After years of experience in dealing with entrepreneurs and their businesses, there are a few myths that Polly Riggs, Content Manager at Inhaus would like to debunk about branding.
There are different ways of pricing branding projects. In today’s landscape, agencies and freelancers price according to 3 possible methods:
- Hourly billing: Price of the project is based on the input of time.
- Fixed price: Price of the project is based on a set of deliverables.
- Value-based pricing: Price of the project is based on the potential value it will yield for the business.
Each model has its benefits and problems. A lot of freelancers bill hourly, partly because they can easily work for other agencies and companies as a temporary part of the team. This is changing fast because freelancers are quickly shifting towards ‘fixed’ or ‘value-based’ models, as agencies usually do— us included.
The biggest advantage of working with value-based pricing is that the project is tied to the business outcomes, not the deliverables. Meaning you keep going until the desired business result is achieved, not until the time is up. This might mean bigger budgets, but also a lot more dedication from the agency you hired and a common understanding of the effective goals of the project.
It may sound like ‘value-based’ pricing is just a way to ‘charge more money’, but if there are some clear advantages for both client and agency:
- The relation is based on trust and common goals (in hourly billing, the relationship is that of an order taker/giver);
- If something is done faster, everyone is happy (in hourly billing, we need to ‘hide’ quick wins);
- Because the budget is tied to the outcome, the agency in question will challenge your thinking (in hourly billing, they just want to perform the hours);
- The agency will not produce useless deliverables based on a predefined scope (in the fixed price model, client and agency define a set of deliverables together, regardless of the right business outcome).
Let’s take a look at some factors to consider when it comes to defining a budget for your investment.
Below are a few important factors to keep in account when deciding on the investment you want to make. We use the ‘value-based’ pricing model as a way to calculate the budget. This is not only a handy way to calculate prices for the creative studio, but also for you to decide on the importance of a project.
Risk: What if it goes wrong?
As a business owner, you’re constantly weighing up different options and tend to choose for the most risk-averse option. These are some of the questions that will certainly pop into your mind when considering different agencies. What is the amount of risk? What is the size of the company? How much is depending on this project to go right? Are we losing sales fast? Are we burning through resources but without results? The amount of risk should be an important factor in deciding who to go to bed with and how much to invest.
Think about this way. If you have small flu, you’ll probably visit any doctor in your area. If you have brain cancer, on the other hand, you’ll want to go to the best goddamn specialist there is. But what does this mean in terms of budget?
How much do we need to invest?
– If there is a low risk, you’ll want to invest 1 to 3% of the possible cost to your company.
– If the stakes are high, you’ll want to invest 5 to 10% of the possible cost to your company.
If we screw up this new packaging on our main product, we might have a drop in sales of 30%, worth €500.000. This is a high risk with a lot at stake, so you’ll want to do the utmost to make sure that you don’t screw up.
Low-risk option: €4000 to €12.000: Usually freelancers, starting studios or cheaper options such as Fiver, Upwork, low-cost labor countries,…
High-risk option: €25.000 to €50.000: hire a professional studio or agency
Value: What if we do this right?
What is the possible value of this project? What is the market potential of doing this right? How will our company change?
How much do we need to invest?
– Low option: Even if we do it right, chances are very unlikely that this will work: 1 to 3% of the possible gain to your company.
– Medium option: It’s likely to happen, but external factors will decide : 3 to 5% of the possible gain to your company.
– High option: It’s almost certainly going to happen if we do this right: 5 to 10% of the possible gain to your company.
If we launch this new campaign, we will be able to speak to this new market and thus generate extra revenue of €1.500.000 in the first year.
Low option: €15.000 to €45.000: Usually freelancers, starting studios or cheaper options such as Fiver, Upwork, low-cost labor countries,…
High option: €75.000 to €150.000: hire a professional studio or agency.
Opportunity cost: What if we don’t?
Looking at the marketplace, there may be an opportunity that is hard to miss. But who will jump into that? What is the missed cost if we decide not to take the opportunity but our competitors do?
What to invest:
Example: If we do not capitalize on this opportunity, there is a high chance this competitor will take a market share worth 3% of the total market share. That means €1.200.000 lost opportunity cost in the first year.
Option 1: It’s highly unlikely competitors will act on this or the chance of them succeeding is very low. Don’t over-invest in an opportunity, you can’t do it all, you can’t spread yourself too thinly. Think about testing out different techniques costing 1% of the possible value: Usually freelancers, starting studios or cheaper options such as Fiver, Upwork, low-cost labor countries,…
Option 2: We already see a competitor’s moving and we have seen similar moves in other industries. The time to act is now and we can still have the upper hand if we do things the right way.
Budget (value-based): 5 to 10% or in this case €60.000 to €120.000: hire a professional studio or agency.
Time: How fast/good do you want it?
You can’t have fast, cheap and good. Experienced people will help you in solving a problem faster, but it will cost you. Also, the more experienced they are, the less time you will need to invest. And as you may know, your time is worth a lot of money.
Example: We have a huge opportunity for our company, but we need a quality solution and needs to be done quickly, otherwise we lose the opportunity. If we do this right, it could yield us €400.000 worth in revenue.
You’ll find plenty of ‘cheap’ options saying they will do it fast, but again, keep in account the business opportunity and risks involved. If we execute this wrongly, what will we lose? Or what won’t we gain?
It’s okay to try out things, quick and dirty. Heck, I’ve told a lot of startups to just ‘generate a logo’ with Wix logo maker and get started. Why? Because risk/opportunity is fairly low when starting out and trying new business ideas.