Transparency is for Windows, Not Pricing Professional Services

by Tim Williams

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The last time you bought a new pair of shoes, did you first demand to know the costs that went into manufacturing them? It seems like a ridiculous question because buyers rarely (if ever) have visibility into the costs of the seller.

Except in the professional services business.

Most professional firms have been marching down the path of cost-based compensation so long that it seems normal to answer questions about salaries, overhead, and even profit margins, but it is decidedly not normal. In no other industry — outside of classically-defined commodities — does the seller disclose their costs in this manner to the buyer. Even in commodities, the prices of oil and coffee beans rise and fall based on factors that go far beyond the costs of production. Just check the difference in what you pay to fill up your gas tank from month to month.

Imagine asking your dry cleaner to supply detailed information about their costs of doing business — which you’ll then compare to the cost structures of other dry cleaners — before you’ll entrust them with your new Armani suit. What is it you really care about? The lowest-cost provider, or one with whom you can entrust the care of an expensive part of your wardrobe?

So what should be on the table in discussions about the business relationship between a marketer and its agency? The agency’s costs (hourly rates) or the value of the solutions it provides? 

Remember, you’re the seller

Whose job is it to change the dialogue? Sellers are in control of not only what they charge, but how they charge. Wiley professional buyers (think procurement) will always attempt to bring the conversation down to the lowest common denominator (the costs of your inputs) because that’s their job. But you have a job as well, and that’s to continually bring the conversation back to what is actually being purchased: the outputs and outcomes created by your firm. 

You do not have to be a hostage to either their process or their methods. You’re the seller, and you get to decide how you charge. The buyer can decide not to do business with you, but they don’t have the power or the right to tell you how you should price and sell your services. 

A long path leading in the wrong direction

Little by little, one year at a time, agencies and other professional firms have ceded power to the buyers of their services by providing more and more information about their cost structures. If it feels like professional buyers now hold all the cards, that’s because you have repeatedly shown them your hand. Not a winning poker strategy.

At some point along this margin-eroding continuum, professional buyers in our industry even starting writing the contracts. While this, too, undoubtedly seems normal to most agency managers, it’s notnormal. Envision purchasing a new X5 from your local BMW dealer, except that when consummating the transaction, you (the buyer) develop the contract and ask the dealer to sign. It’s not going to happen. 

The positive power of "no" 

The buyer-seller dynamics in most agency-client transactions are an aberration in the business world. It’s easy to argue that it’s procurement professionals who made it happen, but it’s the amateur sellers who allowed it. You are under no obligation to be “transparent” about your costs any more than Samsung is compelled to disclose their margin when you buy a new mobile phone. Procurement asks for this information because they can, and they will keep asking until they get a “no.” 

As Tom Kinnaird — former head of procurement for WPP — warns, “As long as procurement keeps getting a “yes,” they’ll keep asking.” When you have the self-confidence and self-respect to say “no” to filling in the spreadsheets that compare your costs with the “should cost” data clients say they’ve compiled from your competitors, you’ll put an end to your firm’s race to the bottom — and not a day before.