/U/Money

Everything is great, except the money.

It’s not that the money isn’t flowing. It is. You’d just like more of it. I don’t blame you. I’d like more money flowing, too (hint, hint – boss!) But with an agency, there’s a danger to taking on more work to gain more profit – you risk overloading the team and needing to bring in new staff or freelancers to pick up the slack

In this article we look at ways to improve your agency’s revenue without simply taking on more clients: 

Tip 1: Upsell additional services

As a design agency, you often get requests for business card designs. This is a pretty standard job you can whip out quite quickly, and the client then takes the design file and gives it to the printer of their choice. Sweet as, right?

Well, why not take care of the printing for the client? If you’re putting through a lot of these jobs, you can probably strike a deal with a local printer. You get the files to them, check the quality, and give the client a completed job for a nice price. Everybody wins.

Many creative agencies will offer a range of additional services that cost them very little in terms of time or investment but return a decent margin. These include services like:

Printing: print costs for posters, business cards, flyers, etc. Social Media: setting up Facebook, Twitter, LinkedIn pages, and sometimes packages for updating them. Complimentary services: For example, a web design agency offering copywriting services (through a contractor). 

Tip 2: Market to a New Client Base

Maybe you don’t want new clients, but what you could think about doing is working toward replacing your current client base with clients who are willing to pay more.

The truth is, some businesses will only pay a certain amount for design work or marketing, but others will pay a higher rate. Your local small business marketplace might not be able to afford more than $150 for a business card design, but by focusing on larger companies, or a specific industry (for example, hotels or tech companies), you could charge more than double the rate.

If you are considering marketing to a different type of client, here are some things to consider:

Think about where you might find higher-paying clients. Where do they hang out? What type of projects are they offering? Do you need to tender for jobs? Adjust your marketing strategy according to your research.

Focusing on a specific niche or type of business could allow you to charge significantly more. Many agencies have had success marketing as specialists to one specific market; For example, NZ Agency 7 Group have a US office dedicated to creative services for dentists.

Working virtually allows you to work with clients all around the world. This means you can market to clients in a country / city where the average price for creative work is significantly higher.

Tip 3: Raise Your Rates

If you want a simple, no fuss, instant way to improve your agency’s bottom line, then you need to raise your rates. Yes, really.

If the thought of increasing rates has you shaking in your Jimmy Choos, and you’re suddenly feeling like you really wish you hadn’t had that quiche for breakfast, then it’s probably well past time you raised your rates. When was the last time you raised your fee? Are you accounting for inflation? For the increasing cost of doing business? Are you valuing your work as high as you should?

Many agencies are doing away with the cost-per-hour model altogether, instead offering a full cost for a specific package and practicing what we call “value pricing”. To learn more about how to price at your agency, sign up for Jason Blumer’s pricing webinar. Jason is a CTA for creative agencies and he has tons of advice about the best way to price for success.

Tip 4: Team up with other companies

One of the ways many agencies propel themselves up the chain is to partner with other companies to cross promote. For example, a friend of mine runs a local graphic design agency that teamed up with a property development firm. Now, the agency produces beautiful glossy brochures for various property development companies around the country for a premium fee.

Working in partnership with another firm can have a huge number of benefits. Mainly, you will instantly be doubling your professional network and marketing reach. Two firms offering complimentary services can often charge a premium for their combined packages; most clients are willing to pay more for convenience and quality.

Tip 5: Rob a Bank

Well, we didn’t say all the ideas would be legal, did we?

Disclaimer: We do not encourage nor condone bank robbery.

So is your agency ready to get serious about pricing and look for new ways to improve profits? There are plenty of ways to improve profits without expanding too big. Stay tuned for our upcoming agency pricing webinar with Jason Blumer of Businessology for more details.

One of the most difficult decisions for any business owner – professional service or otherwise – is how best to effectively price his or her product or service. And with good reason, too.

Price too low and risk undermining the brand or leaving money on the table. Price too high and chance alienating a profitable market segment.

Not to dismay, because we’ve compiled a list of its top 5 steps for a successful strategy by giving you everything you need to know about value-based pricing.

1. Price based upon your value, not your cost.

The first step is to realize that the value delivered to clients is not the same as the cost incurred or the hours worked. Sound pricing models don’t start with statements like, “well it takes me 3 hours to do this kind of tax return, so the price should be…”

Consumers don’t walk into supermarkets with consideration for how long the farmer spent harvesting the corn they’re about to buy. They don’t make careful decisions of laundry detergent based on the hours of R&D and volume of intellectual property the manufacturer logged. And they most certainly don’t ask for a timesheet from the butcher behind the meat counter before asking him to hand over their perfectly carved filet.

None of that matters. They’ve decided what they’re willing to pay for corn, detergent, and steak, and regardless of what it took to produce those items, that’s all they’re going to pay. Like it or not, that’s how clients think about the services they receive too.

As ridiculous as those examples sound, it’s exactly how we used to think about pricing.

Here’s how Adam Smith defined value in the Wealth of Nations:

“If among a nation of hunters … it usually costs twice the labour to kill a beaver which it costs to kill a deer, one beaver should naturally exchange for or be worth two deer.”

If Adam were going to re-write the Wealth of Nations today, it’s just as likely that he’d say something like this:

“If among a nation of consumers….it usually costs twice the labour to mine salt which it does to mine a diamond, one gram of salt should naturally exchange for or be worth one gram of diamond.” (Which, if you’re doing the conversion, is five carats).

For all of the things Adam Smith got right in the Wealth of Nations, his theory of price wasn’t one of them. Fortunately, a new way of thinking called Marginalism emerged in the 1870s, which flipped the traditional Labor Theory of Value on its head.

And what does Marginalism have to say about pricing? Ron Baker offers the most succinct explanation I’ve found, which is:

“The costs do not determine the price, let alone the value. It is precisely the opposite; that is, the price determines the costs that can be profitably invested in to make a product desirable for the customer, at an acceptable profit for the seller.”

In other words, the price is dictated by what the consumer is willing to pay. Period. And the costs to provide that good or service dictate how much or even whether the supplier provides them.

In accounting, we commonly refer to this concept as “value pricing,” but in the real world, we just call this a “market rate.”

You probably haven’t read a single article on pricing in the last year that didn’t mention value pricing – it’s become the rage in accounting and many professional services. The reality is value pricing isn’t new or novel; it’s just an alignment to the way mainstream economics has thought about pricing for the last 140 years.

2. All services are not created equal

At its core, value pricing asserts that price is a subjective, not objective, measure of value. Your price should reflect what your customer is willing to pay – or said differently, the benefit they perceive. But, do all customers perceive value the same way?

Depending on your industry, the answer is probably “no.”

Airline tickets fluctuate wildly depending on time of day, time of year, capacity of the airplane, and proximity to the travel date. Movie theaters charge different prices depending on the time of day and age of the ticket holder. And bars even occasionally charge different prices based on gender – ladies night, anyone?

These are not examples of companies maliciously extorting their consumers – they are companies that recognize different types of customers value their product or service differently. A daytime business traveler demands an airline ticket differently from a weekend vacationer. A moviegoer catching an afternoon show in the middle of the week often behaves differently from one on a Friday night date.

So, how do you know if you should charge different prices for similar services? Well, there are a few questions you should answer first:

1. Am I servicing different, identifiable markets?

2. Do those markets have different price elasticities. (In other words, are they more or less price sensitive)?

3. Can I keep the two groups separate?

For example, are individuals shopping for US tax services on April 1st as price sensitive as those shopping for services on January 1st? Probably not.

Do businesses subject to annual audits value precise GAAP financial statements in the same way that small, sole proprietorships do? Probably not.

If your business can answer each of the previous questions with “yes,” then you should strongly consider if and how to segment your market segments and price accordingly.

3. Don’t underprice yourself.

For a firm struggling with pricing, particularly a brand new firm, the initial reaction is often to underprice services. The typical thinking goes like this – “I’ll price myself low to start and make it easier to sell in the beginning, and then when I have the client experience to command a higher rate, I’ll raise my prices.”

Wrong. Don’t do it. And here’s scientific proof that you’re making it harder, not easier, to sell your services to your target client:

In behavioral economics, there’s a concept called Irrational Value Assessment. And it effectively states that consumers assign value to a product or service not by a rational or objective deduction of its true value, but rather by a completely irrational assessment based on how the product or service is framed in the moment.

Take for instance this experiment conducted by the Stanford Graduate School of Business. Members of the Stanford Wine Club were asked to participate in a ‘blind’ taste test of 5 wines, each with varying prices, and were asked to rate each wine. The twist, however, was that the experimenters didn’t provide 5 different types of wine – in many cases, they served the same wine multiples times with a different price.

The result? Participants consistently rated the wine with the higher price tag more favorably than the wine with the lower price tag – even though they were from the exact same bottle.

Your price is a signal of your value. The lower your price, the lower your perceived value.

4. Provide your customers with options…

When pricing services for your firm, consider providing a small array of options from which your client may choose. Why? It’s all about framing.

Consider an experiment with the Economist documented by behavioral economist Dan Ariely. To a series of experiment participants, the Economist offered two subscription packages:

Online only access to the publication for 12 months: $56 Online and print access for 12 months: $125 When asked to select between the two options, the participants overwhelmingly selected the cheaper option.

Next, the experimenters added a third alternative – a decoy:

Online only for 12 months: $56 Print only for 12 months: $125 (DECOY) Online and print for 12 months: $125 When a new set of participants were asked to select among the three options, something really interesting happened. No one selected the print only option and the resounding majority selected the third, more expensive option!

By adding a third option that no one wanted, the experimenters were able to compel participants to purchase the more expensive option simply by framing it as a better deal.

5. …but don’t provide too many options.

If a business provides its customers with too many options, they run the risk of paralyzing the customer with indecision.

Take for instance an experiment run by Sheena Iyengar, a professor of business at Columbia University. In a California grocery store, experimenters set up a display to sell a particular brand of jam. Periodically, they cycled between a display with 24 varieties of jam and one with 6 varieties of jam.

What they found was that while shoppers were more drawn to the large display (60% of passers by stopped at the large display vs. 40% at the small display), they were significantly more likely to purchase after having sampled from the small display.

30% of shoppers that stopped to sample from the display with 6 jam varieties made a jam purchase, while only 3% purchased after sampling from the display with 24 varieties!

Putting it into practice

While we’ve found these steps and thinking were helpful for us in our own service business, implementing each will look differently for each business.

If nothing else, the most important first step is to understand why your customers buy your product or service and what value (monetary or otherwise) they’re getting from it. If you have to ask, ask. They’ll tell you.

And when you’ve figured it out, have the courage to ask for what you’re worth (to them).

If you’ve found other pricing strategies effective in your business, tell us about them. We’d love to hear!

How often should you do your cash flow forecast, and how granular does it need to be?

One of the frequent requests we get at Float is for daily cash flow forecasting. A lot of businesses are interested in more granular forecasts to get better insights into how their available cash changes day by day. And with good reason: Even if you have a big invoice being paid to you in a couple of days, if you reach your overdraft limit today, you may still be in trouble. It’s worth keeping on top of your cash flow! We’ll take a look at how often you should do your forecasting, for some tips on what to do and when.

Daily

Small businesses, especially those who are going through difficult financial times may want to review their forecast on a daily basis. Being able to see how much is going out and coming in to your accounts every day can really help you manage your cash – ask for extended payment terms, chase up the right invoices or talk to your bank manager for an overdraft if you know you’re going to be short of cash for a couple of days.

Float is currently beta testing daily cash flow forecasting, letting you see your cash flow for the coming month(s) broken down by day. This is a great way to get detailed insights into your business cash flow, and you’ll have better control of what invoices are coming up, so you can tell any creditors that payment will be late, and maintain good relationships even in tough times. Want to try it out? Get in touch with us over at our contact us page.

Weekly

Even when your business is running smoothly, you might want to understand how you’re doing on a week-by-week basis. Being able to schedule in bigger purchases can be smart – so that you buy those new computer kits in a week where you don’t also pay out salaries, your VAT bill and pay for train tickets. Many also set weekly budgets, meaning that you can plan your spend and minimise risk. As with cash flow forecasting in general, it’s about being smart with your cash – which is why we are passionate about cash flow forecasting.

Monthly

Most businesses will do their accounts, budgets and forecasts on a monthly basis – even if you may still check in every week or even every day to see how things are changing. Float was initially built to do monthly cash flow forecasts, and we focus on up to 18 months into the future, as your accuracy will decrease the further into the future you move. With monthly forecasting, you get a good understanding of how your healthy your bank balance will be at the end of the month, but it’s still important to make sure you don’t hit any overdraft limits or run temporarily out of cash in the middle of the month.

Quarterly

If your company is in a great place with money, you have predictable and reliable income and fixed expenses that don’t exceed your receivables, then you probably have other things to spend your time on than cash flow – but don’t forget that business finances can change rapidly. You should probably still review your cash flow on a monthly basis, but a quarterly check-in with board and management with the high level projections per quarter can be a useful and time-efficient way to share financial insights without spending a lot of time on it. And why not use the quarterly cash flow forecast to inform spending decisions? A useful article on quarterly business health checks can be found here – don’t underestimate the value of cash flow forecasting.

Lastly, we should probably also mention yearly cash flow forecasting as well – although we would not recommend only reviewing your cash flow on a yearly basis! What can be quite useful is to review your cash flow for Year to Date against your projections, to see how you

In the end, it comes down to what situation your business is in, what insights you need to make the right decisions, and what information external parties like investors, banks or the HMRC. Most businesses who fail do so because they run out of money, and making sure you have a clear overview of when you might get close to running dry is a good way to ensure you can plan ahead. Check out these tips for dealing with creditors and HMRC when cash flow is tight, and use Float to inform your business strategy.

And remember, if you do frequent forecasting, you’ll probably be better off than if you use the forecasting stone.