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Value pricing: The dirty little secret of graphic design
Imagine if your plumber charged you more to fix the toilet than the sink—even though it took the same number of hours—because a working toilet has more value to you. Or what if your mechanic quoted you a higher price than usual for a tune-up because you told him you were about to drive cross-country?
Believe it or not, this is how many graphic designers charge for their services.
It's called "value pricing" and is a generally accepted practice endorsed by no lesser entity than the leading graphic design association in the country, AIGA (of which I'm a member). According to a recent article on their site, "pricing is based on value not hours":
Once a design firm has prequalified the client, built a strong relationship and asked the right questions, pricing becomes a “gut” instinct based on the intrinsic value that the final creative deliverable or service has to the client....Intrinsic value is the amount a client is willing to pay, certainly, but also the worth that the final deliverable or service contributes to the organization. (For example, a corporate logo has more value than a logo for a one-time event or small product launch.)
In other words, the price you are quoted is determined by the design firm's subjective "gut instinct" about the value of the deliverable to your company. In practice this means if you're a bigger company you get charged more—regardless of how much time the work takes.
I can't think of any other industry where this kind of unethical, irrational pricing system would be tolerated for an instant. It's no wonder designers have a hard time justifying our value to clients and feel like we can't get any respect.
It would be one thing if I could point to my work and state with certainty, "This brochure will increase your sales by 10%." Then I might be able to justify charging a percentage of that profit as my fee. But no one can quantify the financial return of a logo or brochure or annual report. Graphic designers—most of whom lack business or finance degrees—may be among the least qualified to make such predictions.
It's interesting that the AIGA article specifically mentions logos because this is always the example I hear from other designers in defense of value pricing. The argument goes something like this:
It makes sense to charge more for a logo if the company is big or high-profile or running a national ad campaign because obviously a logo has more value to them than it would to a small mom & pop company doing only local advertising.
There are two fundamental flaws with this line of thinking:
1. Logos for big, high-profile, national firms don't cost more because they have higher value; they cost more because the work is more complex and takes more time. I can't tell you how many times I've heard designers moan with jealousy about companies like Landor and Pentagram charging $250,000 for a logo redesign. As if Fedex or Coca-Cola would ever consider hiring a one-person firm to help them with brand management! Big, multinational corporations need big, multinational design firms with the clout and business acumen to build consensus around the redesign and manage giant egos and huge budgets. And if you think that doesn't take hundreds of hours, you're out of your mind.
I'll say it again: Big jobs for big clients do indeed cost more—because they take more time, not because of some fuzzy concept of "value."
2. Graphic design is not a product, it's a service. Plenty of designers still believe the client should pay a "buy-out" fee to obtain copies of the project files, the same way that photographers used to charge for negatives. You wouldn't believe how often designers come crying to the forums looking for ammunition to justify this archaic practice to their predictably recalcitrant clients. You'd think we'd get a clue and realize that if our pricing model is unpopular with customers, maybe we should change it.
I believe the reason designers cling to the product model is because it's easier to justify our pricing. It's hard to value a work of art—ultimately, it's worth whatever someone wants to pay for it. But as soon as you're providing a service, you have to defend your rate. And while I am convinced graphic design can be extremely valuable to clients (for a variety of reasons, not all of them contributing directly to the bottom line), most of us are not very good at presenting a strong business case for design.
The value pricing system is an anachronistic trap that designers need to free ourselves from. It's unfair to clients and encourages secrecy and lack of transparency in billing. Furthermore, it betrays a lack of understanding of what clients expect from designers and how they view the work we do.
Here's the good news: estimating how long a project will take and multiplying that by a reasonable hourly rate frees us from the headaches of trying to calculate the "value" of a logo project to the client and having ugly arguments about why they can't have the design files unless they pay extra; it gives us a solid basis for calculating profitability and efficiency and, most important, lets us feel fairly compensated for our time.
Designers are consultants. We don't sell products or works of art or logo licenses—we sell our expertise, measured in hours. AIGA and the design community at large need to accept that and move away from unproductive, unethical pricing strategies that undermine our credibility and make client relations more difficult than they should be.
[ Kim Bieler wrote this article and she welcomes your comments.]
The value pricing system is an anachronistic trap that designers need to free ourselves from.
10 comments
Kim,
I think everything is about value, no matter in what units it's provided to the customer. A value is part of the equation, whether on the final deliverable or the unit of time. I, as a professional, and the customer, both engage in ascertaining value. Is the deliverable worth the dollars? the hours? the trouble? Are hours at $15 a better value than those at $20? What if the $20/hour person is smarter and faster than the $15/hour person? Is knowing that a project will only cost $500 worse that signing an open-ended contract for a cheaper per-hour price?
I think there is room for both approaches and I can't agree that value-pricing is unethical. It certainly doesn't seem to be anywhere near as problematic as some of the hourly-billed issues that I have been involved in and heard about, pushing more hours and stretching out engagements.
Furthermore, as someone who hopes to be in a situation to hire consultants/contractors, I would actually want to have a firm total figure upon which to base my budget. How that's calculated is less of concern.
ph
Thanks for your comments, Phillip. I agree that all pricing is at some level value-based, that's a fair point. Although any hourly rate should be grounded in reality: how much do I need to make to cover expenses and make X amount of profit? (factoring in such indefinables as: how experienced, efficient, and in-demand am I?).
I don't actually advocate billing clients by the hour, since, as you point out, clients like to know what things will cost up front. My approach is to estimate the number of hours a job will take (based on as tight a scope as possible) and use that to calculate a flat fee.
The scope x rate = estimate approach is not foolproof, but it's more rational than value-based estimating and gives the designer better tools for assessing change orders and out-of-scope requests.
Hi Kim,
I've long had an issue with value-pricing except I have to admit that it has often been because of two things. Lack of really good information to fairly evaluate what something is "worth" and my own issue with valuing what I do over what someone else does.
But, in general, I still have an issue with value-pricing for some of the reasons you mention. I know it makes for a more robust written piece to fall down hard on one side. But I agree with Philip that a blend of hourly and value can be appropriate in some cases.
I know you've thought through the issue. And I don't want to try to convince otherwise.
It makes me much less squeamish to just be very good at estimating time and taking into account the client's status (small nonprofit versus large company) and their corresponding available budget and need to have more effort put into design work, than to value price.
Except that after 20 years, you get smarter, more efficient, better at what you do and even if you raise your rates, you may not be paying yourself any better. But this can easily be taken care of by remembering to add your profit in, which I often don't do.
But I would have to disagree about the logo design issue if only because one has to consider what is worse, which could be low-balling a corporate logo job. I'm not saying it's worse. I'm only saying that in life, there are some things that just are the way they are. High-fashion designer clothes are not necessarily always better made or of better fabric. They are priced for their perceived value to maintain an image. People buy them. And clients will hire a higher priced firm for their real or perceived clout.
That being said, I know first hand of a $25,000 logo job (which I'd take any day) where the work was totally mediocre. The bigger issue is is the work stellar for that kind of price, let alone $250,000.
I respect Kim's opinions and she makes some very just arguments. However, I write to let your clients, and my clients as well, know that not all of us share this opinion. My viewpoint is not better, not worse, not wrong, not right, nor is it universally shared — it is just an alternative way of looking at the same argument. I would not write such a long post if I didn't feel there needed to be some clarification.
AIGAs STANCE ON VALUE PRICING:
Kim stops short of make a convincing closing statement on the "evils" of value pricing. She has, in my opinion, reaffirmed the fears of clients reading this post. Clients who may now assume that all designers are unscrupulous hacks with profit as their only motive.
Part of this, I believe, is that AIGAs writing on the subject may have been misinterpreted: "Intrinsic value is the amount a client is willing to pay, certainly, but also the worth that the final deliverable or service contributes to the organization. (For example, a corporate logo has more value than a logo for a one-time event or small product launch.)"
Kim's take on the writing was: "In practice this means if you're a bigger company you get charged more—regardless of how much time the work takes."
AIGA's intended meaning was, if you are creating a corporate logo that has to stand the test of time it has more value than a logo that is ephemeral and intended for one-time use. For example, the design of a logo for Pfizer Pharmaceuticals (the company) is worth more than the design of the logo commemorating it's 150th anniversary. After Pfizer's 150th anniversary, the commemorative logo has no lasting value except as an archive entry.
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QUANTIFYING THE VALUE OF YOUR WORK:
At the core, design for communication is not an exact science. Communication whether it be through advertising or design is about persuasion. And in the words of Bill Bernbach, “persuasion is an art.” However, the value of your design work can be quantified through the use of market metrics and sales figures that measure the rise or fall in sales based on the introduction of a new logo or new packaging. The Arnell Group's recent experience with the Tropicana Orange Juice carton is a good example. A 20% plunge in sales after rebranding is an indication that perhaps the redesign and rebranding didn't sit too well with the buying public.
Your design work can also add perceived value and thus increase sales. That is why so many in-house brands emulate the name brand products they sit next to on the drugstore shelf. Give people the choice of plain identical white t-shirts and they will invariably pick the one with the Nike logo on the garment label. Heck, since 1968 there has been a recurring global design contest that celebrates the quantifiable effectiveness of your design/advertising work: http://www.effie.org/about/about_effie
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CLIENT BUYOUT OF FINAL FILES:
The turnover of source files and resources used to create the final product for a client needs to be negotiated accordingly. These files do not belong to the client. If you go to a restaurant and ask the chef to cook you a meal that is not listed on the regular menu, you do not own the recipe.
... ... ...
IN CLOSING:
The inherent argument against value pricing has one minor flaw. It removes the benefit of experience and talent. If we reduce the billing model down to "labor hours to complete" multiplied by "billable rates" it works with one exception — not everyone charges the same hourly rates — and for good reason. As an experienced designer you should not be denied the right to charge more for your services, the same way experienced, successful lawyers command higher fees.
In theory, the service(s) we provide are akin to those supplied by doctors, lawyers, mechanics, architects and yes, even plumbers. Whatever the end product, our goal is the same, provide the client with the best so they can continue on with their lives. That end product is worth whatever the market will bear — and there exist designers for every price point. Designers who are business savvy and good at presenting a strong case for design, should not be penalized.
Monirom,
Thanks for your very thoughtful and articulate comments.
I've been thinking about this some more and I believe the problem comes from confusing the project's (or the client's) value with that of the designer. Clearly a designer who can demonstrate high value should be able to charge more for his or her services. But I still believe this should be irrespective of the value of the project.
Pfizer is not going to entrust their corporate logo redesign to just anyone. However, they might very well have an event logo produced by in-house designers who aren't as skilled. In other words, the perceived value of the project is the client's concern, not the designer's. If Pfizer approached Paul Rand to design their event logo, you can bet he wouldn't be giving them a discount off his usual fee just because it was less "valuable." (I invoke Paul Rand because he figures in a common anecdote about logo pricing, and he's dead.)
Charging for design files is up to the designer. If clients understand this up front and still want to work with you, then there's no problem. However, treating your InDesign layout like intellectual property doesn't mesh well with how most clients (in my experience) want to work with designers. They want to be able to make updates themselves; they want to be able to have their in-house folks take my design concept and use it on other pieces; they want to be able to get reprints done without going through me. Sure, this takes work away from me, but my feeling is it's better to work with clients than against them. I know there are a lot of compelling arguments against this hands-off approach, so I can only say I've had good results following it.
I sincerely hope any design buyers (aka, clients) reading this will be reassured that far from being unscrupulous hacks, designers are thoughtful, hard-working people who are trying to make a living doing the work we love, and that we care enough about these thorny issues to debate them frankly and openly.
"...have a hard time justifying our value to clients and feel like we can't get any respect. "
Couldn't agree more!
Kim, your interpretation of value-based pricing is horribly wrong; As is the AIGA's interpretation, from what you quoted.
Your last post stated: "In other words, the perceived value of the project is the client's concern, not the designers"
Yes, that's exactly right. Had you originally taken the time to learn Value-based pricing (instead of relying on your own "gut" instincts) you'd realize Value-based pricing starts with the client/customer, not the designer. It asks clients what they believe your work is worth. That means you as the designer must either meet the client's perceived value of your work, or risk losing out on business. Value-based pricing is the most fair and logical way to put a pricetag on design.
You whine about raising prices for bigger clients, calling it unfair and illogical, but you never considered the opposite: Smaller clients should be charged less.
Design for a smaller client is not as critical to their day-to-day operation. That's why a smaller client won't value design as much as a bigger one. They don't *need* your best and brightest work possible. In fact, the small client might be fine with stock art and a simple logotype.
You shouldn't blindly offer your services and hope someone will buy your one-size-fits-all hourly rates. You'll end up losing business.
You said it yourself: Pfizer is not going to entrust their corporate logo redesign to just anyone. The research, revisions, testing, meetings, consensus building, and experience required...it all requires considerable expertise to handle a project of that magnitude. You know right away it's going to require long hours and your very best work. Why would you charge your average hourly rate? So you can lose money on the project?
Sticking with an hourly rate is a quick way to go out of business.
Fixed Hourly-rates exclude the small clients (where a large quantity of your billings can come from). And a fixed rate will eventually undercut you, the designer, when taking on big projects that require considerably more overhead (meetings, research, testing, account services, utilities) than your average hourly-rate accounts for.
Instead, designers should actively tailor their offerings to meet different groups idea of the value of design. If it's a small client, charge them a fee *they* think is fair, and find a way to meet their needs; if that means using stock art, so be it.
As for putting a number on how much the client actually values your design? No, you shouldn't use your "gut". You look at the market. What does that mean? It means look at what similar clients are paying for design work. You can break down the market by different industries (Pharmacuticals, Lawyers, or a family farm), by big or small clients, and by the quality of work being designed.
Books like "The Business Side of Creativity" actually compile a list of project fees for different types of clients. It can be an excellent starting point for you to determine how much different clients are willing to pay for different types of projects. Asking other designers directly about their project costs can also be a good, informal way to get an idea on pricing. This happens a lot on designer forums where freelancer might need information on the going rates in a city they just moved to, like, say, San Francisco.
Ask what the client thinks your work is worth, than ask if you are able to profitably meet that definition of worth.
Forcing yourself to imagine what your services are worth, then sticking with that rate no matter what, is truly illogical.
If you were a dairy farmer, would you charge your customers $40 for a gallon of milk? Even if you have been raising cows for 40 years and you have the happiest livestock around, and goshdarnit, you think you're milk is worth that much? Does it make sense to charge $40 for a gallon of milk? Even if you have a mortgage payment overdue and the bank is about to foreclose on your home? And you personally need to sell that milk for $40 a gallon?
No, of course not. No one is going to pay that much for milk.
Instead, you charge what the customer is willing to pay; maybe a little more, maybe a little less. But the market (that is the customer/client demand) truly determines pricing. Never the designer, with some hourly-rate derived from arbitrarily determining their personal talent and their own expenses.
Evan,
Thanks for your comments and for taking this topic seriously. However, I have to take issue with several points you make.
First of all, I provide the same quality of service for all clients, regardless of how big or small their project is, and I hope that's true of all designers. I don't believe clients with small or underfunded projects come to me expecting they will receive anything less than my best work, nor should they. I can't think of a faster way to lose business than to give people substandard work.
I think you may have missed my point about an hourly rate. If I got the Pfizer logo job, you can bet my estimate would include plenty of meetings, travel, long hours, iterations, and reviews. It would detail how many concepts they would see and how many rounds of changes they could make so that we would all know what constituted a change order. Assuming I've set my rate correctly (taking into account rent, marketing, salary, taxes, etc.) I don't see how having an hourly rate could in any way cause me to lose money on such a job.
If a client can't afford or is unwilling to pay what I think the job will cost, the last thing I want tell them is, "oh, okay, I'll just lower my rate." At that point, you've admitted that what you charged them the first time was inflated. What's to stop them from haggling your rate even lower? If I took a job on those terms, I'd resent the client so much they probably would get substandard work. The better approach is to say, "we can reduce the price by reducing the scope." Instead of 4 logo concepts, they get 2. Instead of 3 rounds of changes, they get 1. If I have to give something up, so do they.
I think that your milk analogy is a bad one, unless you actually believe that design is a commodity. The market tells us that some people will pay $250,000 for a logo, while others think $150 is a rip-off. Which proves the point I've been trying to make all along: design is a service, not a product. The basic unit of any service is the hour, whether you do fixed-price estimating or time and materials.
Kim, in determining an hourly rate, you are still using value-based pricing. You are asking "what am I worth to the client?". You are looking at the market, what other designers are charging, what the going rates are. This is value pricing.
The only problem is you are sticking with a single value and assuming it's correct, when in reality you might be way off in terms of what's best for business. You have no justification for your own rates beyond AIGA salary surveys and your own "gut" of what your talent is worth. You aren't asking clients what value they place on your work, you're asking yourself. That's my major issue with you calling value-pricing "illogical". There is no logic in your creation of an hourly rate because it starts with the supply instead of the demand.
If you moved from a big city (where you first came up with your rate) to a small town, do you really think you could successfully run your business based on your old rates? The answer is no. You'd need to adapt to the new market.
As for Pfizer, your rate *cannot* stay the same for Pfizer because your overhead (which you originally based your rate on) will not remain the same. You are going to have a lot more non-billable hours that you simply cannot recoup for without raising your rates. If you simply add more hours to account for "meetings", then at that point you're padding your budget, which is unethical.
I never suggest that you lower your rate after a client balks at your offer. I only suggest you learn about your client and what they are willing and able to afford. If you can profitably work at the reduced rate, and you need the work, do it! Don't turn down small clients just because you think it's beneath you!
I think your idea of "lowering" yourself or providing "substandard" work says more about your own ego than it does the business of running a successful firm. There is nothing wrong with charging a smaller client less for a quick logo. And that sort of flexibility is exactly the good business sense that keeps firms afloat in bad economic times.
Lastly, re: your commodity comment. Sorry, but design is subject to market forces, just like everything else. Talent is not enough.
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