Different Pricing Models
Blair is struck by how creative businesses have trouble applying their creativity to their revenue models, so he and David discuss some of the best ways firms can get paid.
Links
The Automatic Customer: Creating a Subscription Business in Any Industry by John Warrillow
2Bobs Episode 31: “Mastering the Value Conversation”
2Bobs Episode 25: “Pricing Creativity”
Pricing Creativity: A Guide to Profit Beyond the Billable Hour by Blair Enns
Transcript
DAVID C. BAKER: Blair today, you want to talk about how to make money but more specifically some pricing models, right? Is this one of those topics where you've just been afraid to suggest we talk about it or you're really excited or something sets you off?
BLAIR ENNS: What makes you say that?
DAVID: Well, I mean, and I know you're always reading every one of my emails very carefully and every once in a while they piss you off and you say, "Oh, that is the next topic. I've got to correct the world." Where did this come from?
BLAIR: So, my book, Pricing Creativity: A Guide to Profit Beyond the Billable Hour came out in January of 2018. I've been traveling the globe speaking on pricing and working with firms on pricing. One of the high level topics that I think lends itself well to this podcast is the subject of the numerous ways that you can get paid. I see the agencies just get so... They're creative businesses, right? But I've long been struck by how that creativity doesn't really get applied to the business models and in particular the revenue models.
BLAIR: So I get asked about this topic a lot and I thought, okay, let's just list and talk about as many of these revenue models as possible because I think they'll serve as these thoughts starters for our listeners, because if you're listening this and you're in pursuit of the one right way to charge or you've just been charging the same way for all these years, then I would like to kind of push people to think a little bit more broadly about this topic by giving them a whole bunch of different ideas that they might want to consider.
DAVID: Yeah, and so we have eight that we're going to get to, or at least some of them. We'll start on the list of eight, see how far we get. Before we start that, I know there's some context that we probably want to keep in mind, but also another question, are you suggesting that firms land on one or that they develop their own unique mix of one, two or three or how does that work?
BLAIR: Yeah, and that's a great place to start because I think the most common pricing mistake out there is the idea that there is one right way to price, and there is not one right way to price. And I think I make the distinction between customized services firms and productized services firms, and most of the people listening to this podcast, their firms are customized services firms.
BLAIR: That means they should have a small number of clients and each of those engagements should be a creative act that's structured specifically to the needs of the client. But I would also add that the pricing or the compensation model for each of those engagements should be a creative act also.
BLAIR: So the idea that there's one right way to price is just, I'd like people to let go of that idea right away. You and I both spoke at a PR conference recently, and you know PR firms, to them everything is a retainer, right? They take every fee and they divide it by 12 and want to bill it on a monthly basis. There are reasons why that might make sense, and there's all kinds of reasons why that might not make sense.
BLAIR: I'm not the biggest fan of retainers. We'll talk about them. I'm not opposed to retainers. What I think is, it's probably a mistake to build a business where all of your clients are on a retainer or on the same pricing model. I think you should look at pricing as a creative act.
DAVID: Right. And by the way, just to clarify to folks listening, we're not talking about payment models, we're really talking about pricing models, two completely separate things. And the one we're talking about today is a lot more important. What are the three categories of things that you can price and sell? Because this is something that you have mentioned several times. I just want to bring it to the forefront of the conversation here.
BLAIR: Yeah, and I wrote an article on this recently. I haven't written much at all recently, so it's one of the more recent articles. And I forget what it was called, maybe it was called there are three things you can price and sell. Think of it this way. You can sell your inputs of time and materials, you can sell the outputs of deliverables, the ad campaign, the app, the website, whatever it is that you do. Or you can sell the outcome or essentially the value that you create.
BLAIR: And so, these are the things that you can price and these are the things that effectively the client is buying from you.In the article I wrote, the point I was making is, you have a responsibility to, (a) understand what it is that you are selling to the client, pricing and selling to the client, and (b) communicate that to the client.
BLAIR: So you need to be clear in your mind, are they buying from you the capacity of inputs, are they buying from you the outputs of deliverables, or are they buying from you the outcomes or the value that you create? So, those are the three broad categories of things that you can price and sell. And then under those three broad categories, I've got eight different more specific categories that we can dive into each of those.
DAVID: Right. So, let's dive in if you're ready to these eight, and the first one just warms my soul, the term is just, ah, I just want to like curl up next to it. It's called capacity.
BLAIR: Capacity. Doesn't everybody want to buy capacity?
DAVID: It's so exciting. If you have extra capacity today, you just put another sign outside and when people drive by-
BLAIR: Capacity, two for one today.
DAVID: But that's pretty self explanatory, right? Selling capacity. But how is that different than selling hours if it is at all?
BLAIR: It's not different. It's a form of that first level of pricing, the idea that the first thing that you can sell is the inputs of time and materials. So, capacity is another word for that. But I want us to just unpack this a little bit because when we think of a capacity, most firms we think of hours because we're in the business of counting and selling hours, or at least a lot of firms are, right?
DAVID: Right.
BLAIR: So you think of your capacity and you think of it in terms of time and it doesn't necessarily have to be just time, but that's how we tend to think of it. And then we think in units of time, so we think of hours. Now, some firms like a PR firm or somebody who is more towards the consulting end of the spectrum might sell days. So you might be selling hours, you might sell days. And then I was remembering that you and I used to both be on this platform, and maybe you still are, clarity.fm.
DAVID: Right, I am.
BLAIR: Where you can sell minutes, right?
DAVID: Exactly.
BLAIR: And how have you found that?
DAVID: Well, I hate the concept and I don't tell anybody about it except to the 4 million people listening to our podcast right now. What pisses me off is that you have to choose from a very set framed number of hourly rates, and then they divide that by 60 and that's what your minute rate is. I picked the highest one obviously.
BLAIR: I knew this is what pissed you off. There isn't an hourly rate high enough to make you happy, right?
DAVID: But what I'd love about the platform is that we don't do much small talk when we're on it. And that's what I do love about it. Wait, we shouldn't be talking about this.
BLAIR: Well, no, I'm with you and I think there's nothing about that format that pisses me off either. I think it's actually a genius idea. The idea that we're selling capacity and even... Like you and I don't sell hours, but we do effectively sell days in some way. But the idea of selling minutes, the beauty of it is, with the way the scheduling platform works, you just slot these really brief engagements in between other stuff. It's time that you would otherwise have wasted.
DAVID: Right.
BLAIR: And as you pointed out, because the client is paying an ungodly hourly rate but not ungodly enough for you apparently, they get on the phone, there's no chit-chat. They want to chat about the weather. That's fine because they're paying $60 a minute or whatever the rate is. But I think there's something genius about that.
BLAIR: So, let's just go over like the way we think of capacity. We think of it as hours. We think of it in terms of days. We talked about clarity as a platform that allows you to sell minutes. Then there's the notion of sprints, right?
DAVID: Right.
BLAIR: Agile shops tend to sell sprints in one or two week segments. If you're selling capacity, you must look at sprints as Nirvana because essentially you're taking a whole team and you're selling all of their capacity for a two week period. The utilization rates, and I don't study these things, maybe you have this data, the utilization rates on firms that are selling sprints has to be really high, doesn't it?
DAVID: Theoretically, yes. The truth is, and we have got to do an episode on this, the truth is, there are very few firms practicing real agile who are actually making money and we need to unpack that. But theoretically, yes, absolutely, and it's so simple in so many other ways too, right?
DAVID: Because it improves the client experience because you're not wasting time scoping things. You're also not spending time for your clients that isn't doing the most important thing for them. So a lot of big advantages to it. But yeah, exactly, theoretically it should be really high usage rate.
BLAIR: We keep threatening to do an episode on this, but I guess we got to do it one day.
DAVID: Yeah.
BLAIR: But there are other ways to think about capacity too. What about the idea of reserved capacity? Now, this wouldn't be necessarily the primary offering, but it would be a value driver in a lot of firms where you would have a client that would value the fact that they don't necessarily want to pay you for hours and days that they're not being used.
BLAIR: But if the understanding is that the client has work that comes in, fits and starts. A good client would not only value, but would pay you for the understanding that you will always have some capacity set aside for them. Now, as you've talked about before, it's kind of a common scenario that most firms have too much capacity. So, this idea that they don't do enough to limit their capacity because they're always afraid that that's going to have to force them to say no.
DAVID: Right.
BLAIR: As soon as they limit their capacity, the most highly coveted prospective client is going end up on their doorstep and want to hand a large piece of business to them. Now, it almost never works that way, but the reality is, most firms have all kinds of capacity.
BLAIR: But if you don't have capacity, if you're doing a really good job of keeping your capacity below your opportunity level, as you say, and I think that's really good advice. And then you have a client who has work that comes in, fits and starts, that client will value and perhaps pay you in some way some form for this idea of reserved capacity.
BLAIR: Another way that we might think about capacity is simply the idea of access. It's kind of a similar topic, but access to senior decision makers, the ability to pick up the phone and call and have a conversation knowing, just put yourself in the client's shoes for a minute, knowing that I can pick up the phone and call whoever I need to call over at the agency at any time or even get them down here for a day, et cetera, et cetera.
BLAIR: So I think we think of capacity first in units of time, but I'd like us to think beyond just the units and the idea of kind of almost like mental capacity, this idea of reserved capacity. Do you have any thoughts on that?
DAVID: I was just thinking, I'm kind of just a hangers-on in this space, but especially what you and some other folks that are really good advisers are talking about all the time, but getting away from billable hours and time and so on. As long as we're still paying people based on time, I don't see us ever really divorcing those two. If we start paying people based on what they accomplish rather than how much time they devoted to something, I just don't see how we're going to get away from this time thing.
DAVID: The other thought I have was, and this comes up a lot in my work is, we have to be honest with ourselves that time is not a renewable resource. So, if we are on call as you said, and I'm thinking to myself of one of those exclusive doctors that only works for rich people is on call all the time, right?
DAVID: Let's say you weren't sick so you didn't call the doctor this month. Well you don't get an extra appointment if need it next month. Time is not a renewable resource, so we can't just bank it to the future. And that is, the best way to understand this is access. If you don't use it, it doesn't roll forward. It's not like the old cellphone minute plans.
BLAIR: Yeah, I think that's a great way to think about it. When I first started exploring the idea of value-based pricing, and we'll talk about value-based pricing in a minute, I gravitated to the notion that everybody should move away from selling time to the idea of selling value. And the longer I do this, the more I see that just isn't true.
BLAIR: There's a lot of what a typical agency does that would be highly commodified and even low value work. So in that situation it just makes sense to sell time. You're not going to burn in hell if you're selling capacity, you're not violating any moral or ethical thing.
BLAIR: It's not like you can't make really good money in an efficient firm where your utilization rate is really high, but it's the obvious place to start this idea of capacity. And I just want us to think about capacity beyond just the units of time, but setting aside capacity and thinking about the idea of access.
BLAIR: You prompted me to just go back and cover off something that I had meant to earlier on. And that's, I'm going to talk about other people who also serve the space. I'd just like to name some names. Tim Williams from Ignition consulting and Ron Baker from VeraSage. I've learned a lot from both of those two. There's a really great concept, I don't know who I got it from. So, it's either one or both of them.
BLAIR: It's a really helpful mental construct and that is in a customized services firm with a small number of clients where I said each engagement and each compensation model is a creative act. You should view your client portfolio the same way you would view your investment portfolio.
BLAIR: And again, I don't remember if I got this from Ron or from Tim, but it's a powerful idea. So you've got an overall risk profile and if you work with a financial planner, that financial planner has an obligation to essentially structure your investments so that you're still able to sleep at night. You make money and you're able to sleep at night. So the balance of your portfolio should reflect your risk profile.
BLAIR: But even if you're a moderate to low risk person, there's still room in your investment portfolio for a small number of high risk investments. So, you would think of your client base the same way. You would have some low risk clients, and those low risk clients are the ones who you're selling capacity or time.
BLAIR: Then you would have a small number of high risk clients, and if you had a really high propensity for risk, maybe you have a higher number of high risk clients. High risk clients tend to be value-based pricing clients where you're putting some of that compensation at risk.
BLAIR: So I just want to put that idea out there and credit Tim and/or Ron for that idea. It's a really powerful way to think about your client base. And again, back to the point I made earlier, there's no one right way to charge. Everything should be a good creative act, but the overall portfolio should balance out so that you're able to sleep at night. You've got some high risk, high reward investments and some low risk, low reward investments.
DAVID: We should have Warren Buffett on here next week to give us some ideas about that, right? I'm sure he would love to. Lunch with him just to auction for three and a half million dollars. Yeah, I'm not sure we can afford it. Okay, so that's the first one.
DAVID: At this rate, we're going to have a three part podcast on pricing models, but the second one is retainers, and you're talking about that on the PR side. There are other kinds of firms that use those, but how do you want us to think about retainers as one of these eight?
BLAIR: What do you think of retainers? Where are you on that subject?
DAVID: I don't like the term and I really don't like the concept at all for all kinds of reasons, but I do think there is a place for what I call a minimum monthly fee. What I'm doing for that as a firm is I am guaranteeing to reserve this amount of capacity for you. If you use it, fine, If you don't, it doesn't roll forward.
DAVID: Every month you're going to get a bill with three things on it. It's going to be next month's minimum monthly fee, any out-of-pocket expenses, and then any overages from last month's minimum monthly fee.
DAVID: Then we're going to review it every three months and adjust it because it's not fair to adjust it up or down. We have to be fair to the client and be fair to the agency at the same time. So that's kind of how I think about it. I think there's room for it, but I still don't like it at its base. But I do think there are times when it makes sense.
BLAIR: Yeah. And you can see the benefit of it, right? It takes the variability out of the cash flow. So, that's the big appeal of retainers. And I would put retainers into two categories. Most retainers are buckets of hours, so it's a way for you to kind of sell capacity. And I've never really been a big fan of that because I always feel like in a retainer relationship, one party feels like they're getting the short end of the stick.
BLAIR: If you're using retainers to sell capacity, the idea is you're bundling up 20 or 40 or 400 or however many hours per week or per month, and you view it as profitable if you under deliver, if you don't end up using all those hours, and the client views it as profitable or to their advantage if they end up getting you to use more hours. So I'm not a big fan of that.
BLAIR: Like Alan Weiss, I think retainers are a great use of consulting. You sell consulting, so that minimum fee that you talked about, I would say that's for advisory services and you could put all the project management, account management, et cetera under that category too, and high level strategic guidance, then I would use that. I wouldn't tie it to hours. I would just tie it to effectively the guidance and the overall account management.
DAVID: Yeah, exactly. Can I just add, sorry to interrupt you there, I just feel like one of the great things about retainer or whatever you call it, is that it encourages me to put my feet up and think on behalf of the client and not worry about where I'm going to charge it, because I have a special relationship with this client.
DAVID: They value me so much that they want to pay me so that I'll think about their stuff even when I haven't been asked about something, but I will go to them on my own. Take the initiative to do that, and that's one of the things I do like about this way.
BLAIR: Yeah, me too.
DAVID: Do you have anything else on retainers?
BLAIR: Nope.
DAVID: Okay. Leasing/licensing. This is taking me back to our days of the Revenue 2.0 where we were surfacing and monetizing your IP. Those were some great events. I remember hearing you from the front talking about this as one of those options. So, fill us in sir, leasing and licensing.
BLAIR: Yeah. So, licensing is when the client pays you on a usually a monthly basis for work that you've done and are doing, but you are retaining the IP. That is the key to this model, this idea that they're paying you on an ongoing basis and the IP is yours. Usually, there's a buyout clause where if they want to buy it out from you, they can.
BLAIR: So, this helps clients with a couple of issues. Number one is affordability. So, if you're looking at the expense as some sort of one big time capital expense, like the classic example is the website. You think of how websites used to be built and sold. It was, you build a website, then you forget about it and it would serve you for three or four years, even though after about six weeks it would start to drive you nuts. It was like, ah, my website isn't new anymore, but you would live with it for three or four years and then you would knock it over and you would build a brand new one.
BLAIR: Now, everything moves so fast. It's rare that you're knocking over your website and building a new one, although having said that, we're about to do that again. It's more likely that you see your website as an ongoing, living, breathing organism that's connected to other elements of the business. It's more like a piece of custom software.
BLAIR: If you think of how clients buy software, how we all buy software now, we prefer to pay on a monthly basis and then updates get pushed live all the time, et cetera, et cetera. So that's a really helpful way to think of selling anything that's tech heavy, particular a website or some sort of technology stack to your client.
BLAIR: You remove that kind of one time capital costs, and the client understands that this isn't a relationship where you pop in every few years and deliver something new to them. Rather, it's a relationship with a product that they're buying from you that requires you to be involved on an ongoing basis and make decisions for them.
BLAIR: So, most of these clients, they're used to buying that sort of technology and even bundled consulting services that go with the technology often. They're used to buying that on a monthly basis. And I've been talking to Webdev Design and dev firms about this idea for many years now.
BLAIR: I think that's how your clients think about buying those services and if you're not selling them that way now, you're probably behind the times. It was a radical idea when I first proposed it five or six years ago, now I think it's common.
DAVID: Yeah, they just call it growth-driven design in at least the firms that I see out there doing that on the website side of things. So if it's something where you're retaining the IP, I presume this is moving the firm a little bit more towards productized services on that spectrum?
BLAIR: Not necessarily. I wrote about the story in my book. I've got a French designer friend who told me he could almost retire based on his royalties, and his royalties from websites and logos, so he would work with early stage companies or even startups and they couldn't afford his fees, very talented well-known designer, so he would lower his fee, retain the IP and then they would pay him over time.
BLAIR: I'll just skip ahead a couple because another way to think about that model is this pay per use. So you could lease or license a logo or an identity or any other design work that you do to a client who can't afford to pay you the design fee upfront, and then you could change the payment structure so that you're paid based on how they use it. I'm just riffing here, but if it's a product logo, if it's going on products, as they introduce new product lines, they could pay you more. Does that make sense?
DAVID: Yeah, it does. So we have capacity, retainers, leasing and licensing, and then pay per use, which we folded in there. How is subscription, which is the next one, how is that different from leasing and licensing?
BLAIR: Subscription is probably the business model du jour that everybody's talking about, there are three books out right now on the subject. So there's Subscribed by Tien Tzuo. He runs a company called Zuora and he's one of the early Facebook employees, and his company, Zuora Software, that runs subscription-based businesses.
BLAIR: And then there's a book called The Membership Economy, and that's by, I think it's Robbie Kellman Baxter is her name. Haven't read that one yet. And then there's The Automatic Customer from your friend John Warrillow who also wrote Built To Sell. So, these are three books that have all come out in the last 18 months or so on the subject of moving your business to a subscription based model and you're seeing it everywhere.
BLAIR: If you read Tien Tzuo book, Subscribed, the first half of that book is just example after example after example of businesses that are moving to a subscription model and it'll blow your mind, like there are a couple of luxury car providers, I think Porsche is one of them. So you think of the difference between, I'll answer your question eventually, you think of the difference between leasing a car versus subscribing to a car company.
DAVID: Uh-huh.
BLAIR: The car lease is tied to that car. The subscription model is not tied to the car. I don't know all the details on how it's working for Porsche and I think Cadillac is the other one that's rolled this out recently, but you can subscribe at two or three different levels like bronze, silver, gold, where you would pay so much a month, and as you're paying that per month, you get to drive any car you want within that class, and you can turn the car in every month and grab a different car.
BLAIR: All you pay is the gas. Your subscription to Porsche pays for whatever vehicle you're driving. It pays for the insurance, it pays for all of the maintenance. And if you want to swap out and drive a different car every month, you can do that.
DAVID: How would we relate that to an expertise-based business?
BLAIR: I think it's a great model for those who are caught in the mushy middle between being a customized services firm and a productized services firm. So Win Without Pitching is a training company, we're pursuing scale, we have between 70 and 80 ongoing clients at any one time and in theory we could have a thousand or more.
BLAIR: You can't do that as an agency, although I know some agencies who do have clients approaching that number, they really should be somewhere between 10 and 20 clients. So, imagine you're a typical firm. You should have between probably 10 and 15 clients, but you've got 40. When you look at where your revenue comes from, you'll see that the Pareto principle applies.
BLAIR: The vast majority of your revenue comes from a very small number of clients. So the idea of moving to a subscription economy is, you look at those best clients and you say, our very best clients, we're going to charge them a monthly amount, and there are different ways you can break this down and you can price it based on some form of value, but we're going to charge them a monthly amount and for that amount they get everything. There's no limits on what we will deliver to them.
BLAIR: So you're putting forward this high concierge level service offering that only your best clients will value, but they're the ones where you're making all the money anyway. And I know of at least one firm that has moved to this model. I don't remember her name, but I've met her. I heard her talk on this at a conference recently, and I think it's a really intriguing model.
BLAIR: It's a model where if you're going to move to it, you probably need to go all in on it, to contradict some of the advice that I gave earlier. So I think it's a model, it makes sense for people who have far too many clients and look at the few number of high quality clients and realize, you know what, we could make a lot more money if we just did more for this small number of clients.
DAVID: Right. Yeah. Which is almost universally true no matter what the client base is or the person listening here, and yours and mine, that's almost always true. As long as we don't get into any client concentration issue for sure. All right. The next one is barter. This takes me back many, many years growing up,
BLAIR: I wanted to ask you, yeah, because you grew up in a barter economy, right?
DAVID: I did, and I know I'm going to say this next phrase and you're going to choke and wonder if I'm using the wrong, but my empathy, hold it in whatever you're thinking, my empathy keeps me from bargaining too hard. These are folks that are subsistence farmers and... But anyway, yeah, it's a complete barter economy. There are no prices for anything listed anywhere, which is why tourists get ripped off so much, right? But anyway, what do you mean by barter in here?
BLAIR: So I know you've got your experience growing up in remote Guatemala and living in a barter economy, but I wanted to ask you, have you ever in your professional firm, have you ever done a trade of any kind, rather than taking cash?
DAVID: I have, and I know you've done quite a few of them way more than I have. I have usually regretted the ones that I have done, but I have done some and some have been okay. A lot of my clients have done this. Most of the time it didn't work out. Kind of like that illustration you gave at the beginning where somebody ends up feeling like they got the short end of the stick. There's a little bit resentment somewhere or both places. But yes, I've done it.
BLAIR: I did a talk in Reno, Nevada. I talked about this a little while ago and you said, "Oh my condolences. It was a great talk." I waived my fee in exchange for a tour of the Tesla Gigafactory. So that's an example of a barter.
DAVID: It's an example of somebody getting ripped off, it's what it is. Somebody who's drinking at the Tesla juice fountain, right?
BLAIR: I have a client I worked with in Austin not too long ago and we were talking about the different ways you can get paid and they said, "We got paid in Tacos once. We have a $10000 Taco of credit." And I said, "That's a fantastic example."
BLAIR: There's a guy I know who makes over a million dollars a year just doing public speaking. I referred him to an engagement where I couldn't speak because I was going to be in another part of the world at the same time, but I know he makes a lot of money speaking, and I knew this organization didn't have a lot of money.
BLAIR: When I talked to him about it afterwards, he said, "No, we worked something out. Like they gave me all the money they could, but I got a whole bunch of other stuff out of them too." The agreement to put all his books and his materials in front of the audience, the handing over the list of all of the people who would be there, et cetera, and he had this great line that's always stuck with me.
BLAIR: He said, "No is intellectually lazy." Because they only had five grand for the gig, he wasn't going to walk away even though he was a guy who's made over $1 million in a year from public speaking, he wasn't going to walk away from it. It's like, okay, you've only got 5000 in cash, but you have other things. Let's talk about these other things that are of value to me too. And they were able to bundle up enough to make it worthwhile for both parties.
BLAIR: So, it's just this idea that, you seem to be far apart in a negotiation with the client. This idea that no is intellectually lazy, that if both parties get creative and think about the different ways that it's possible for you to be remunerated, then I think you might end up coming up with something that's really interesting that might include $10000 worth of Tacos.
DAVID: And then with my luck I get allergic to Tacos, and then take a 50% discount on the coupon somewhere.
BLAIR: Yeah.
DAVID: Okay, so that's a really interesting one. That didn't take us where I thought it was going to, but I liked that one. What's funny to me is on this speaking thing is, somebody says, "Well, it's a small group. We don't have that much money," and actually I'm more inclined to speak for less if it's a big group because then there's more potential clients there. It's sort of interesting how that works and how they think.
BLAIR: Right.
DAVID: Okay. Performance pay. This is something we've talked about quite a bit and maybe one of the things that we should do, I do want you to summarize a little bit, but we can also put some links in the show notes as well to send people to some of that stuff, but just summarize this for them, for our listeners as one of the key options here.
BLAIR: This is really value-based pricing where you are putting some compensation at risk, and one of the things that's really struck me over the last 18 months or so as I've been doing a lot of work with firms on the subject of pricing is how they think value-based pricing is just one thing.
BLAIR: Back to what we talked about at the top, which is, there are pricing models and then there are payment models. There are ways you can get paid. There's the basis on which you will earn your money, but then there's also the ways that you get paid, or it might be as simple as terms.
BLAIR: When it comes to pricing based on the value that you will help create, you can put no compensation at risk. You can simply say, "Listen, we propose to create this $20 million in net new value and therefore our fee is X, a percentage of that," and not put any compensation at risk. Or you could put it all at risk and offer to work on a contingency basis where you say, "We don't get paid anything until we hit these goals, until we help you create this value, then we get paid a whole lot of money."
BLAIR: And those are just two ends of the spectrum. Two extremes. There are just so many different ways that you can get paid in between there. So, when I talk about getting paid based on performance, what does performance mean? Performance does not have to be the lagging indicators of sales, right? You can get paid based on the leading indicators. And again, leading indicators are predictors. They're the things that you would measure that will predict future success.
BLAIR: So, some examples of leading indicators would be leads generated in a performance marketing firm. In most B2B marketing firms, you're in the business of lead generation, so you could get paid based on leads or certain types of leads that meet certain standards that might be known as marketing qualified leads. You can get paid based on the traffic that you generate, either all traffic or specific traffic coming from specific sources.
BLAIR: And then you think about how you might get paid. You can get paid in cash money. You can get paid in stock options. You could get paid a percentage of sales. You could get paid, if you're still under the category of putting some compensation at risk, you can just get paid certain fees based on certain milestones. You can get paid in equity in a startup business.
BLAIR: I had a friend visit recently and he owns an agency, and he pulls this device out of his pocket and he said, "We help launch this product," and the owner didn't have the money to pay our fees, so he offered me half of the fee and half in equity and I said, "No, I'd rather take the cash."
BLAIR: So the owner of the business went and borrowed the money and paid their fee, and he's holding the product, I'm not going to name it. It's quite famous now. And I said, "So how much equity did you walk away from?" He very coolly said, "$240 million."
DAVID: And you made him pay for dinner too, right?
BLAIR: And so, that's a really big topic and we're kind of up against time, we're already over here, but this idea of performance pay, getting paid based on the performance, what my message to people would be, just again, think creatively. Performance means all kinds of different things and there are all kinds of different ways that you could get paid beyond just cash.
BLAIR: You could put all of your compensation at risk, you could put none of it risk. And I'll just say, I have a bee in my bonnet under this term that agencies use when they say, "We partner with our clients." I don't know what percentage of agencies would actually have those words on their website, but probably like more than 10, maybe as many as 30% of all agencies would use that phrase, 'we partner with our clients'.
BLAIR: I think if you are not engaged in some performance pay compensation model with some of your clients, then that's a bullshit statement and you should not be allowed to use it. Your client will think of you as a partner when you are getting paid based on the value that you create and you're putting at least some of your compensation at risk.
DAVID: Okay Blair, we have gone through some great things. I do want to remind people of how to get your book if they want to because a lot of these things are talked about in there and we've been doing this podcast for years now, and we talked about the book earlier, but just tell people where they can get the book.
BLAIR: Yeah, the book is, Pricing Creativity: A Guide to Profit Beyond the Billable Hour. It's available at pricingcreativity.com. Thanks for the plug.
DAVID: You're welcome. We'll talk next week. Thank you, Blair.
BLAIR: Sounds good. Thanks David.