By Tim Williams
Answer this simple question: What is the value of three hours of your time spent on a client’s business? You can probably tell me what the cost of your time is (salary plus overhead), but assigning a value to the time is a much more subjective question.
There are many different kinds of value agencies create for their clients. When we try to bundle them all up in a single hourly rate (usually based on the seniority or pay scale of the person doing the work) we miss an opportunity to capture the compensation we deserve.
To simplify, there are three basic ways to look at value creation:
Inputs
Most agencies charge for inputs. Time is an input. Timesheets only capture what the agency puts into something, not what the client gets out of it. Charging for inputs represents the most rudimentary approach to getting paid. which is why so many service businesses default to this practice.
Outputs
Getting compensated for outputs is slightly better in the sense that at least the client is paying for a “deliverable” rather than the effort that went into creating it.
Outcomes
If outputs are the features, then outcomes are the benefits. Ultimately the buyer of professional services is paying for a result; or as economists would say, “utility.” We buy not the service itself, but the usefulness that comes as a result.
RIGHT IN YOUR OWN BACK YARD
Think of value creation this way. Imagine that you want to hire a yard care service to take care of the big, beautiful lawn that surrounds your house. In fact your lawn is so big you need help not just with the mowing, but trimming, fertilizing, aerating, and even watering. It’s a huge lawn.
There are three basic ways a yard care company could charge for this:
Yard Care Company A informs you that their rate is $50 per hour, and they’ll mow, trim, aerate, fertilize and water your lawn every time you request it, add up the hours it takes them, and present you with a bill at the end of every month. You, the customer, don’t like this approach very much, because you notice some weeks the lawn is attended to by Vinny, who is speedy and efficient, and some weeks by Manny, who is slow and plodding. A lawn mowed by Manny costs more than the same lawn mowed by Vinny. But the hours were spent and you get a bill nonetheless. In fact, you get a slightly different bill every month.
Yard Care Company B says they don’t charge by the hour, but rather they have a unit price for mowing, fertilizing and aerating a lawn your size. You like this better because you know in advance what it’s going to cost you and the price isn’t dependent on which person is doing the work.
Yard Care Company C takes yet a different approach. They explain that what they sell is a green, healthy lawn, and they will take complete responsibility to insure that your lawn is the most spectacular one on the block. For this outcome, they charge you a fixed price. You, the customer, decide this is by far the best arrangement because you don’t have to worry about which person is doing the work, how fast they are, notifying them when the grass gets too long, or any other logistics. You just pay for the “utility” produced by the yard care company; a green, clean lawn the entire summer.
Would you be willing to pay a slight premium for Yard Care Company C? My guess is that you would. This is because in the world of economics, outcomes are always worth more than outputs or inputs.
Could your firm make a living selling outcomes? Of course you could. It just requires that you set aside the “Scope of Work” question until you have a clear understanding of the “Scope of Value.” Armed with a clear understanding of the desired outcomes of the assignment, you can align the economic incentives of the agency with those of your client.
Does it take more effort than simply turning around and selling inputs? Of course it does. But if you want to get your firm off of the commoditized hourly rate treadmill, this is one of the most effective ways to do it.