Value-Based Company Pricing
Picking up where we left off earlier in our attempt to crack the myth that there’s a unilateral approach to pricing for event businesses, I’d like to spend this post diving into the contribution- or value-based business.
Let’s start by unpacking what it means to have a company that bases its services on a contribution or value. By and large, these kinds of businesses do not sell either a product or service. They offer something much more valuable: a reliable return on investment for the creativity and expertise they bring to the event, in which they directly impact the creative experience or financial performance for the client.
To be clear, all companies contribute some kind of value to whatever project they work on. However, only a handful of them contribute primarily in a way that is almost entirely based on what they have in their heads and how good they are at applying it to the client’s needs. Outside of the event world, for instance, consultants, doctors, and lawyers are great examples of professionals who could and should charge a fee based on the value they contribute to the successful outcome for their clients. While some attorneys charge an hourly rate for one client, they often charge a percentage of the total amount won in the case if they come out winners (and, importantly, they earn zero dollars if they end up losing the case, because no real value was offered by the attorney in order to create a successful outcome).
Interestingly, find an attorney who works by the hour, and you will find one that is incented to work more slowly, because that’s how they make their money. They are paid more for doing more work, and you, as the client, suffer, because your costs go up and they take longer to get the work done. I don’t think any reputable professional is going to do anything nefarious, it’s just that they aren’t motivated to work faster than slower.
Now, say this same attorney was compensated as a percentage of the winnings for the big case you brought her. She’s going to get paid if she/you win, not for how long she takes to accomplish the victory. This means she’s going to do her absolute best to win your case, and, for her own benefit in being able to take on more cases at the same time, she’s going to work as fast as possible on your case to get it won and done, and move on the next.
Let’s switch from the very logical to the very creative by exploring how artists might charge for their services. Some painters, for example, are paid by the square inches of canvas they create for their clients. The foundation for this way to compute costs is really based on the amount of product that’s used and then adding a mark-up that makes sense. Others charge for the amount of time they take for the piece they create. This can be done either through an hourly computation put into the price of the piece, or by charging their purchaser a stipend to create the art. Either way, the primary driver is the amount of time they spend on the project.
The problem with both of these approaches (product-based and time-based) is that there’s no place in the pricing for their subjective talent in doing what they can do and others cannot. The commodity is not their time (which everyone has) or the paint (which everyone can buy), it’s what they can do with their minds that others cannot.
Applying the artist as a contributor with a subjective value to the event world, we quickly see the comparisons to party designer. These creative people should be charging a fee for the work they offer the project they participate in. The design for the party is literally not happening unless they create it out of thin air. And it’s not just putting together a furniture collection or saying a bunch of floral should go together in a container on a table, just as Picasso wasn’t someone who took paint and brushed it onto canvas the same as others before him. If you are an event designer, you should be paid for the value you add to the experience you’re creating.
I believe event planners fit into this category of value-based contributor, as well, but they do so in a different way than designers. Have you ever wondered why some event planners call themselves consultants? It’s because they are doing more than just planning their clients’ events. They are contributing in real ways to the objective outcome of the event in their guidance on vendor selection and budgeting. Not to take away anything from day-of coordinators, but planning a $1,000,000 wedding or milestone anniversary is very immersive and carries a lot of responsibility not seen with day-of coordinating. In the case of luxury events, there are actual objective and subjective values provided by the event consultants, and these contributions can be measured.
Currently a big trend in the luxury event planning world is to charge a percentage on top of the overall spend for the event and make that your planning fee. As the planner, you simply tack on a fee of 14% or 16% or whatever percent to the total amount the party costs and that’s your fee.
While I can see that some of the logic of this pricing approach matches the value-based contribution that a lawyer offers to winning her clients case, it’s really very different. In the case of the lawyer, she makes money as a percentage of what she earns for her client. The more she wins, the more she makes, and so what is good for the client is good for the attorney.
The motivator for the commission-based planner is entirely against this same principle, because the planner is charging a percentage on what he spends on behalf of the client. The more money he spends for the event, the more money he makes as the planner. This is entirely antithetical to the principles of the value-based contribution: to provide expertise to make, among other things, a tangible impact in saving the client money by offering advice and guidance in creating a wonderful event experience while not spending in unneeded areas. While wealthy clients don’t prioritize saving money over quality of service/product, they still don’t like to spend money unnecessarily, just like everyone else.
When an event planner or designer charges a commission on the amount spent, it’s just another way of saying they are going to charge based on the materials used to produce the event. This takes away the value of what they are contributing and simply rewards them for spending the client’s money. Sure, it’s a great way to ensure that the planner or designer gets a proportionate contribution for the size of the party, but is it in the best interest of the client?
If the pricing model does not work out in the clients’ best interest it is never a good pricing model. Period. Charging more for spending more money compounds the efforts in negative ways for the client.
So how to charge, then, for the value-based contribution? Put a price to the subjective value and the objective value of what you contribute to the party. If you’re an event designer, you’ve got to put a price on the creativity you bring to the event experience. What do you do that no one else can, and what is that worth? And, yes, the value you bring to a bigger party necessitates a bigger charge for you to the client. Not all events are created equally with equal values to the client.
If you’re a planner/consultant, you’ve got to put a price on the expertise you bring to the event planning, including the money you can save, vendors you can collaborate with, trauma you can prevent and stress you can avoid. You should start with a list of agreed-upon objectives for what a good outcome looks like when you’re talking with your client in the early stages. Your job is to succeed in reaching these outcomes, and, if you do, you should make a fair proportion of what you save against the budget or create in value.
When you come up with what you think your value is worth for a particular kind of contribution, check the pricing against a competitive set for your specialty to make sure you’re not way out of line. All things normal, you should move forward with a fixed fee for a fixed scope of work. Each party is different and so each value is different, as well. Don’t get too caught up in one price, or a minimum price. You charge what you need to for that particular project based on what you give to the outcomes. You can even use this as a selling point during the bidding process, saying you charge a share of what you save or create in value for your client. It should go a long way, especially if you’re selling against people who are rewarding themselves for spending more of the client’s money or billing by the hour.
Obviously, there’s a lot more to dig in on when it comes to pricing for value-based contributions. And that’s the whole point: The situation is not simple, so the solution cannot be simple either. Like most things in your business, pricing is complex and nuanced – and really, really important to get right.
We’ll spend some more time in the coming weeks discussing it. Now that you know the criteria for finding out what kind of business you have, we can start to pull out some profiles or characteristics of each kind and build on these for ways to structure your pricing. Stay tuned for more!