying no to procurement stop filling out rate cards stop disclosing your overhead change the conversation to outputs and outcomes even better you can do this gradually you can do it one client at a time give three options on a proposal we're seeing this more and more this is a liquor brand digital campaign I know this is an eye chart you can't see this I'm just showing you real live agency examples that have done this and it's incredibly successful and most of the time the people pick the middle option once you get really sophisticated you can start to do four options but you can never go above four because we can paralyze people with too many options and you can't do two because two is not enough if you give people two options it's a price decision and more times than not they'll pick the lowest of the two prices when you give people three options it becomes a valued decision and more times than not they'll pick the middle option and sometimes they'll pick the top option Rory Sutherland who was the president of the IPA for a couple years and he's at old will be the in the UK vice chairman brilliant guys got four TED Talks he's got all sorts of talks you can find online I highly recommend you watch a couple of them not only is he sterically funny but he's profound and he's become a behavioural economist and one of the things he said during his presidency is hundreds of agencies have developed models for how advertising works what's needed now is for agencies to base their business on how people work he his message during his presidency was if ad agencies don't become behavioral economists they're going to become obsolete so he started a unit in Ogilvie called the nut unit which is full of actual behavioral economists behavioral psychologists psychiatrists that actually understand human behavior let me just give you one example a car company came to him and said we'd like to give people three thousand euros off the price of our twenty five thousand dollar car not a particularly strong car brand either and the behavioral economist looked at it said well as out is that the best we can do and they said well four thousand euros would be better but we don't have four thousand euros no no I don't mean that he says but rather than giving the three thousand euros off the twenty five thousand dollar price why not add three thousand euros to the trade-in value of their car and the car executives looked at him and they said well that's the same thing he said well it's the same thing if you're an economist it's not the same thing at pure human being because three thousand dollars on my seven thousand dollar jalopy sounds like a better deal than three thousand off the 25 thousand dollar new car because again it's all contextual and relative it increased sales of this car sixty thousand units that's a behavioral economics insight how long did it take to develop I don't know five minutes how do we how do I put that on my time sheet what do i price for that but those are the types of insights that behavioral economists can do now and they can do it in a flash of brilliance much like the logo I'm not saying these flash of brilliance or or common I know they're outliers but I think they can happen more and more if we move away from this idea that no no put the napkin away and let's go back to the office and make them wait for the logo for twelve weeks like that ads any value I mean that's just insane if people who build by the hour built the Concorde they would have charged it out by the hour it's crazy the Concorde is more valuable because it was faster right the slowest horse and the rate in the race wins under the billable hour model but not in an outcome model I really do believe the only place that time spent should matter is in prison and that's why I'm a anti timesheet person and you can't separate time sheets from the pricing model because what we measure is really really important in an agency what you measure is what you get and if you measure time you'll get time even if it destroys your business because people will fudge the we humans are the ultimate scamp's you give us a rule we'll find a way around it you give us a metric we'll find a way to game it every time accountants make a living off of this it's called loopholes we're really good at this and timesheets are probably the worst because they're so fungible so the other thing I wanted to say about that is to run your agency with your timesheets is the equivalent of timing your cookies with your smoke alarm because by definition by the time you see it on a timesheet it is no longer manageable we are crying over spilt milk at that point it's coming in after the war the battle and bayonetting the wounded it doesn't make any sense we need leading indicators that that like Canaries in the coal mine that helped us stave off problems so a lot of these agencies that have made the change have changed their internal measurements to things that the client cares about promises and turnaround time and things like that and and access and all those types of things on how clients grade us so I just wanted to leave you with this because this is one agency that did something very creative with this concept of timesheets and I wanted to share it with you because again I think it's the mark of not only great creativity but absolute brilliance timesheets are a significant challenge industry-wide timesheets are definitely not the most important thing in my day who actually has the time to ever do timesheets overdue our submissions can result in a serious loss of revenue for an agency we need people to record their time accurately we need them to record a long time and we need to be able to Bill our clients so we get paid introducing timesheets by B video a revolutionary new timesheet solution the leverage is an existing replaced behavior going to the toilet data showed the average time to complete a timesheet is 18 minutes the exact amount of time that people spend in the washroom during an average workday and incredibly 100% of time spent on the toilet is also spent on a device so we put 2 and number 2 together and created a new mobile time logging experience turning unproductive time into very productive time we're looking at this as an entirely new movement in timesheet management time shifts now it's never been easier to wipe your timesheets off your to-do list excuse me I have to do my timesheets [Music] absolutely brilliant I think Warren Buffett said the single most important decision in evaluating a business is its pricing power if you've got a business that can increase its prices by 10% you've got a great business which is why he invests in things like Coke and Apple but if you have to have a prayer session before increasing your prices by 10% then you've got a terrible business and I think this is a pretty prophetic statement from somebody who understands value pretty well especially when it comes to valuing companies so pricing is the number one thing you can do to drive profitability in your agency more so than cost-cutting more so than efficiency games more so than rainmaking invest in it higher prices or educate people inside your agency to be prices and turn that function over to them pricing has become a profession it's now a CC C suite function in most of corporate and most of the corporate large corporations anyway usually the prices report write to the CEO why because it's where the money is because a 1% change in price can have a dramatic impact on the bottom line far more than anything else you can do in your business so it pays to experiment with options and different pricing strategies you don't have to just use one pricing strategy you can have a whole portfolio sometimes your agency might be able to own the IP and do what photographers do charge a royalty or a use fee or a license or you can or you can share and put skin in the game and get paid for certain milestones or some one agency in New York called anomaly does nothing to look by the billable hour and they're actually more like a venture capital firm and they invest with like when Virgin America opened up they actually built the seatback entertainment systems they didn't do it for a price they did it for a percentage of the advertising revenue and it was a really really profitable engagement we have to become more profitable with I mean more comfortable with taking risks stop shying away from risk stop asking yourself well how do we know if we're gonna make money that's the wrong question the right question is how do we maximize the value and how do we get compensated fairly for that because that will make for a better client relationship so folks this is how you can find me I do do a radio show it's on every Friday you can look at all 200 radio shows that the soul of enterprise comm it's been an absolute honor to talk to you today ladies and gentlemen thank you very much [Applause]

Channel: Advertising Council Australia

Views: 3,621

Rating: 5 out of 5

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Id: fPL5YnDXaYE

Length: 54min 58sec (3298 seconds)

Published: Mon Jul 08 2019