I can tell you from more than six years of experimenting with this model, value-based pricing is about testing and revising. You will get some pricing very wrong, and you will get burned a time or two, but as long as you have the right tracking and reporting systems in place, you can quickly adjust and move on. It is important to note that the value-based model does not eliminate the need for timesheets. Accurate time tracking actually becomes more essential in order to monitor efficiency and productivity, evaluate employee performance, produce activity reports, and evolve pricing. We will talk more about time-tracking systems and software.
Hourly Revenue Target (HRT)
How much revenue does the agency need to generate per hour of client work to achieve profit goals? For solo practitioners, the HRT will probably be similar to your hourly rate, but, for agencies with multiple employees, you will need to consider additional variables such as expenses, growth goals, payroll, and target profit margins.
In essence, the HRT is similar to a flat rate in the traditional billable-hour model, but now it is only one of seven factors taken into consideration when determining service prices. My best advice is to talk with your accountant or financial advisors to determine your agency’s HRT, but the following is a very simplified way to look at calculating it using the industry-standard benchmark of revenue per employee.
We will assume an agency has five full-time professionals with varying client-service hour capacities. For example, the CEO may be forecasted for 50 hours per month, whereas the assistant account executive is targeted for 140 hours per month. The agency’s annual revenue per employee goal is $120,000, which translates into $600,000.
Are there any costs associated with the production and delivery that will be built into the price? This may include fees from partner agencies for services such as graphic design, video production and editing, or licensing fees. I suggest considering these costs when determining your HRT. For example, you may decide that, on average, it takes your agency eight hours to write a 1,000-word sales sheet, and your HRT is $105.
Your price would be $840, but that does not take graphic design fees into account. So you contact your preferred designer and negotiate a fixed cost of $500 on design. Now you have a price of $1,340, which you can leave as is, or round up to $1,400 to account for markup or to give yourself a little flexibility on your time estimate. Is a 1,000-word, professionally designed sales sheet worth $1,400? That question leads us to our next factor, perceived value.
What is the fair market value What are clients willing to pay for the service? In many cases, this is the most important factor to consider. By drawing on your own experience and researching what other agencies are charging, you can often settle on pricing that fits market demands.
Revisiting the example sales sheet, you may determine that $1,400 is too low. You have been charging clients $1,800 to $2,200 for the same job for the last two years and have had nothing but rave reviews.