“We do value-based pricing.”
It’s a method of pricing for agencies that’s been talked about ever since the Mad Men days, but in many instances, is just a veil for a fixed price on a quote or scope of work.
When asked, I’ll often hear many agency leaders talk about how they’ve moved away from time and materials. Articles exclaiming the death of the billable hour are abundant across Linkedin. But, dig a little deeper and you’ll often find that projects quoted on time and materials are alive and well, they just wear a value-based costume with a fixed-price label.
What did the fixed-price tactic resolve? Well, it allowed us to quote a fixed fee with a client, in an attempt to keep control of margin. If we quote for the job to cost us ‘x’ then we have the chance to do it quicker, or with less resource, or less-costly resource and therefore improve the profit we can make on that job and that client.
The reality though? We nearly always blow past it in the quest for doing the best possible job, or because we don’t want to annoy a client that’s asking for ‘a favour’ or ‘just one more round of amends’ because they might give us more work in the future, or, it’s a chance to win an award. Yes. I see you nodding.
And how did we arrive at that fixed-price? We estimated the amount and type of work to be done, who would do it, how much they cost, what rate we sell their time at, add it all up and arrive at the fee. Now, of course, that’s how most businesses work. Cost of time and materials (goods sold), plus margin to account for overheads and target profit. While this helps us work to a target margin it sets a profit ceiling from the get-go and one that has only got lower, especially over the last decade.
No doubt you’ve heard of the term, “price the client.” You wouldn’t sell a re-brand project to Joe’s cafe, for the same price as you would to Starbucks. Maybe you have different rate cards for different clients? But I’d guess, unlikely that the difference between them is as different as the sheer value scale between them.
The other issue with this whole dynamic is, that while we made the fee from time and materials, or even think we’re selling time and materials, the client just doesn’t care. They’re buying deliverables. They’re buying an outcome. A solution to a problem. The size of that problem is the value. The size of that problem being solved is the fee. And that, up-to-now, has been value-based pricing.
Except, not many creative services businesses have achieved it, and it’s not surprising. There are so many variables that contribute to that solution’s success or failure that to claim credit for said success or failure, is nigh on impossible. Perhaps it’s easier after the fact. I’ve worked in agencies that have claimed credit for building a $3.4bn dollar brand, or an increase in share price of 70%. Was it all down to us? Of course not, and while we undoubtedly helped, it was impossible to quantify how much could be claimed as purely our work. And for the ones that fail (or aren’t as successful as we claim they’ll be) will we get paid less? Of course not, too.
So if the fee isn't really built on value, and the client was never buying the time in the first place, here's the question I keep coming back to. What are we still measuring?
Have a look at your utilisation report.
Because many agencies that saysthey’ve moved to fixed or value pricing still run the same weekly report they ran when they sold hours. Billable versus non-billable. A target of 80%, or 85%, or in some of the more optimistic places I've worked, 90%. We changed what we sell. We never changed what we watch.
I do get it though. Utilisation is, for most owners, the only early warning system they've got. It's the number that tells you whether you're about to run out of people or run out of work, and it does that job reasonably well. Take it away and you're flying on feel. Nobody wants to be the founder who cancelled the one report that might have shown the wheels coming off. So it stays. Not out of stupidity, but out of the absence of anything better.
Look at what that leaves us with, though. We tell the client we're selling them an outcome, then we go back to the office and grade our people on how many hours they managed to fill. A business that sells one thing and manages another. And the people in the middle of it, the ones logging their time on a Friday afternoon, can feel that gap even if nobody's ever named it for them.
Which brings me to what’s about to change all of this, and it isn’t the thing most people are talking about.
The story we keep being told is that AI makes us faster. Set it running, get thirty percent of your week back, off you go. That’s a bit of a shallow view, not one I’m really experiencing when I think about it deep-down, and I suspect you might not either. We won’t get that time back and put our feet up. We’ll fill it. We always fill it. Give an agency a spare afternoon and it’ll have found four things to put in it before Tuesday.
So the question was never how much time we save. It’s what we choose to fill it with.
Because used properly, AI isn’t a shortcut. It’s a jet-pack. It doesn’t get you to the same place quicker, it has the power to get you somewhere perhaps richer or deeper, different or better, in the time you already had. Six routes explored instead of two. The strategy interrogated properly rather than just feeling right. The idea tested before it ships, instead of defended after it lands.
And that’s where this loops back to the fee.
Think about what really stopped us doing value-based pricing. It was never the conversation with the client. It was the proof. We could never say with a straight face which part of that share price rise was ours, so we quietly went back to adding up hours and hoping nobody asked.
Now think about what a jet-pack does to that problem. Real measurement built into the work rather than bolted on if the budget survives. Benchmarks taken before we start, so there’s something to compare against. Going back six months later to find out what actually happened, instead of writing the case study from memory. Testing that produces evidence rather than opinion. All the unglamorous proof work that every agency knows it should do and almost none of us have ever been able to fund.
AI can actually help fill in the gaps and (dare I say it) lack of enthusiasm we had for measurement before. It’s an excellent researcher, analyst, where we might not be.
That’s how you hold the fee. Better still, that’s how you raise it. Not by charging for hours we didn’t spend, but by finally being able to show a client (or the next client) the size of the problem we solved for them. We’ve spent thirty years asking to be paid on value while being almost completely unable to demonstrate it. This is the first thing that’s given us a real shot at closing that gap.
And here’s where it runs straight into that report.
Every single thing I’ve just described is traditionally non-billable.
Building the measurement in. Going back half a year later to see what happened. None of it has a client code sitting against it. On a utilisation report it looks identical to someone not working. So the problem isn’t just that the report measures the wrong thing. It’s that the report actively punishes the one behaviour that would let you charge more.
Which is the real question. If you’ve genuinely stopped selling time, why are you still measuring your people by it?
Now, I should declare an interest, because you’re about to think it anyway. I run a company that has a product with a time-tracking feature. So you’d be well within your rights to expect me to argue that everyone should keep filling in timesheets until the end of days, or to assume I’ve just talked myself into a corner.
But I don’t think the timesheet is the problem. I think the problem is the column we drop it into.
Billable and non-billable is a binary, and it carries a judgement. Billable is good. Non-billable is waste. Get the first number up and the second one down. Which was a perfectly reasonable way to run a business back when the hours were the product. It falls apart the moment the most valuable work you do is the work with no client against it.
Because that proof work I was talking about, the benchmarking and the testing and the going back six months later, isn’t waste. It’s the most profitable thing on the whole list. It’s the thing that lets you charge more next time, and more again the time after that. Filed as non-billable, it looks like lost revenue opportunity. Filed honestly, it’s the investment that raises the fee.
So no, don’t stop tracking. Track harder, if anything. Just stop sorting it into billable and everything else, and start sorting it into effort that builds value and effort that doesn’t. Those are not the same question.
I’ll be honest, I haven’t got all of this worked out. What I’m fairly sure of is that the answer isn’t just renaming the old number. Utilisation dressed up as “capacity” or “productive time” is still a measure of how full someone’s day was, and how full someone’s day was is the least interesting thing about them now.
The numbers I’m more interested in are the ones that survive the jet-pack. Profit per job. Whether the client came back, and whether they came back with something bigger. Whether we can point at what changed for them and back it with something more than a well-art-directed case study. Whether profit per job or client is increasing. And, I realise how soft this sounds sitting next to a utilisation percentage, whether the people doing the work have anything left at the end of the week.
And that last bit, definitely nags at me. We’ve been handed that jet-pack with an opportunity to improve outcomes for a client even more and, for the first time, to actually prove it. That’s the closest this industry has ever come to earning the right to price on value. The risk isn’t that we miss it. It’s that we point the jet-pack at volume instead, take on more jobs at the same tired margin, and then wonder in three years why the fees kept falling.
It’s not a pricing decision or a methodology discussion. It’s a leadership decision. And it’s arriving a lot faster than most of us have a plan for.
.png)
