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  • Pricing Strategies for a Value-Driven Industry

    Filed Under: Tools and Resources,

    When it comes to developing the ideal approach to pricing creative and design services, there is no silver bullet or magic answer. But there are industry “best practices,” or lessons that will help guide you in the right direction.

    Lesson 1: Price isn't everything

    Price isn't everything-it's only one component of a larger sales process that leads up to a proposal. Based on my consulting and communications with hundreds of creative firms and corporate creative groups across the country, I have come to understand one very important and overarching rule: The most-qualified clients don't make their selection decisions based solely on price.

    Creative firms with a higher “win” record on new proposals are those that have built a strong professional relationship with the prospective client. Those firms focus less on offering the right price and more on conducting the due diligence necessary for prequalifying themselves, the client and the project.

    More importantly, “winning” design firms nurture a strong relationship with prospective clients and key decision makers. They tend to develop an advocate within the client company-someone who deeply admires the design firm and has the necessary ability and clout to defend and sell its price and value upstream, either to the client company's executives or critical stakeholders.

    As part of this scenario, the advocate collaborates with the creative firm to negotiate a price fair to both the client organization and creative firm. The best clients will hire a creative firm despite its price, collaborating to revise the proposal to meet the client's budget, and even asking a design firm to increase its fees if the price seems too low. (Really! This happens more than you think.)

    In sum: Firms with high win rates know that building relationships with prospective clients and understanding their needs is far more important than price in the client's final decision/selection process.

    Lesson 2: Don't make assumptions

    Another factor that increases a design firm's win rate is the need to be truly fearless in asking the right questions. Most design firms simply accept a client's initial request for proposal (RFP) as is, whether it is written or verbal. These firms are truly afraid to ask deeper questions that uncover the client's true needs and expectations. Making assumptions based solely on instinct or out of fear of “nagging the client” can, and often will, result in a misalignment of expectations, as well as a poorly crafted generic proposal. In such cases, the price may be based on false expectations.

    Often, clients that respond negatively to inquiries for clarification about a project's scope are unqualified clients. For example, they might not be primary decision makers or they could be less familiar with the value that good design can add to their organization. They may be looking for “order takers” rather than strategic thinkers and collaborators. In such cases, price will almost certainly be the primary criterion in the client's selection process. The larger question is, do you want a client with so many red flags?

    Creative firms with high win rates do not accept a vague request for proposal and are not in the business of responding to every RFP. Rather, these firms ask deeper questions that help the prospective client specify tangible criteria. Defining criteria enables the client to compare competitive proposals equitably and allows competing design firms to customize their responses within the proper context.

    In sum: Asking the right questions allows design firms to truly respond to their client's needs with a thoughtful proposal and pricing structure based on tangible, accurate criteria.

    Lesson 3: Pricing is based on value, not hours

    Once a design firm has prequalified the client, built a strong relationship and asked the right questions, pricing becomes a “gut” instinct based on the intrinsic value that the final creative deliverable or service has to the client. A design firm's ability to assess the project's brand or market value and convert that into a price will grow with experience.

    Intrinsic value is the amount a client is willing to pay, certainly, but also the worth that the final deliverable or service contributes to the organization. (For example, a corporate logo has more value than a logo for a one-time event or small product launch.) The more that a design firm works within a specialized industry, or with a particular client, the easier it is to determine the ratio of value to price.

    Calculating or negotiating fees based solely on hours estimated (and hourly rates) undercuts the importance of intangible value within our profession. In these cases, the client's perception of the design firm becomes that of “service provider” or “vendor,” rather than trusted expert-an expert that brings years of experience and industry insight to the relationship.

    Such expertise cannot be measured in hours or built into hourly rates. Even if the design firm does not actually show a record of logged hours to a client, if the final fee looks like it's been calculated based on hours (with a number such as $18,750), the same impression results. Rather, a round number such as $20,000 shows confidence in fee and pricing that has been calculated based on value, not hours.

    In sum: Design firms that command higher fees negotiate their services based on clearly defined deliverables and a flat pricing structure (not hours).

    Note: There are a few situations where pricing based on hours may be acceptable, including:

    • Pricing for purely production-related projects and revisions
    • Pricing for clients that inflict a high “aggravation” factor. Such clients require significant hand-holding and a scenario where the hours incurred actually exceed the value of the project or relationship
    • Pricing for monthly retainer agreements. In these cases, retainers based solely on hours accrued are best used for implementation/execution level engagements. Strategic, conceptual-level retainer relationships that are based on value, not time, should be negotiated on defined deliverables, not hours accrued

    Lesson 4: Track time and calculate your true hourly rate(s)

    Accurate time tracking and calculations of true hourly rates is a critically important pricing tool (with extra benefits in terms of staff and process management).

    A design firm that calculates profitability based on accurate time tracking and realistic hourly rates is better prepared to:

    • Keep historical financial records for past projects that can then be used to determine pricing for future projects of similar value, scope and complexity
    • Identify profitable relationships and projects
    • Identify and eliminate unprofitable relationships and projects

    Hourly Rates: Many design firms don't calculate true hourly rates but instead rely on industry-standard rates or blended-studio rates. To improve accuracy, design firms should assess each staffer's true hourly rate on an individual basis. These hourly rates are based on each person's current salary as well as the firm's overhead and expected profit. Accountants or bookkeepers should be able to calculate these costs.

    Additionally, I recommend the formula provided in The Business of Graphic Design, by Ed Gold (unfortunately, out of print). Many other books offer similar formulas.

    Blended rates: Blended rates-although useful for simplifying financial recordkeeping-do not truly reflect the value of each person's level of experience. In studios that utilize blended rates, oftentimes principals or creative directors do not fully realize that while they themselves may work faster than a junior staff member, their time has more value.

    Time Tracking: Another best practice and great pricing tool entails requiring all staff to track their time by project, client and task. One common stumbling block here occurs when principals of firms don't track their own time, yet require their staff to do so. In this situation, it is impossible to accurately calculate true project costs and profitability, since not everyone's time is accounted for (especially at the senior level). That's why everybody should track their time and maintain daily time sheets. Time should also be recorded daily for improved accuracy; weekly time tracking is ineffective and ultimately is just a “guess.”

    In sum: Maintaining accurate historical records of past projects based on invoices/estimates (market rates), as well as time and profit incurred, is an important pricing strategy. With this practice, design firms can accurately determine whether past estimates and invoices have truly reflected actual hours incurred. These records also provide design firms with the necessary historical context to price future projects based on similar criteria (including: client, industry, project type and complexity).

    I recommend that design firms rarely release their hourly rates, unless the client requests this information or billing production-related changes occur that exceed the initial estimate. Design/concept/strategic revisions should be billed based on value and in proportion to the estimated fee-again, billing should not be based on hours accrued.

    Additional Pricing Strategies

    Now that the “homework” is completed (the design firm has pre-qualified the client, built a strong relationship, asked the right questions and kept accurate historical records of past projects), what comes next?

    The following are additional best-practice pricing strategies to consider when defining and presenting final fees:

    1. Ask clients for their budgets

    This is yet another question designers fear asking. Most clients may not answer (although I find that about 25 percent will). Yet most will not be offended by the question so long as it's put into a context that they can understand. A good way to frame the question is:

    It is often very helpful for us to better understand any necessary budget parameters you may have, so we can tailor our proposal and services to meet your needs. Do you have a particular budget in mind?

    If the prospective client still declines, give them parameters for what a potential budget might be (based on your firm's experience), and include a range with high and low estimates. Then explain the difference in scope for the different prices within the range, to see which fee best aligns with the client's expectations. This shouldn't be done in writing but as part of an informal discussion.

    When pricing is framed within this context, the client will most often respond with some insightful feedback that will help the design firm to determine the best fee to include in the final proposal. Be prepared: The client will most likely want the lower fee, but with the higher level of complexity, so make sure that your low number is still one that is both profitable and accurate.

    2. Ask colleagues

    Discussing pricing strategy with industry colleagues is extremely valuable, so long as everyone contributes and there is value for all. This can be done informally among friends or in more formal discussions. I know several small, local professional groups that meet monthly to share such information in a confidential, yet transparent environment. It is important to note that such conversations are not meant as a way to conspire with your competitors to fix prices, but rather as a helpful way to share industry knowledge and trends among colleagues.

    3. Calculate the “aggravation” factor

    Be aware of any potential red flags that the prospective client or project may communicate. Often, there are warning signals that indicate potential future challenges. These include, but are not limited to, clients that are:

    • disorganized
    • uneducated about design
    • not the primary decision maker
    • time consumers (e.g., engaging in long calls or meetings unnecessarily)
    • disrespectful of your time (e.g., unwilling to return your calls/emails)

    In these cases, add 25 percent or more onto your fees as a hidden but important “aggravation tax.” Determine what red flags are acceptable, and which ones will drive you crazy.

    4. Be firm, be confident

    The way prices are presented in a proposal is really important and should reflect your confidence in the price. Presentation should come across as valid and well thought out. If you give clients any opportunity to nitpick fees, they will.

    Price ranges can be an ineffective pricing strategy. The client will invariably choose the higher scope of work for the lower fee. If you are pricing different options (such as a 16-page vs. 32-page brochure), don't give a price range but a flat fee for each option. You should always have a clearly defined list of project parameters that define the final fee-therefore, if parameters change, additional fees can be negotiated.

    As a general rule, if a project is less than $25,000, give one flat figure. The more you break down your fee, the higher the chances are that your client will reduce or negotiate your fees. If the price is higher than $25,000, price by either component or project phase.

    But be careful: Don't price all project phases or responsibilities separately. For example, pricing “research and discovery” or project or production management as separate fees offers clients opportunities to try to negotiate or eliminate these categories entirely (often with the explanation, “Oh, we do that”). Unless the prospective client values these responsibilities (and some do), incorporate the costs for those phases or responsibilities into your other fees.

    Once you've mastered these lessons and pricing strategies, a final price will often become more accessible and easier to determine. With the right mix of due diligence, experience and access to historical records, pricing can be instinctive. Ultimately, the most important tool in winning new client relationships is not the price but the relationship you have. This in itself is the most valuable pricing strategy of all.

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