I was halfway through writing another post on an entirely different topic when, in typical fashion, I was distracted by another article discussing the Hertz / Accenture debacle. Since this is a relatively recent story, there are still many people publishing opinions about the case itself and the state of similar digital projects that involve a design and development component. Reading comments from agency professionals like myself made me see just how divergent opinion is about the actual value of the services we provide. Which got me thinking – just what IS the difference between a lower-tiered project and high-priced, enterprise agency offerings? Agency owners who specialize in small businesses are bewildered at what is spent on the high-end of the spectrum, while those with backgrounds in an enterprise setting have no idea how to be scrappy. And at the end of the day, they are all competing in the same exact medium. Isn’t that crazy?
So, what are some factors that differentiate price points? Well, I’ve published a few articles on the topic in the past here and here. However, I never quite approached it this way. Let’s discuss what really goes into these projects and why pricing diverges so far from one corporate world to another.
Insight is More Valuable Than Production
This is my first thought – the value of insight is much higher than that of production. This means that agencies who can provide guaranteed results versus just deliverables can always capture a premium. What does that look like, exactly? Here are some examples:
- Design of a website that increases conversions by x%.
- Architecture of software that can realize cost savings for a company by x%.
- Optimization of infrastructure to save y% on hosting and bandwidth.
- Design of a logo and branding treatment for a product where sales and performance are directly correlated.
The New Design Frontier report by Invision spoke to the types of ways that companies embrace design. And, one of the areas studied was the gap between “doing” and “achieving.” This is pretty much the same concept as what I am detailing there. Insight is achieving. Production is doing. When you provide value to the client, you are giving insight. Otherwise, you are merely producing deliverables. The difference between the $250,000 web design and the $25,000 web design is that the former will be able to justify the expense via real results, while the latter will be judged by more fundamental factors, such as the speed of production, and less tangible determinants such as “clean” or “modern”.
This isn’t to say that all companies really need insight. At the end of the day, the majority of companies are just fine looking competitive in their industry with some level of design maturity and confidence instilled in their users. However, for companies that are looking to optimize their experience and drive conversions, sales, and other results, insight is essential. And in this case, you can see ridiculous pricing for agency services. The most astute agencies will value price the solution to the problem, thus becoming partners in the project. On the lower end, since agencies aren’t accepting any risk for solving a problem but instead just delivering materials, the premium is much lower. Indeed, providing insight takes more time, and should come at a premium, but above that, the pricing increases are based on the agency assuming some risk in the proceedings, as well.
Credible Budgets are Relative to Client Scale
This may sound stupid, but companies that earn a lot need to spend a lot. You can’t go to a company with 9 or 10 figures in revenue and even propose a $25,000 solution. They will think you don’t know what you are doing. Case in point, we recently had come across a client who had a six-figure budget for a 3-template microsite. They could have done the project for 80% less, but, that’s what they expected to spend. So, agencies oblige and come in bidding with all sorts of other tertiary services and inflated hourly rates. After all, how can something so simple cost so much anyway? Yet we see this all the time. I have some friends in the pharmaceutical agency business who tell me stories of $250,000 microsites. How can that be? Well, because drug manufacturers assume their situations are so complex that they should be paying outlandish amounts to specialist firms when in reality, their situation isn’t so advanced that such a premium is warranted. On this note, I plan to write a post about how niched firms are in some cases fleecing customers – we recently onboarded a company paying over $7,000 per month for simple hosting and content updates. Wow!
This is a prime example of how people see value differently. It's hard to justify adding a zero to a price merely because the client can tolerate it, yet it happens in the agency world all the time. I can't think of another industry where this practice happens on a regular basis.... Can you?
In Enterprise, Expect a "Red Tape" Premium
I’m not saying that all large-scale projects are overpriced and the work is inflated. The cost of working with enterprise customers often carries with it some level of premium. To be honest, it’s because of all of the hoops agencies have to go through, or what is also known as the “PITA Premium.” By PITA, we don’t mean the bread… Simply put, enterprise customers take much more time to work with. There is more to consider in the realm of regulation and oversight. Procurement takes forever and costs money in legal review. Payments come slow… Reaaaaaaallllyyyy sloooooow. And, there are other costs associated like massive required minimum levels of insurance and similar. In a lot of ways, enterprise customers are challenging to work with, and as such, the cost premium is to be expected. However, with all of that in mind, it still makes you have to wonder – is the premium 10x?
Agency Structure & Overhead Premiums
One other thought in this regard is to the level of overhead agencies have. Most agencies of 20 or fewer employees have much less overhead than the larger agencies. In fact, many have minimal overhead – some are even distributed with almost no office space to speak of, and today, services that a business needs to perform optimally are at an all-time low in terms of cost - such as phones, internet, etc.
But those aren’t the agencies that typically get hired by larger companies. Bigger companies seek out bigger agencies that have made investments in infrastructure, office space, etc. It’s all about perceived value and security. As I mentioned in last week’s post about Accenture, people don’t get fired for choosing the large agency. They see the office space, and my favorite example is the big, shiny chandelier, and assume this means there is some level of competency. However, I want to introduce the idea of separation value to the equation.
I’ll admit – I am borrowing the concept of “separation value” from a spectacular book about golf and scoring called “Lowest Score Wins.” In the book, the authors assign value to particular skills based on which can affect your score the most. (I’ve been looking for a way to give those guys a link for years – glad I finally was able to!) In the agency world, a similar concept applies – but around different variables. In the world of the creative or digital agency, there is a separation value that exists in relation to the services provided by a large versus a smaller, boutique agency.
My theory is that the larger the agency, the higher the cost of the resources on your account, but the lower the quality (and speed) of their output. Whereas, with a smaller agency, you’ll pay less, but get better quality output, better-experienced personnel and all at a faster pace than the larger agency. And this is one of the critical components driving cost differences between the two entities. Larger agencies have more hands in the profitability cookie jar. They have massive headcounts with many junior employees that are always in transition. And they have high hourly rates to pay for all the infrastructure and cool office spaces that clients adore.
On the inverse, smaller, niche agencies can employ better qualified, more experienced teams, retain personnel longer, and work at a faster pace because their structure is just that much more straightforward. In addition, they provide their employees with a quality of life that includes massive workplace flexibility that larger organizations can't. The shame of it is that the larger companies do one of two things with these smaller agencies. Either they don’t take them seriously and never give them an opportunity, or they make it too hard to work together with ridiculous red tape, corporate policies, outrageous payment terms or rigid legal agreements that would put almost every agency out of business if acted upon. Therefore, they are leaving much value on the table - instead working with larger organizations which in many cases are owned by holding companies - groups that care more about the bottom line than the actual output. And that's how Accenture billed Hertz $10M over the quoted price in work orders... Because they cared more about revenue and profits than quality output.
Technology Considerations
Finally, one more factor that determines price is the technology required. Simply put, some technologies price at a higher premium than others. In the enterprise world, certain platforms cost more for agencies to work with. This can mean either they have higher license fees, higher cost of attracting and retaining talent to work on said systems or take longer to work with. Sometimes, it’s all of the above. An Adobe AEM implementation can cost 10-20X what the same project would cost in WordPress when you factor license fees, labor costs, and the fact that it’s a bit of a bear to work with. We’ve literally seen microsites with budgets in the multiple hundreds of thousands which we know could’ve been hard-coded for probably $10,000 or less, thrown onto an Amazon S3 instance and be ultra-secure.
So why pay the premium? Honestly – I don’t know. It’s hard to justify, and we see waste like this all of the time. Perhaps it’s just the American way…?
Wrapping Up
Pricing divergence in this industry is almost always a factor. As a boutique player, I’m routinely astonished at what the larger agencies are charging for digital work. The Hertz lawsuit, healthcare.gov – how can it be that these projects were so expensive (and failures, to boot!). The fact is, whether your agency is two people or two hundred, the majority of folks have no idea what they are doing. There, I’ve said it. I’ve seen one-man “agencies” where the principal is brilliant and really moves the needle for their clients. Then, I’ve seen large agencies that put junior resources on million dollar projects that go nowhere. But hey – they were the safer choice, right?
I suppose it’s time for procurement to change. Time for clients to focus on what really matters. Unfortunately, not every client knows what matters. Barring some level of regulation or licensure, this problem will remain one for years to come