How to Do Value Billing with Retainers
My second favorite chapter in Profit First for Creatives is Chapter 4, Unlock Your Value with Pricing. My favorite is Chapter 1. Why value pricing? Because it is THE most powerful tool to increase profit in your business. Many creative industries work with retainers. So how does that work with value pricing?
What is a Retainer?
I’ve had several people ask me in presentations on the subject, how do you use value pricing when you use retainer agreements? The simple answer is there is no difference, but the execution may look a little different. The concept of basing your pricing on the value perceived by the customer doesn’t change at all.
I see different types of arrangements with retainers. Oxford defines a retainer as “a fee paid in advance to someone in order to secure or keep their services when required.” The traditional method is that you bill a set amount per month, and then you work the balance down based upon your time. As you can see, this is NOT value pricing. It’s just a payment arrangement. You’re still billing for your time and expenses.
The alternative is to use the retainer as a fixed price for a menu of services. In that case, I would say it is no longer a retainer, but fixed billing. Is fixed billing consistent with value pricing? Yes! At this point I think the word retainer is misleading. The customer is not pre-paying for work. You are providing a set list of services or outcomes for a price.
Value Pricing with Retainers
When companies try to move from individual services based upon time and cost to a fixed price menu of services, they often stumble with the pricing. “How can we set a price when we don’t know how much time it is going to take us?”
It’s actually easier than you think, and it works whether you’re doing it with one service or a group of services. Ideally you have some data to look back on to determine how much costs and time you have in delivering a specific service. Take the average and set that as your minimum price. You can certainly go higher, but no lower. You will make far more money on the easier clients than you will lose on the occasional more complicated ones.
Let me use Core as an example. Most accountant’s pricing on tax return pricing is essentially alchemy. There is no rhyme or reason for it. Some may use a price per form to calculate the price of tax return preparation. Others use the actual amount of time it takes multiplied by an hourly rate. Either way it’s awful.
We set our prices based upon the complexity of the returns and have three different price points. We took a deep dive into the type of tax return we prepared, and figured out what the average fee was based upon the complexity and then we set those as the new price points. Some of the returns will be “overpriced” and some will be “underpriced” but overall, our prices are now simplified which makes life easier for everyone.
Now technically this isn’t value pricing, it’s just simplification, but you can use the process to work on your services to give you a starting point for value pricing. Say you are a marketing agency that provides a bundled service that includes SEO (search engine optimization), social media management, and web design. You look at the complexity of the work you have already done and the amounts you’ve charged. Start by charging 150% of your average. You may have to put some guardrails around the service, by excluding certain things or limiting others (e.g. 10 pages on a website).
But now you’ve raised your average fee by 50%!
If you want to take it to the next level, start looking at what your customers’ real value is for these services. You will have to dig deep into their marketing plan (they do have one, right?) and understand the growth plans, their total cost of customer acquisition, and their return on that investment. Odds are that you can raise your prices even more!