Agencies with high pricing power can raise their prices without their clients raising their eyebrows. Pricing power also depends on the circumstances. Knowing this, “grunt work” can be sold as highly critical “nuclear event” work for which price is not an issue.
Imagine you’re stranded in the desert. Your mouth is parched and you feel like you’re dying of thirst. In fact, you’re pretty sure you are.
All of a sudden, a stranger offers you a cold bottle of water. You can see droplets of water condensing on the clear plastic of the bottle. Your eyes follow the bottle hypnotically as the bright sun sparkles in the ripples that form in the crystal clear water inside. Your hand reaches for it as the stranger mockingly moves the bottle in front of you.
“It’s not for free!” she says.
How much would you be willing to give for that bottle?
Entire life’s earnings?
I assume you’d pay everything you have for a life-saving bottle of water. At this moment, the stranger has enormous pricing power and can ask any price of you.
Now imagine the same thing happens on a cold, rainy day in the city. You’d probably feel considerably less generous towards the stranger. Her pricing power is weak, at best.
In the Words of Economists, You’re Thirsting for Utility
Economists have a name for your perspective – utility:
“In economics, utility is the satisfaction or benefit derived by consuming a product.” – Wikipedia
The concept of utility also applies to the pricing of services. In many cases, your client doesn’t see value in what you’re providing simply because they’re not in an urgency to buy it. The problem your service solves or addresses isn’t pressing enough for them to pay up. Its utility is low for them.
Using Sales Conversations to Shape a Buyer’s Perception of Utility
Great salespeople know about the role of utility and try to affect it through their sales conversations. A while ago I interviewed an experienced sales expert about a technique called nudging. This expert has been advising agencies in selling for decades. He once shared a testimonial which stuck with me since it illustrated utility and its role in sales so well.
In the testimonial, the expert’s client stated that before talking to the expert she slept soundly at night. The sales conversation had made the utility painfully obvious. The client could no longer go on living blissfully unaware. She was compelled to act.
The Value Curve Shows the Contextual Dimension of Pricing Power
While framing a conversation in order to emphasize utility is an effective tool in sales, pressing circumstances is an even better ally to achieve high pricing power. One way to visualize this is using something called the Cobb Value Curve which I discovered while reading Ron Baker’s book Implementing Value Pricing.
If you’re a frequent reader of this blog you might recognize that title. I refer to it quite a bit. It’s for good reason, it’s chockfull of fantastic ideas when it comes to pricing value.
The inventors of the Cobb Value Curve originally designed it for law firms. That makes it no less relevant to other service businesses. It is an imagined curve of types of work in relation to their relative share of the market. While the curve is useful, one of its caveats is that it isn’t backed by research findings as far as I know. Even so, it offers a practical way to talk about services, their utility, and pricing power.
Let’s have a look at the curve:
We can draw some immediate conclusions:
Agencies With a Strong Track Record or the Right Connections Get Work That Is Highly Critical and Valuable
This usually involves averting something that is very costly or catastrophic. It can also be about doing something that has a significant impact on the client’s future. For those practicing law, this would mean merger and acquisitions or high-risk lawsuits. In marketing, it could involve managing a client’s brand or image while the company is being hung out to dry by the press. For IT, it could involve preventing costly downtime for a high volume e-commerce website. The inventors of the curve estimate this high utility work makes up less than 4 percent of the entire market.
Agencies That Seem Most Capable Get the Kind of Work That Must Be Done Just Right
Work that is high risk or has considerable impact often goes to companies and professionals that are seen as being the best at handling it effectively and well. That determination is based on how the client experiences the firm or professional. This is work that the client cannot afford being done incorrectly or unprofessionally. In the case of law, it could include real estate, high profile contract law or divorce. In IT, this type of work could mean building applications and systems that need high availability and reliability. This kind of medium-to-high utility work makes up about 16 percent of the market.
Agencies With a Strong Reputation and Brand Get the Work That the Customer Doesn’t Want to Take Any Chances With
Important work that is routine yet still important often goes to agencies that have a well-established brand, name, and reputation in that particular niche. Big agencies with established names get a lot of work this way. Smaller companies need to aim to establish a strong reputation in niches over time to win brand name work. This work doesn’t have the pricing power of the two higher tiers but it’s still considerably more valuable than commodity work. Medium-to-low utility brand name work makes up roughly 20 percent of the market.
Companies That Do Not Have a Strong Brand and Compete on Price Get the Low-Value Grunt Work
Finally, there are commodity services. These are the things that just have to work and aren’t perceived as bringing any considerable value. They usually involve low-level compliance and administration work. Buyers assume this kind of “grunt work” to function and to be of acceptable quality. Quality or defects will be annoying but not a serious risk or problem. Agencies specializing in such services have low pricing power. This kind of low utility work represents about 60 percent of the market.
Remember, Just Because You’re Small and Unknown Doesn’t Mean You Can Only Do Grunt Work
What we can learn from this:
You Can Use Positioning to Shape Expectations and Pricing Power
- Agencies of all sizes can position themselves differently and have a shot at the more valuable types of work thereby improving their pricing power.
- By focusing on a niche and targeting your marketing effectively you can create name recognition there and winning brand name work.
- Similarly, a strong network can be an asset. Build a network of people who know you and perceive you as competent and reliable. They will trust you to do critical nuclear event work.
- The most valuable work with the highest pricing power falls under the category of nuclear event. It’s not unusual that clients pay multiples of the rate for the more common work, even though they’re essentially the same activities. Going after that kind of work could be a working strategy. You can position your agency as the “disaster experts” that step in a fix a mess with minimal fallout and you’d have fantastic pricing power.
Invest in Building Great Client Relationships
- It’s important to understand that each of your clients will likely place you at different points on this curve. Some clients view you as a fungible supplier of commodity services, while to others you’re a highly trusted advisor they can rely on when in a pinch. Be sure to know which clients are which and where to invest your client relationship building efforts.
- By creating exceptional client experiences you can increase your chances to win work based on how the client perceives you.
- Your pricing power depends on the context and offering the right thing at the right time. That’s why marketing plays a critical role in building relationships and brand recognition that pave the way for deals with tremendous pricing power.
Shape the Buyer’s Perception of Utility When You Sell
- By shaping buyer utility in your sales conversations you can upgrade a commodity transaction to a near-nuclear event, in their mind at least. This is key to pricing based on value but requires getting in the mind of the client first.
How do you see your agency or freelancing business positioning itself for the higher tiers of work?
Please write in the comments. I read all the comments.