Using Value Based Pricing for Creative Services

Posted in topics: Leadership

What’s the value or price of a good idea? Can you put a price on creativity? At Fiscally, the topic comes up often: how do you price creativity?

Often, we find that creatives don’t love to fuss with the numbers and risk missing the forest for the trees. There are some things you can’t put a price on, like home, or freedom. The Beatles were right when they sang “Can’t Buy Me Love.” 

People also say you can’t put a value or price on creativity. We disagree. You can put a value or price on creativity without sacrificing your vision, spirit, or spark. You just need the right pricing strategy, and we believe it’s value-based pricing.  

The following are strategies that marketing creatives can use to price their work and help their clients understand how their particular business works. Creative industries need to turn a profit, and you, as a creator, need to create. Getting your head around some numbers and strategies like value-based pricing can help grow your business and significantly impact your bottom line. It’s not scary, we promise. 

This article builds on pricing strategies to help marketers, advertisers, graphic designers, architects, and all creative service professionals to better price their creative products. 

This article will cover:

  1. Traditional pricing in the advertising industry
  2. Three common strategies for pricing creativity
    1. The input approach
    2. The output approach
    3. The outcome approach

Traditional Pricing in the Advertising Industry

In commission-based pricing models, advertising agencies receive a 15% commission on the client’s total media spend. The creative and work expertise was free; the media costs determined what an agency would charge. If you are unfamiliar with the commission-based approach to pricing creativity, we’ll provide a little context. 

It all started way back in the late 1800s in Philadelphia with N.W. Ayer & Son. The company was one of the first advertising firms and would charge clients a 15% commission on the media buy and provide creative for free as part of the package. 

The strength of commission pricing is that it is very lucrative. If a media buy was $100,000, the agency received $15,000 in fees. However, if a media buy for the same creative is $10 million, the agency fees would total $1.5 million for no extra work.

The commission model became the standard up until the 1990s. Traditional print and broadcast media space was expensive (and still is). Not to mention digital advertising was not really part of the equation.

The commission-based system led to occasional misalignment of agency and client goals. Agencies could provide creative solutions to a client’s problem – that is part of what the client pays for. Then the agency needs to get the message out using optimal media channels – this is where the commission model gets tricky. Agencies could opt for more expensive media, as the commission would be greater. Given the multitude of new media options and pricing options, the industry has come up with new models for determining the price of creativity.

The Three Most Common Pricing Strategies for Creative Firms

There is more than one way to shine a penny, and there is no perfect method for pricing creativity. In an industry built on creativity, it’s surprising how little creativity we see when it comes to pricing. The following models are great strategies to apply to your creative business. 

The Input Approach to Pricing Creativity

The Input Driven Approach – or the time and materials approach – is all about hours, materials, and resources. These are all inputs, thus the name.  In other words, TIME = VALUE. You would estimate the number of hours it might take to complete a project and convert it to a price. This price will include a standard number of revisions, after which you could start charging more. The estimate would consist of a combination of staff costs, overhead rates, and expected profit. Add these costs up, multiply by the number of hours, and bam: value… right?

The input method has its flaws. This system rewards time-consuming tasks and not necessarily great ideas. It suggests that your skillset, experience, expertise, and knowledge are not as important as time spent working on a project. Possibly creating a disincentive to be effective. This is a complete misalignment of interests between the firm and the client. It also does not consider the market value for the service you are delivering. 

For a lot of your work, at some point, it doesn’t matter how long it takes to do.  The market will set a price. Let’s look at a couple of examples. 

Pricing Creativity for Nike Swoosh

The Nike Swoosh: A cultural icon for $35.00

The iconic Nike “Swoosh” logo was created by a graphic design student, Carolyn Davis, in 1971. She was paid a rate of $2/hour for a total of $35. Does that seem like adequate compensation for a timeless design that has remained unchanged for decades? Sure, it didn’t take long – but sometimes brilliant ideas happen fast. You can’t charge an hourly rate for a eureka! moment.

Pablo Picasso

There is a story of a woman, let’s call her Jill, sitting in a café. Jill surveys the café as she sips her hot coffee, and who does she see from across the room? Pablo Picasso. Jill, an art lover, approaches Picasso and asks him to sketch something on a scrap of paper and that she’ll pay for whatever he wants. In a flurry of artistic vigor, Picasso whips up a sketch. He says, “That will be $10,000.” Shocked, Jill says, “But that only took you thirty seconds!” Picasso responds with, “No, it took me forty years to do that.” He exits the café with his sketch in hand.

The input approach and fee system’s utility lends itself well to execution-type work that is more likely to be commoditized in the market (think banner ads, brochures, or studio work). Though popular and widely used, it does not always capture the real value behind creativity and all the work that goes into the process. 

The Output Approach to Pricing Creativity

The output-driven approach to pricing is all about deliverables. Generally, this would come from a discussion of the creative brief and expectations of the client. For example, a client requests a website redesign. After negotiation, you agree on $60,000 for a new site and a handful of other deliverables. Unless the project scope changes, the price is the price, regardless of hours worked or resources consumed. In this approach, the market generally influences the price. You charge the fee the market will bear.

Restaurants

Let’s look at a restaurant server and a restaurant manager. The server has an hourly wage – often lower than minimum wage – but they make tips. When it’s busy, a server can make some bank (though it is arduous work). When it is slow, the server makes fewer tips. The manager, however, is often salaried, and they frequently do not collect tips. Often restaurant managers work crazy hours and are paid the same regardless of certain perks and responsibilities.

The server represents the input method: an agreed-upon hourly rate with opportunities to bring in some extra cash.

The manager represents the output method: The manager gets paid the same regardless of how busy the restaurant is, how many staff are on shift, or how experienced each team member is.

The Outcome-Driven Approach to Pricing Creativity

The Outcome-driven approach is about outcomes and results. This method is all about the value you create.

Value: This is less about inputs and deliverables and more about the value you create for your client’s business. The stronger your positioning and the more differentiated your offering, the more opportunities you’ll have to create greater value.

Blair Enns went so far as to say that value-based pricing is the most valuable skill in business.

Pepsi

In 2008 — Pepsi underwent a rebranding, most notably with a fresh new logo. The Arnell Group – responsible for the design – charged a whopping $1 million. The Design proposal (Logo Design Development) includes extensive brand analysis and art/design theories dating back hundreds of years. Arnell and Pepsi knew the value of an impactful logo.  

What does the Pepsi example say about the Nike example?

Both are global brands, household names, and titans of industry. They were designed decades apart, and their designers compensated very differently. Is the Nike Swoosh more or less valuable than the Pepsi Globe? 

Value-based pricing can be risky, but the greater the risk, the greater the reward. The outcome method can also extend to performance compensation. Creative firms may choose to put partial or full compensation on the line contingent on the work achieving specific goals. That could include an increase in online traffic, an increase in brand awareness, or sales growth. 

Coca-Cola

In 2009 — Coca-Cola adopted a new pricing method when working with agencies (AdAge). Coke would only pay agencies the costs to produce the creative. But to turn a profit, agencies must meet specific performance goals outlined in Coke’s research and brief. The research goals can help drive innovative ideas and work that performs, but occasionally, it can do the opposite. 

Coca-Cola Co. is trying to start an industry-wide movement toward a ‘value based pricing’ compensation model like one it’s adopted that promises agencies nothing more than recouped costs if they don’t perform — but profit markups as high as 30% if their work hits top targets.” (Mullman, 2009)

Perhaps reconsider the restaurant example we mentioned earlier. We noted that the server represents the input method, but we can also think of the server as representing the outcome method. If the server provides an overall positive experience, they receive a gratuity at the customer’s discretion (or the client’s). If the customer gets a higher value than expected, the server gets more compensation.

Conclusion

Let’s think about the art world. How do you think Jackson Pollock and art dealers landed on a price for a given work? In 2006 — the painting “No. 5, 1948” sold for $140 million (per the New York Times). Surely that price can’t be attributed to the value appreciation of the materials used.

We won’t even begin to imagine what Pollock’s hourly rate may have been.

Maybe Pollock created the painting on commission, and the $140 million price tag just makes up for inflation. Probably not.

How do we understand the pricing of a famous painting, a logo design, or a new website? The most useful way to look at pricing creativity is to look at value. Value-based pricing is more nuanced and takes work, but it makes the most sense (or cents? Please don’t mind this irresistible pun.)). 

At Fiscally — we get it: value-based pricing is difficult and even uncomfortable for some. We leverage decades of experience in creative industries just like yours to support you in finding the best pricing strategy for your business to maximize your profits.

No matter your pricing strategy, there are numerous ways to look at the situation and boost your business growth.

Even small improvements to your pricing will pay big dividends over time. But, whatever your pricing strategy, your goal should be to create a firm where the focus is on the results that your firm delivers.

Take some risks. Often, they pay off.

More Insights on Value Based Pricing

Pricing Strategies for Creatives – A List Apart

Pricing Your Creative Services – Communication Arts 

Value Base Pricing – An Interview with Blair Enns