Creative Production

Agency Pricing: Why effective scoping and taxonomy are essential in delivering digital transformation and profit for agencies

Who sets pricing?

Pricing is key to business success so why is it not the responsibility of the CEO in most advertising and marketing services agencies?

It’s a common misconception that a scope of work tool should be categorised as a back-office pricing system belonging to the finance department. Scopes and invoices are after all, close relations insofar as their commercial function. But scopes of work are so much more than just prices on a page.

When you begin building a scope of work or a fee proposal, you shouldn’t be starting with roles and hours. The focus needs to be on the outcome – the deliverable – the thing you’re doing. It’s about describing the work consistently and clearly to your client, in line with ROI and KPI objectives.

Fundamentally, agencies don’t just need to be better at pricing; they need to be better at selling what they do. It’s more than just finance; it’s business management.

Pricing is a business-critical function

As a business that supports agencies we recognised the need to transform the way scopes of work are created, presented and treated as a business-critical function. We knew that agencies needed to digitise a traditionally manual process, turning ambiguity into clarity, standardisation and clear service level agreements (SLAs). We recognised the need for a solution, so to help agencies deliver true digital transformation we developed SCOPE.

SCOPE is first and foremost designed to change the antiquated agency process of estimating based on hours and roles, instead providing a structure process for selling things. We didn’t develop SCOPE to just replace spreadsheets, it enables true digital transformation.

We began tackling the conundrum of better scoping because we spent ten years building a market-leading time-tracking tool – Traffic Live. What we learned from building, implementing and supporting that system within around 1,000 agencies is that once you’ve sold the work, time sheets don’t matter at all. You can’t change anything just by reporting accurately on time spent.

We know now that if you price right in the first place, you don’t need to rely on a timekeeping system to try and stop profits being whittled away. To transform your agency and optimise profits, you need to be better at building scopes of work and job proposals. Just listing roles and hours doesn’t help you to focus on what’s required to achieve an outcome. You need to outline the deliverable and the tasks to be completed in such a way that your studio can follow the plan and your client can understand and value what they’ll receive.

Along with its obsession with hours and roles, the marketing industry has another commercial quirk; for some reason, pricing in agencies falls under the jurisdiction of the CFO. Logical? Maybe – but in almost every other industry, pricing is the responsibility of the CEO. And in our opinion, this is how it should be. Pricing is after all, one of the keys to all business success and this strategy should ultimately be the responsibility of whoever holds the top job.

Designing a new pricing process

The reason we find ourselves in 2021 with a dysfunctional, legacy compensation model is rooted in the formative years of the creative sector some 30 or 40 years ago.

Originally, the advertising and marketing industry never worried about charging separately for creative services because fees were based on commissions. Billings were all that mattered.

The evolution came when agencies needed to start charging for creative work and the cost-plus model was born. Because salaries were the formula that fees would be based on, the task was relegated to the back office where the CFO held all the relevant data. Instead of concerning themselves with the work to be delivered, finance opted for a remuneration model that pitched creative talent as a commodity, selling hours and FTEs. Take the cost of 40% of Tom’s time to the agency, add a mark-up and then present that figure to the client. Simple, yes. Clever, no. Value-defining, definitely not.

Calling a spade a spade, it’s lazy. I know that’s controversial, but I’ll own it. In defense of those early creative teams, they never really had to worry about pricing, but the world has changed and now agency pricing is more important and competitive than ever. Those who now lead the industry are the same individuals who grew up with a culture of lazy pricing. There’s a big challenge ahead, not only in adapting to better pricing solutions, but changing the deep-rooted mind-sets of the old guard.

For agencies ready to break out of The Matrix, here’s the red pill: You need to productise. Develop and categorise a menu of things that you ‘do’. You need a common language – or taxonomy – for your capabilities and how you describe them so that everyone in your business can consistently talk about and sell the work that you do in terms of output.

As much as anything, it’s what your clients want. As early as the year 2000, Coca Cola were speaking about buying marketing deliverables at procurement conferences and we’ve seen a steady stream of household names following suit. When brands and clients are asking to buy marketing services this way, why aren’t agencies accommodating this?

Because it’s hard to do. It takes expertise, time and a very great deal of industry data to build a full, thorough and accurate taxonomy of creative and marketing services. We know because we’ve done it.

Start by creating a taxonomy

We built SCOPE around a comprehensive taxonomy, based on real, live, anonymised data from more than nine million creative jobs. Industry leaders agree that there need to be standards around buying and selling marketing services, and here it is – a full, accurate library of deliverables to be used by both agencies and brands.

There’s no denying that the industry is recognising that things need to change and the discussion is gaining some traction – but in our opinion, the concept of taxonomy should have been embraced years ago.

Make 2021 the year that you address what’s broken and fix it by putting deliverables, standardisation and a clear taxonomy at the heart of your business priorities.

About the author

Tracey Shirtcliff is founder and CEO of The Virtu Group. Creator of the award-winning SCOPE online app.