I'm Rob Da Costa and this is The Agency Accelerator Podcast. As someone who has stood in your shoes, having started, grown and sold my own agency. I know just how it feels during the ups and the downs of agency life. This podcast aims to ease your journey just a little by sharing my own and my guest experiences and advice as you navigate your way to growing a profitable, sustainable and enjoyable business.

If you are in the agency world, then no doubt you have heard of the wild company and particularly the bench press reports that they produce. In this two-part special, I am super excited to be joined by Rory Spence. Rory loves helping ambitious agency owners who want to grow more profitably and sustainably. Also, he helped thousands of agencies across the UK. Advising them on pricing strategies, project management and final financial processes. All focused on helping them increase their profits, which is music to my ears and will be music to yours as well.

So, I'm super excited to jump in all things pricing and profits with Rory today. Welcome, Rory. How was that for an introduction and how has your life been in this fight past strange year?

Thanks, Rob. Thanks so much for having me on. I've been very well, thank you. Also, it's great to be here. It's been obviously a roller coaster of 18 months, but it really feels like positivity is pretty high right now. It feels like people are excited about the opportunities that await next year, I guess, versus, has tried to pour cold water on that a little bit in the last couple of weeks. Unfortunately, without going too political. But, hopefully, this will all pass quickly, and you will have a really positive 2022. 

How have your agency clients typically faired throughout this crazy kind of last 18 months? 

I think as everybody can probably relate to, back in when it was March 2020. When everything kind of kicked off and we were forced to work from home and go into that first lockdown. At that point, there was a bit of panic. There was a lot of worries. It was really difficult.

I think the positive news is, for a lot of people, it was nowhere near as bad as actually what they were maybe expecting. We certainly had fewer agencies have to close down than we were expecting slash that they were kind of maybe thinking as well. I think although people were able to take on things like the bounce back loans and a lot of the funding that was available, we've seen a huge number of them actually not need that money or they've used it back in ways to really gain an advantage rather than just to survive.

Then, that's been great to see. I think a lot of people now after the lessons that we've learned in the last 18 months, certainly I think a lot of clients are feeling like they're in a better position than they've ever been. The team are more united than they've ever been. There's also a feeling that, if we can get through this, we can get through anything. I think that's really nice. I completely agree with that as well.

Yes, me too. I think I've seen a similar thing. I think those people who didn't panic and who kept trying to serve their audience even if their audience was cutting back on all of them. Marketing costs have come out the other side of it in a much stronger position. So, it's good to hear that. That's a common theme.

In this episode, we are really going to focus on pricing. Also, this episode is actually going out at the beginning of the year, so that is a fantastic time for agencies to be thinking about reviewing their prices. I'm always encouraging my clients to put up their prices when they can. Then, let's start with that question. Should we be reviewing our prices every year? And if we should be increasing our prices, how enough we go about doing it without fear of losing all our clients? 

Great question. Well, to answer the first part of that, should we be reviewing prices? I think the answer without a doubt is yes. Now, what a lot of agencies have done is not increase their prices in the last 18 months, and I can see why. I'm not necessarily saying I agree 100% with that, however, I can absolutely see why. I think there was certainly a sensitivity around the timing of that.

Obviously for some agencies, those that for example who worked in e-commerce. Well, actually their clients were booming and hopefully, they did see that as an opportunity to increase prices. However, other agencies have had it tough and have had to sort of stick by their clients. Well, actually, I would completely understand why you would decide against increasing prices. What I'd add to that, though, and what I'd say not just in the 18 months we've had, but really in business in general, everything is getting more expensive. 

Your staff don't turn around at the end of the year and say, “You know what? Actually, I think I might take a pay cut this year. Do you think we could organise that?” They're all asking for pay rises? Rent is going up. General costs of business are going up. The cost of living is going up. Therefore, if you're not increasing your prices, you are squeezing your own profit margin. It's quite simple that that's what's going to happen because your costs will be going up.

A hundred per cent, you should be thinking about doing that. I completely agree, Rob, this January is the perfect time to be doing that. Start of the year that people take that as a fresh approach, right? A fresh year. What should we be doing? I think it's a great opportunity to do that. 

Also, it's interesting what you said, because a lot of agencies do always say they are really worried about increasing prices. I don't want to lose my clients. I'm a really big believer that there is a way you can craft this conversation where it is almost impossible for you to lose from it. To really dive into that, I think it's in this specific phrase that you can use. When thinking about increasing your prices, I'm sure we'll come back to this Rob, maybe in more detail, but the logical places often are to start with your new clients.

When you're pitching for new work, that's a great opportunity to increase prices, but don't forget about those existing clients. What you can do and how you can structure this conversation? You can actually go back to them and say, “ Hey, look what if, to have a conversation with you because when we first started working with you, you were down at this level in terms of an hourly rate or a day rate. You know, actually, this is what we charged you and we still charge you that at this point now as well. Whereas actually, we're now taking on clients and their upper at this level. You know, we're charging them a much higher hourly fee or day rate? Or, how you charge it. 

This is an interesting phrase you can say. You can just ask them, “How would you feel about bridging that gap?” That's a really interesting phrase because, as I mentioned, I'm a big believer that it's really difficult to lose from this. There's kind of three possible outcomes from you asking this question.

One is that they turn around and they say, “Absolutely not. We cannot increase our hourly rate by even a pound. If we do, we're going to have to go out and find another agency.” At least then, you know where they stand and you can react to that. Your reaction might be “Okay. Well, you know what? That's what you're gonna have to do then, unfortunately. We've made the decision that we're not going to be able to carry on with clients at this level.” Or, you might turn around and say, “Well, actually, we really love working with you. So you know what? Let's keep it at that level. It's really good to have this conversation. Will review it again in six months.” Time, years' time, whatever, but you're in control of that decision crucially. You're able to make that decision. 

Of course, another reaction from your client's perspective might be, “Hello, actually, we love working with you. You do a great job. We were expecting this call. You know, actually, we thought you might have called us six months again. You didn't. But you know what? Actually, we're really happy to go to those new rates because we love working with you.” We value everything that you do, and you'll be amazed how often that will genuinely happen. 

But then, the third option is the most common I would say.  It is where they're going to turn around and say, “Okay? Yeah. Well, not too surprised. To be honest, I'm not sure if we can really justify getting to that level, but could we meet somewhere in the middle?” Then, you can just have a nice negotiation and a nice conversation with that client. Also, just try and find a happy medium.

Yes, such good advice. It's interesting that I totally agree and believe that the third answer is the one that most people will get. Although I also think in their heads they think they're going to get the first answer, and that's what stops people from doing it. It’s interesting. I'm just interested in your view on this.  When I've spoken to a few of my clients about this, they often say, “Rob, you don't understand. My market won't bear it or we're at the limit of what we can charge.” I think I believe that is true, but I'm interested to know your thoughts on that. 

Yeah. Sorry, the question Rob being around. 

Yes, so, for example, I have a client that works in the education space. When I talk about pricing and I say, “Look, you need to review your pricing,” they'll say, “Yeah, but Rob, you don't understand because, in the education space, this is as much as the establishment will pay.” I'm often thinking, Is that really true? Or is that because they're comfortable charging that fee?

I see. Yeah, 100%. I think it's a confidence game without a doubt talking about pricing. Talking about money in general, I think, is a confidence game and the word game is being a key part of this, right? Pricing, I'm a big believer is an art, not a science. 

There is no set fee, which is the correct fee. If you're getting pushback like that example you gave Rob from a client in a particular sector saying that no, this is the level. Well, actually, maybe they have not worked with you before. Maybe they have not got the sort of value that you can provide for them.

It's a game. You can have a little play around with that and actually see what do we feel is the right level. Then, although we've got a load of stamps around, what those hourly rates might look like. I think this is where and I know you're keen to come back to this Rob as well, but that conversation around value-based pricing.

Yes. It's the perfect segway, I think because you were talking about hourly rates and daily rates just now. I totally believe in getting that internally, we need to figure that stuff out but externally, we shouldn't be selling that to our clients. Then, let's jump into that thorny topic of value-pricing and value-selling because it's one that I know you've had a lot and I've had a lot. Let's start with a really simple question which is what is it exactly? So, could you? I don't know if you can give a really good sort of simple definition of what value-pricing is.

Great question. I guess an interesting way to answer this question is to share some stats taken directly from our bench press report. We've asked every year for the last few years, actually, how do agencies price? 

Just to share some percentages and some statistics with you, 87% of agencies will use a fixed-fee pricing model. Where someone will come to you with a brief and you'll say, “Right, we will deliver on that and this is the fee for it.” Fixed-fee is fairly straightforward. It is 87% of agencies. 

60% of agencies will still use time and materials. Now, I think luckily that figure is decreasing. I think that needs to decrease further. I think if you are literally just selling time for money, there's a risk that you're just going to be a commodity. In the sector that hopefully, the audience is in that marketing sector, there are so many agencies. There are thousands of agencies out there. 

If you're not able to differentiate and if you're just selling time for money, it's gonna be tough. It's gonna be really difficult for you. Then, value-based pricing, I will answer the question of what exactly it is, but just as in context, 23% of agencies are using value-based pricing, and that number has actually remained pretty constant. I thought it would have increased because there's more talk about it, but it's remained fairly steady.

However, value-based pricing is effectively the opposite of sending that time for money. It is taking that out of the picture entirely, and it's working out. What is the thing that you offer? What is the service that you provide? What's your sort of secret source as an agency that probably is very unique to you? It might be very unique to a particular sector that you're selling it to, but what is that unique and high-value proposition that you provide that people will pay disproportionately for? That's where value-based pricing can come in and be really powerful. 

Yeah, great definition. When we talked about selling time and materials, we’re selling inputs and outputs. When we're selling in a value-based approach, we're selling outcomes and impacts, and that's what the clients buying.

I think that fundamentally, clients are never, ever buying time. They might think they are, and there's a couple of flaws with that. One is that when you sell time, it assumes that the client has some expertise in what you do. Because if you sell time, especially if you report on time and they start questioning, why did it take half a day to write this press release or to set up this digital campaign? 

It assumes that they understand how long something should take. You've probably heard me say this because I said it many times on the podcast. I always liken this to the dentist. If you've got a toothache then, you go to the dentist and they get rid of your agony. They get rid of your toothache in 15 minutes and they say that's £300. You would never say that is a lot of money for 15 minutes of work because if you did, the dentist could turn around and say, “Well, okay, if I took three hours, £100 an hour to get rid of your pain, would that make it more valuable?”

Of course, the answer is no. Then, we are getting rid of the pain for our clients, and that's that secret source thing. It's like working out. What's the pain that you're getting rid of? That's the outcome of the transformation from being in pain to not being in pain. We have no leads to we have lots of leads. Our brand is terrible to our brand is really strong. That transformation is what the client is buying. If we can price on that, then why wouldn't you pay for it. If I said to you, “Hey, Rory, I can get rid of your pain in 15 minutes. Also, I can get rid of it in three hours. Which would you prefer? Well, of course, you're going to go for 15 minutes. 

Yes, it’s a great analogy. I love that, Rob.

It's just a really good way of making people have that kind of, “Yeah, I get it now.” I think those stats are kind of interesting and slightly depressing that you did. I think people understand intellectually the concepts of value-pricing, but I don't think they know how to implement it in a real way.

If I were a client that had traditionally reported on tasks and time, and I totally bought into this moving to a value-based approach then I wanted to transition a client or even quote a new prospect. How would I go about it? How or what would the proposal look like? How would you put the scope of work, the timeliness and all that stuff together if you're just focusing on the value approach? 

Great questions. I think there are two parts to this. If you are an agency owner and you're thinking of moving into value-based pricing, the very first thing that you need to do is ask yourself two questions. What can I be the best in the world at? And, who can I be the best in the world at providing it for? Then obviously, the idea is here, how much can you specialise in terms of the services that you provide or specific service that you provide? It doesn't necessarily have to be with the best in the world at all five of these services that we offer. You might go that thing there.

It's often going to be more on the strategy side of things. Going back to that short term, like a commodity. If you're providing a sort of straightforward service that’s not gonna quite be. It's going to be that strategy. It's going to be that advisory element. Then, what could you be the best in the world out there? Then, as I said, who could you be the best in the world of providing it to? Is there a particular sector that you can sell into? You specialize in health care, travel, or e-commerce. Work that out. 

I think if you can answer both those questions or even just one, to begin with, to be perfectly honest. I mean both is ideal, but if you can answer one of those questions that at least give you a direction to go in. That's where your focus should be when looking at value-based pricing.

Then, that without a doubt is the best place to start. Also, I would encourage you to do that to really help you to transition towards this idea of value-based pricing is in introducing three pricing options. Now, this is something that gets spoken about a lot, across agencies and service-based businesses that they should be doing. Yet, surprisingly still, a huge number of agencies, well, 50% of agencies, that might be 49% of agencies are still only giving one pricing option when they have pictures, or they're quoting for work.

I guess just to talk initially about the cons of doing it that way. If a client is coming to you with a brief and they're asking for a quote. Then, you just put one fee in front of them and they're getting three other quotes from other agencies, you are just directly competing on price with those other agencies, right?

Now, they might like you more than another. They might value this piece of work that you've done in the past. They might have a good relationship here, but ultimately, like a huge part of that comparison, is going to be on price. You are either going to be more expensive, less expensive or as expensive. 

However, if you can move towards this model of offering three pricing options for every quote and for every piece of client work that you ever do, it will really leave you in good shape and it affects so many different things. It's great for so many reasons. One is, of course, the value-based pricing side of things which will come back to but it also means just to use that example, we were just giving their where you're competing on price.

Well, actually, suddenly if you were to put three prices in front of this client and they decide that they like you the most, they've got the best relationship with you. They trust you the most. You've got great content. Then you've won. Then you're almost competing with yourself on price because they will then go right. Well, we want to work with these guys, but at what level? Because they've given me these three options here. 

Therefore, it will massively help with your conversion rate. Now, the kind of science behind these three options, always offer your most expensive service or quote first and that should be anchored high. Then, if you are moving from offering one pricing option to three, whatever you're one would be basically treating that as your middle option in these three. Also, your first option should be considerably higher than that. 

Let's say you normally quote 25,000 for this particular project where your first option might be 60,000. It might be 100,000 like you work out what's right for you but it's a genuine quote. It's a genuine breakdown of, “Hey, look. Well, this is one level that we can work out. We can provide a service at this level at 60,000. This is what you would get from us at that level.” 

Then, you can say, “Right, your second option here is this 25,000 option.” Which would have been the only one that you put in front of them, “Hey, look, it directly answers your brief. It does everything that you need from us. However, you wouldn't get this additional extra that you didn't mention. But I kind of put in that first quote and also you have to sacrifice this” And, you just mentioned a couple of things that they wouldn't get at that top choice.

Then, you're able to offer a third option as well, This one might be 15,000. It's a little bit lower. “Hey, look. Well, it may be just about answering the brief.” There might be a couple of things that are missing, but at least you're giving them that kind of option. What you'll find is most clients will go for that second choice. That's going to be the standard, but what you'll be really fascinated by is actually, there'll be people that are really intrigued by this top option.

Now, this again just to go back to the science of that. The reason people are lost and go for that second option is you've anchored the price high by giving that first quote at 60,000. They've had 60,000 and they think, “Wow. Okay, it's more than we thought.” Then well, if you only take these few bits out, Actually, you could work with us at 25,000. That suddenly feels like really good value. That's the logic behind it.

As I said, I guess to go back to answering the question directly, Rob, in terms of value-based pricing, I think that's a really good way to start looking at this. These three options are not going to be based on 60,000 worth of time, 25,000 worth of time and 15,000 worth of time. It's going to be based on, this is what we will deliver at those levels. This is the service that you're going to get from us. This is what we can try and deliver for you at each of those levels. Then, it's a really good way of engagement.

Love that. I use that story a lot. In fact, I read just to kind of highlight how anchoring really works. I read this article years ago that I often cite. I'm sure I've kind of got it slightly wrong, however, there was this group that was a workshop. They were split into two separate rooms. In the first room, they were said, you've got 15 minutes. What do you think the typical hourly rate of an agency is? Then, in the second room, the tutors said, ABC Design Limited charges an hourly rate of £150 an hour. What do you think the typical average hourly rate is of agencies in the UK. The first group came back at I don't know, £80 an hour, and the second group came back at £120 an hour.

That is a perfect example of anchoring to set that high point and then come up with an average. Then, I think that sort of highlights the point. I can't really understand why people wouldn't use the three pricing prices. Something I tell my clients to do all the time. It's a great piece of advice.

 Actually, listeners, if you take nothing away from today's episode, then that piece of advice from Rory is really good and really easy to implement. Just think that the middle price is the price you really want them to pay. Then, the anchor point is, they're all singing and all dancing, what would be the most perfect sort of offer that you could give them. Then, the clients bought into that. Do you agree with me that internally, we still have to break those projects down into hours and assign work to different people? 

It can be useful. I think there's there's no right and wrong way here. I think internally, you work on how your team will operate best. Some of them, if they've always tracked time and tracked hours, we'll need that. We’ll need that gauge of, “Hey, by the way, we're estimating you're going to be spending 10 hours on this.” That gives them a good gauge to work towards.

But I think ultimately there's a world where we can move away from that and longer-term. It can be the team are also focused on the output and the deliverable. This is what we need to achieve. When we've achieved it, we've achieved it. Going back to your dentist example is a really good one. I guess my strong view on this is we've had clients before come to us saying we've stopped charging by time, but now my team is struggling.

Well, there's definitely that's two separate things. Charging by time externally and then tracking time internally, completely unrelated in my opinion. You can definitely do one or the other. 

I’ll put you on the spot here a bit because I'm a total believer in that I think, to evaluate efficiency and capacity. Well, let me ask you the question rather than me saying. If you don't use time tracking internally, how do you measure the efficiency and capacity of your team? How do you square the circle of a team member saying, “Oh my God, I'm really stressed.”, but when you look at the amount of available work they're doing, it doesn't really equate to the fact that they should be stressed? How do you monitor and measure that? 

Yeah, it's a really good question and it's a really tricky one. Then, that is obviously a huge benefit of time tracking. Actually, you can see this in black and white as long as the team are engaged in doing it accurately, of course. This is something you're concerned about. Time tracking is definitely the way to go. 

I guess to give a counter to that. If you're in a position where you think, I definitely don't want to be used in time tracking, we've tried it before. The team can't get on board with it. It's not an option for us. Think of a really powerful way to track the performance of the agency. Also to get a gauge if we are over or underutilised is to track your gross profit margin. Specifically tracking gross profit margin correctly and most powerfully.

Then, a lot of agencies will still not track gross profit in the most meaningful way.  To quickly explain why I think that is, a lot of agencies will purpose their staff costs. Their basic salaries, pensions in the overheads of the business. Well, actually your service-based businesses. The greatest cost to you delivering on a project or for a client is in the cost of that team. Therefore, I'm a big believer that you should be having those costs, including any freelancers that you're working with. 

Above your gross profit line in your direct costs or cost of goods sold as they're often referred to as well. If you can calculate it in that way, so still got all of your turnover income, take away any direct constitute you've got, including billable staff salaries and billable freelancers. That's going to give you a really meaningful gross profit figure. 

Then, crucially, you can take that gross profit figure. You can divide it by your turnover, and it will give you a margin. If you are struggling with that calculation, please reach out to me and give me a shout. I can help you with this really easily, but basically, that should kick out something around probably the 45% mark. The average in the U.K., to give you context, is 44%. 

Then, I think 50% is the place to really be able for however, those top-performing agencies those to go back to our earlier point around those that are the best in the world are providing something, a real niche in terms of who they provide it for. They will be up around the 60% plus mark. So, I think that can be a really good measure to be able to look at actually how my performing against other agencies. Am I overall underutilised? Am I overall underpricing, as well? That's an interesting start to look at. 

Yeah, that is so good. I mean, you've kind of answered my last question which is, what was the typical kind of margins that people should be working towards? I know quite a few of my clients are not at that number. There are more in the 35, even some at 30. We're always saying that the smart thing here is to get more efficient, not to increase your costs and increase your revenue without increasing your profit, your GP margin. 

Then, I think everyone should take stock of that. Also, it's interesting personally for me this conversation, because I'm working with a client on this at the moment and they work out their GP in a really strange way. They put their staff costs in one area and their freelance costs in another. They really should be in the same category, and they should be considered the same otherwise, you're getting a kind of false reading of what your costs are in in the agency. 

I just want to touch one last thing to kind of circle back to the point you were talking about, where you were saying to ask those two questions about, what can you be the best of the world? And, who can you do it for? It's a really big cheerleading message for having a clear niche, which is, I guess, sort of two of my big hobby horses are value-pricing and having a clear niche. 

Sometimes people are resistant about both of those. However, when you have a clear mission it becomes so much easier to understand who you are doing the work for. Understand why you can be better and get your GP margins up towards that 45-50% goal, which would be a great target to hit.

Yes, I completely agree. 

Do you have any other sort of final words of wisdom around this whole pricing topic? I know we could talk for hours, but I'm always conscious of trying to keep these to 30 minutes. Any other final words of wisdom for our listeners? 

Of course, I think as you alluded to earlier, Rob, my number one tip, if you took one thing away from this session, would be the encouragement to move towards offering three pricing options. The difference that has been made to clients is just immense. Again, I think to reiterate something I did mention earlier, pricing is an art, not a science. 

Then, as much as there are dozens of stats that we've got from various benchmarking reports over the years, actually don't get to obsess with the numbers and how you compared to an average. I think it's a nice gauge to have a look at that and go. Are we massively undercharging? Well, there's an encouragement to actually increase prices. Are we about right? Okay, great but that doesn't mean to sit back, that means okay.

It feels like we're good where we are, however, as, with every year, we should be reviewing this. We should be having these conversations with our clients. We should be looking at where there are opportunities to increase fees. Therefore, increased margins. 

Great. Good advice. I will make sure that we include the links to the benchmark reports in the show notes. Interestingly enough, in part two of this interview series, Rory and I are going to be talking about regional differences. I know that the weather agency has just started producing some reports about different regions, so we'll be sharing that in the next episode. Make sure that you look out for that.

Rory, thank you so much for joining me today. I know that our listeners will have got a tonne of useful insights from this because I have and I've made a bunch of notes of things I need to do. I really like that where you talk about bridging the gap on pricing because I'm going through the same thing myself. 

I've got some legacy clients that I haven't increased my prices for a long time. When I do, I'm sure they're going to say, “Rob, I waited for you to do this.” Even though, I run that fear of them, saying that they don't want to work with me. Then, we’re all there. I found that really useful. I know our listeners too. So, thanks so much for joining me today. 

Absolute pleasure. Thank you for having me, Rob.