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Points Based Pricing And Why Agency Owners Continue To Struggle With How To Use Points

Posted by Mike Lieberman on Oct 3, 2019 8:14:00 AM

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Points Based Pricing for AgenciesFirst, thank you to everyone who shared comments with me about the Can An Agency Survive With Strategy Only Consulting Services? blog article. I really enjoy reading comments and I try to reply to them. It’s nice to know people are reading and appreciating the articles in this blog.

I’m talking about POINTS today because in my September Mastermind Group (which meets every fourth Thursday of each month from 10 AM to 12 noon ET) was unanimous about wanting to spend more time talking and working through the points-based pricing challenges.

What I see most often and what I think continues to present challenges to agencies are the separation of points and Agile delivery.

I think if you’re using points but not using Agile (with a capital A) to work with your clients, this might be why you’re experiencing some extra and unnecessary challenges with your points pricing approach. Let’s unpack this more.

Let’s back up a little bit, so we can go forward more productively.

Why Even Consider Points?

I get the pleasure of talking to agency owners every single month. Some of them are working with me, but others are not. But we all have similar challenges.

If I had ten agency owners in a room and I asked them all these four questions, I know exactly what the answers would be. How do you answer these questions?

1)     Would you like to make higher net profit margins in your agency?

2)     Would you like to get paid full value for the services you provide?

3)     Are your teams over-servicing at least some of your current clients?

4)     Would you like your delivery teams to be more efficient in providing services to clients?

YES! We all want to make more money. We all want to get paid full value for the services we provide, and we want to make sure our teams are NOT over-servicing clients!

Moving to points and moving to an Agile delivery methodology check all these boxes. I think this is enough to consider points-based pricing. But before we dig in, let’s talk about why I think Agile and points-based pricing are tied together.

Agile and Points

For me and the team at Square 2, points and Agile have always been part of the same solution set. We never did one without the other. When we learned how to be an agile agency we learned how to use points in the estimation process, in the daily huddles, in the sprint planning and backlog grooming processes. We also learned how to translate those processes for clients including how they need to think about points and their monthly engagements.

When our team is doing estimates on work, they do it in points. When our consultants are talking to clients about their budgets, we’re talking about points. When we do sprint planning, we’re planning work in points. When we execute work, we burn down client points. When we plan the client’s upcoming month, we’re talking to them about their points and how to best spend those points.

It’s all one process. This includes backlog grooming (planning what the client needs), estimating (working with delivery to understand the work), communicating our recommendations to the client and keeping them in budget,  and delivering the work (burning down and tracking points used). It’s always been challenging for me to think about one without the other.

All The Areas That Points Adds Value

Regardless of your take on Agile, points add a ton of value in a wide range of areas across the agency.

Most importantly, points were the only tool that helped us stop over-servicing our clients. Through the planning exercise and the monthly burn down process, we’re able to plan and manage each client to stay within 5% of their purchased points total each month.

This ensures we’re not doing extra work and not getting paid for it.

Points also helped us get team buy-in on the work required for each client and each client project. Every month our teams meet to review what the consultants are recommending and make sure that those estimates are accurate and reflect the delivery team’s understanding of the work requirements. If there is misalignment, it's dealt with and resolved quickly.

This benefit provides a lot of additional team member satisfaction as they are now a part of the decision around how long and how complex their work is and how this relates to what we get paid to do that work.

Points help us value engineer pricing and get full value for our work. Our work has value and this process allows consultants to look at estimated points and value engineer those points to their appropriate levels for their clients and their specific client projects.

This is one of the best ways to start driving up your net profit margin in a structured and process-oriented way.

Everything You Should Expect From Points

Here’s what you should expect from a move to points. First, you should expect a  more profitable engagement with all your clients. Assuming your client services team is proactively managing client expectations, the regular delivery of work and the client relationship, there should be no ambiguity around what clients are getting and what they are paying for.

There should be little or no over-servicing. Clients have a set number of points and how they spend those points is between you and them. It’s agreed to at the beginning of the month and we manage to that number. If priorities change (and they do), if additional projects come up (and  they do), if projects become more complex than originally thought (and they do), then additional points are required.

This leads to a very healthy conversation about how to fund that extra work. Do you borrow from an upcoming month? This is only a limited option at Square 2.  We don’t let clients borrow more than 5% from an upcoming month. This limit prevents us from using so many points that a client has zero points in a month and is paying for us to do no work.

More importantly, do they buy more points? That is the goal to grow a client’s program and you can do this effectively when they keep bumping up against their points cap and have additional work or objectives they want to accomplish.

Over the years, we’ve started actively bringing more work then the budget can afford in an attempt to show clients how additional investment drives additional results. This works very well when all you have to do is buy 20 extra points for $2,000 in a month to get that innovative new project idea into the monthly sprint.

Running an agency in 2020 is very challenging. Running an agency in 2020 that makes money is even more challenging. The pricing pressure from clients, your team’s desire to make your clients happy, your need to not overwork your team and your desire to drive efficiency into the operation make managing an agency complex.

While using a points-based pricing system and Agile delivery model won’t cure everything, it’s going to make hitting your cost of goods and net profit goals easier. And, yes, it’s a system that might take years to hon. Having been using points and Agile for almost five years now, I would not do it any other way.

New call-to-actionIf you’re looking for more guidance and advice around points and or agile delivery, consider the Operations Manual and Playbook for Agency Growth. There are specific sections on points and agile that help you be better prepared to tackle these operational upgrades and realize the improvements in client relationships, client profitability, and overall agency efficiency. 

Plus, you’ll get additional advice and guidance around marketing the agency, optimizing your sales process, hiring and many, many more proven tips and techniques you need to grow. All for just $199. Just click the button above to order your playbook and 11 videos today.

Start Today Tip – If you’re still considering points-based pricing, do your homework. Talk to other agency owners, read up on the pluses and minuses, and talk to people outside the industry. If you’re not using Agile for delivery, apply the same homework assignments. Consider an outside consultant to help your agency make the move. We used a consultant, and I’ve recommended that consultant to several agencies.  All have made the transition successfully and all are seeing the value. Then, and now this is the most important tip: Burn your boats. You should never consider going back to the old way. Push through the challenges, iterate on your processes, and keep moving forward with Agile and points. 

Agencies 2 Inbound – Helping You Grow Your Agency Beyond Your Expectations.

 

Topics: Agile Delivery, Points Based Pricing

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