Aug 15, 2018
Blair interviews David on what each of the three levels ofsuccess in running a creative firm looks like.
Links
2Bobs Episode 39 - "Replacing Presentations WithConversations"
The Win WithoutPitching Manifesto,by Blair Enns
TheBusiness of Expertise: How Entrepreneurial Experts Convert Insightto Impact + Wealth,by David C. Baker
Built toSell: Creating a Business That Can Thrive Without You,byJohn Warrillow
Pricing Creativity: A Guide toProfit Beyond the Billable Hour, by Blair Enns
2BobsEpisode 31 - "Mastering the Value Conversation"
TRANSCRIPT
BLAIR ENNS:David, it's been a while.
DAVID C. BAKER:Has it? I haven't missedyou all that much. Have you missed me?
BLAIR:Since we've last recorded apodcast, I was listening to one that aired recently and itwas talking about my first book is in its fourth printing. It's nowgoing into its fifth printing and I realized that it just aired andwe recorded that over a year ago. So if Marcus is digging into abacklog that far, that means we haven't been together for awhile.
DAVID:Yeah. And it's scary too becauseimagine how much our thinking has changed in a year? 'Cause youwere wrong about so many things.
BLAIR:That's an old joke, you need newmaterial.
DAVID:Okay, sorry.
BLAIR:So since we've last recorded apodcast, I know they keep airing because we've got all this in thecan, but you and I did an event in London and then we came home andthen you and your wife came up to Kaslo and we celebrated. I wasjust looking yesterday at a photo of your wife and my wife in abear den together on her birthday.
DAVID:Right, I didn't want to go in it,it's why I took the picture.
BLAIR:You're too smart. I took it frominside the bear den, you were outside.
DAVID:Right.
BLAIR:And then you went to Chile onvacation and then you've probably been in some other places.
DAVID:Yes, I have. I'm kind of off theroad right now. I head back out of the country on Friday but I'vebeen back trying to get our 61 acre farm livable. So just a fewminutes ago, if you'd seen a picture of me, I would have beencovered in white from head to toe because I am still trying tofigure out how to use a paint sprayer and I realized I have a lotof expertise to develop yet.
BLAIR:That's why on a hike I was carryingthe bear spray. Okay, so it's been a while since we talked. Todaywe're going to talk, I want to call it good, better, best but it'sreally the three levels of success in running a creative firm and Ithink you've broken it down into the categories of starting,existing and thriving. And you sent me an entire spreadsheet tohelp navigate this conversation. Things like utilization,positioning, financial, marketing, etc. All of these differentthings that should be true or should be happening or you should beaiming for at these three different levels of success. Do you wantto just take a minute and talk about those three levels of success?Are there lines that delineate between starting and existing andexisting and thriving?
Well, I think there are. We'll find out I guess, right? But Itend to think in triads. And so as I'm getting a question from aclient, I'll sometimes just play this mental game, are theystarting out or are they existing or are they thriving? And thereseem to be these three different categories. And then you canexpand that and say, "Okay, what about financial performance? Whatabout how they think about service offerings or how they thinkabout positioning and how they think about management?" And so Ithink it's useful to think in these categories because it's not asif a single firm is all in the existing, the middle category. Theymight spread across different ones and just gives us an eye openinginto what our world looks like from the outside.
DAVID:I think it'll be kind ofinteresting to talk about. But you're probably going to let me knowhow interesting this is or not. If you rush me through these,that'll be a sign that it's not that interesting.
BLAIR:Well, let's just see. Let's startwith utilization which is the first thing on your list.
DAVID:Right. 'Cause such an excitingword, right? Utilization.
BLAIR:Yeah. So I'll just have a littlenap here while you talk about utilization.
DAVID:Like I said to you one day, I'mpre-interested. Okay, so starting would be subsidizing clients andthe typical firm in a developed country is charging and gettingpaid for 42% of their time and they should be getting paid for 60%of their time. So most firms are in this starting category and theynever really get out of it. It's more of a typical category. Sothere's some significant degree of underpricing and/oroverservicing. And that's the first one, subsidizing clients. Andthen hopefully, we get to the point where we get paid foreverything we're doing, that's the middle category of existing.
And then thriving is package pricing where we're applying whatyou would call value pricing. Where there's very little corelationbetween what we're getting paid and the amount of time we'reputting in. It's really more about outputs and accomplishments andso on. The thing that interests me about this and I'm curious tohear your thoughts on this as well, is that most firms want to skipthe middle step. So they're not getting paid for all their time andthey want to jump right to value pricing without going through themiddle step of getting paid for all the time that they'reworking.
And some of this is influenced by this hatred that everybody hasfor timekeeping, but it's also driven by this sense that peoplehave of they're being cheated. It's like, "My clients are notpaying me what I'm worth and I feel rotten about that, I feelanxious, I feel resentful and I want to jump right past that and gostraight to getting paid for more than the time I'm spending." Sothat's the first one, utilization.
BLAIR:Well, I wonder if that leap isn'tbecause they're not really thinking about value-based pricing interms of getting paid for the value that they create but they seeit as kind of a packaged way of actually getting paid for what theydo. Does that make sense?
DAVID:It does. So they're using a veryadvanced way of sort of eliminating this subsidization without ...Yeah, it kind of does. I feel like people, they have thisresentment level about not getting paid for what they're doing butthey don't really know how to solve it and they jump into differentplans to solve it without really understanding all of them.
This is what you've spent so much of your professional lifedoing in the last couple of years, is helping them think through.Like we did a podcast recently about the value conversation and allof those things. And in London when you and I were talking, I waslistening when you were talking about practicing the valueconversation. And it was so interesting for people, the light cameon on their eyes. And I don't know exactly why but I feel like theyneed to at least go through this second phase first because it'slike learning to walk before you can run and run before you canwhatever the next thing is, leap I guess.
BLAIR:Yeah. And I wonder about that. Ikind of think if I were giving somebody who's starting out rightnow some advice, my advice would be to skip over that middlesection of getting paid for what you do. But if I may, I want toback up a little bit and just talk about these three categories ofstarting, existing and thriving and let's just put some descriptionaround them.
I think we can agree that in the starting phase, essentially youhave a hypothesis and your hypothesis is that you have something ofvalue that the market values and that maybe there's a businessthere. So you open your doors and you're essentially exploring yourhypothesis. You don't know whether you validated or not. There'sall kinds of fear and there's all kinds of experimentation andthere's all kinds of hard work and you're trying different thingsand you're seeking validation.
And I would say in the existing stage, you have validation,there's a business here. You're not going to go out of businesstomorrow but probably you're earning like what you would in a job,maybe a little bit more. So it's okay, I have validation from themarketplace and then the next step is essentially optimization orgetting ... Another way to look at it would be the third categorywhich is thriving. Beyond existing, beyond earning what you wouldin a job. And I know I'm probably jumping ahead and maybe screwingup some of your things that you want to talk about here but we allhave a sense of what thriving is and we all have a sense of whatstarting is.
Starting is you were working with a hypothesis. Existing in themiddle is I validated it. There's something here, now we need totake it to the next level. And thriving is the next level. Arethose good enough descriptions for the three categories we'retalking about?
DAVID:Yes.
BLAIR:Or would you change them?
DAVID:No, I think they are good enough.What's interesting to me though, is that some businesses that havebeen around for 10 years are still in the starting category andthey don't ever get to that other one. And those are the ones whereI might go in and say, "Hey, just an idea here, but have youconsidered that maybe you shouldn't be running a firm? You could bemaking a lot more money working for somebody else, you'd be workingfewer hours and you'd have no financial risk."
BLAIR:And you'd be sleeping better atnight.
DAVID:Right, exactly. All those things.Most folks just sort of look at me and grin and say, "Yeah, I knowall that but I'm willing to invest that much just so that I don'thave a boss." You don't automatically go from starting to existingafter you cross, say a two year threshold or something like that.There is some mentality that has to change on your part.
BLAIR:Yeah. Okay, so you talked about thefirst point of how utilization is different in these threecategories of starting, existing and thriving. You go fromessentially subsidizing your clients to getting paid for what youdo to charging based on the value that you create or packagepricing. The next thing that you want to explore under these threecategories is positioning. So how does positioning change?
DAVID:And this is a little bit differentthan we would have talked about it probably 10 years ago maybe. Youand I both noticed that that's changed in the marketplace. So inthe beginning, you're usually an undifferentiated firm. So thereare many viable substitutes for what you do. And most firms makethis transition for sure, they go into the existing category. Andin this phase, and I delineate this scientifically in the book,The Business of Expertise, you need between10 and 200 competitors and then we can talk about what that meansin terms of your prospects set and so on. How many prospects youneed.
But most firms don't go into that third phase there where thereare no competitors essentially because of some process they have orsome proprietary IP or some black box. That's where you see firmsthriving and they're making so much money. It's not wrong at all,it's just that they really control their marketplace. And so, mostpeople in this category are probably in this existing, the middlephase, and very few are at the undifferentiated and very few are atthe proprietary IP side. I'm not sure what that number is, I'd beinterested to see what you think. I would guess that maybe 10% offirms are in that high level, less than that maybe.
BLAIR:I'm going to recap what you saidhere. So positioning-wise, when you're starting out, you're sayingthe firm begins as fully undifferentiated. You're basically sayingyes to everything and taking whatever you can. And then when youget to the existing phase where you kind of validated yourhypothesis, you typically have 10 to 200 competitors. And then inthe thriving phase or stage, you say you essentially have no directcompetitors because you have proprietary intellectual property. Isthat right?
DAVID:Right, a black box. Something thatthey just simply cannot get somewhere else. And that's built on thesecond phase for sure. You start at the 10 to 200 competitor phasebut then you figure out some magic and you bring it to themarketplace. And that's where just the light comes on andeverything just falls in place for you.
BLAIR:I want to suggest the slightlydifferent way to think about this. And that is at the verybeginning, you starting out, when you have one client, your firm ishighly specialized.
DAVID:Specialized in what?
BLAIR:You're specialized in thediscipline for market, you're doing x for why, you have one client.And then I'll suggest to you that your second client is a lot likeyour first client. And it's often because that first client maybeyou took that client with you from another firm or whatever. He wasattracted to you for whatever reason. Your second client is a lotlike your first client so you're a highly specialized entity. Andthen you think, "Oh my god, I have to mitigate my risk. I don'twant to put all of my eggs in one basket. I don't want topigeonholed." And then you broaden out.
DAVID:And then you mess up yourpositioning with all these other clients.
BLAIR:Yeah.
DAVID:That's interesting, I never thoughtabout that. That is really interesting. So the secret is to neverhave more than one or two clients and then your ... That's Blair'sadvice for the day.
BLAIR:Okay. Now let's move on to thecategory or employees. How does your employee base change as you gofrom starting to existing to thriving?
DAVID:This one is really fun to mebecause I think everybody will identify with this. In the firstphase, you're hiring what you can afford. It's just like, "What? Ican't pay more than this and I know the kind of expertise I wouldlike, I just cannot afford it. So the primary thing is this is whatI can afford and I'm just going to get the most capable person Ican with this amount of money." That's the first phase.
BLAIR:Yeah. We can all identify withthat.
DAVID:Yeah. And none of those people arestill working for you but you still remember those days.
BLAIR:Yeah.
DAVID:And the second phase is existing.And here there's this flip that occurs in your mind and you beginto hire for what you need even if it stretches you financially andyou grow into it. So it's not what you can afford, it's what youneed and you've built this new assumption on the fact that you'retired of training people, these blank slates that come to you andinfusing them with everything you know. But the firm never growsbeyond that because who's smarter than you is getting hired becauseyou can't afford them. So the second phase, what do I need even ifit costs more than I really I'm comfortable spending at thispoint?
The third phase is a really fun one. And that's where you are onthe lookout for amazing once in a lifetime hires. And even if youdon't need that person at this point, you go ahead and snug thembecause you're running your firm so well that it's not going to putyou under to have an extra and actually a highly paid extra personon staff. And this is that third phase where you make the once in alifetime hire every once in a while even when you don't quite needthem yet.
BLAIR:I immediately recall a number ofconversations I've had with my most successful clients and I'm sureyou do too. You've had the same conversations where you asked abouta particular team member and they said, "Oh, that person came tome, I didn't have a job for them but I just couldn't believe thereskillset. So I hired them and I created a job for them."
DAVID:Right, exactly. That's exactly whatwe're talking about. And it's so fun to be at that point in yourbusinesses' history where you can do that. It's such a luxury.
BLAIR:Yeah. Let's talk about financial.You've got some financial numbers and I want to know where the hellthey came from. First, why don't you walk us through them. Whenyou're staring out, you should be earning what?
DAVID:So this financial thing is abouthow much money you're making. And in the first phase, it seems likeprincipals are making 160 to 200 in U.S. dollars and there's notmuch more beyond that. That's pretty much what they get. They maynot even get every pay check, they may catch up sometimes or theymay not, but they're making 160 or 200. If they stop and thoughtabout it, they would say "You know, I could make more moneysomewhere else." That's the first phase starting.
Existing, they may make the same amount of money. 160 to 200,000U.S. dollar equivalent, but there's significant profit at the endof the year. And this builds up starting at their fiscal year andthey may take out some quarterly or when they're getting ready tobuy a boat or another house or whatever, but there is some profit.And then in the thriving, the final one, the third one, they'remaking 400,000. Now, we have to index this if there's more than oneprincipal but there's 400,000 plus a bunch of profit. And there arenot many ... Again, they're probably on a 10 to 20% of firms inthis third category with all the things that we're talking aboutand especially here, 400,000 plus profit. That's where firms arereally thriving.
BLAIR:So I'm imagining the principal of afirm who's in the starting phase, they've been at this like 15months, they're into their second year. They're still starting,they're still figuring it out and they're thinking, "Whoa, I shouldbe making 160 to 200? When does that happen?"
DAVID:Yeah. Where somebody who's making400 says, "I can't remember when I only made that amount of money."People's expectations are so different based on what they bring tothe table.
BLAIR:Yeah.
DAVID:But what principal could not makethat and more as a key leader at another firm? It kind of getscrazy when you think about it.
BLAIR:But are you saying if you're at thestarting phase, let's say you're a year in and you're not at 160,what does that tell you?
DAVID:Well, I think we need to makeallowance for the fact that we're going to invest in ourbusinesses. But if somebody's starting out and they don't haveemployees, it's hard for me to foul them. Anybody making less than160,000 equivalent U.S. dollars, I have to search a long timebefore I find somebody making less than that. So it tells me thateither you're really starting out and haven't figured out somethings or your expectations around money are very different thanmine are. Or you're really making some huge investments in thebusiness and you'll grow out of that at some point. But it shouldsignal that something's wrong if you're not regularly making thatamount of money very quickly out of the gate.
BLAIR:Yeah, okay. And we could do somemath on that around utilization rates and hourly rates etcetera, tocome up with something, but we won't. Let's keep moving.
BLAIR:So the next category you have hereis marketing. And when you're first starting out, how do you aboutgetting new leads that ultimately turn into clients?
DAVID:Yeah, most people don't do anythingbecause they usually don't start with the blank slate. They usuallystart because some client has said on the Q.T., "Hey I want to workwith you." And so they start with some promise of work. Or they'rekind of the new kid in town and for the first, and I find that it'sabout three and a half years, that's about how long it last, theyhave enough referrals or just word of mouth kind of stuffhappening. And then if things slow down a little bit, they'll dosome cold-calling. That's what usually happens at this first phaseand it kind of creates these bad habits for folks in the early daysbecause it lasts for three, three and a half years and then itstarts to tail off.
Then we go into the second phase of existing where most firmsrely on email marketing these days. Now you have some outliers whoare doing different things but that seems to be the basicrecommendation, email marketing. And it's still very effective andsome firms are getting very wealthy doing that as their primarylead generation tool. But not many firms are really in the thrivingcategory who are relying primarily on email marketing. They'redoing something else, they have some notorious thought leadershipand there are many things that fall in this category.
They could have written a great book or they could be a greatspeaker who gets invited to different keynote conferenceopportunities or maybe they have a podcast or something like that,but it's moving beyond the email marketing. And so cold-calling,referrals at the beginning, email marketing and then they leavethat behind and they have this luxury of moving to more of anotorious thought leadership platform.
BLAIR:I love your choice of an adjectivethere, notorious. What do you mean by that?
DAVID:Notorious as in hated? No, that'snot what I ... What I mean is well-known I guess is what I mean. Soit wouldn't count to have a podcast that nobody listens to or abook that nobody buys. I'm talking about well-known type of thoughtleadership. And like you talk about often, it's probably somethingthat's singular. Like it might be a conference that you do or itmight be a book or it could be a podcast. It's usually not acombination of a lot of things. You've just fallen into a groove, apattern that fits your personality and your particular focus in themarketplace and everything is working well. And as long as you'redisciplined and you still take risks with your thought leadership,then you don't ever have to go back to just doing email marketinglike you used to.
BLAIR:Yeah. And so you've got referralsalong with cold-calling in the starting category, but I think whendone properly, referrals follow you at every level. And at thethriving level, I would suggest referrals really do come back. ButI think your point is that like in the very beginning, it really isjust about referrals. The first client is referred to you or theywere a client at the firm that you worked at, you took with you.And you said there's a three to three and a half year cycle forreferrals.
I don't know if it's referral-based but I've talked about thisbefore. And one of the first patterns that I saw as a consultant isthere's a seven year window. There's a point at which where roughlyseven years where organic growth just stops. And you explained tome, your hypothesis was that's when you thought natural referralsquit working. And then there's school of thought around how youactually worked to cultivate referrals, that's an entirelydifferent level. But I think we should probably do a podcast onreferrals at some point because that's a topic in of itself. And Iagree with you, it's vital early and then most people kind of letit go. But some of those firms that are really thriving, they haveformalized how they get their existing advocate, loyal clients torefer other clients to them.
DAVID:Yes, exactly. They're intentionalabout it. And the difference seems to me is that they bring theirreferral sources along with them. So as their capabilities change,they are providing the correct language to those referrals in anactive way, so that the referral sources are given them even betterbusiness than they did in the past. That is something we shouldtalk more about.
BLAIR:Okay. Let's talk about fee billingsper FTE. This is one of my favorite numbers that we often refer toit as AGI per FTE, which is ... Do you want to explain thatacronym?
DAVID:Sure. So AGI stands for AgencyGross Income. The rest of the world would say adjusted growthincome but that's a very different meaning than what we mean by AGIin this industry, and it's basically your fee billing. And then ifwe define FTE equivalence, if there are nine full-timers and twohalftimers, then that's 10 full-time equivalent. So the startingphase is less than $150,000 per full-time equivalent. So we have a10 person firm, that means that their AGI is less than 1.5 million.There's some sort of a transition here that firms struggle to getbeyond and they don't exactly know how to break out of that. It's acombination of all kinds of marketing and positioning and leadgeneration and confidence and all those things that we talk aboutquite a bit. But in this first phase, they're somewhere belowthis.
The second phase is a really narrow band. It's reallyinteresting. I can almost say on the phone, I can say to somebody,a prospect that I might be talking with, I can say, "Let me take aguess, you don't have to tell me if I'm right or not, but I'll betyour fee billings per full-time equivalent ..." And then I'll givethem a number between 150 and 160. And this very narrow band is thesecond place they get stuck. And most firms, the vast majority,never get above 160. And the ones who thrive in this third categoryget above 160, and I've got clients that are even above a million,many of them above 450, 500. Now, you can't get there without valuepricing obviously and packaging the work that you're doing withexpected service offerings and so on. So those are the three, lessthan 150, 150 to 160, the big stuck point, and then above 160.
BLAIR:So, again, I'm going to give youanother way to think about this because when you say starting, thatfirst phase or stage that we're talking about, I'm thinking about asolopreneur. And a solopreneur, if you're making 200, you'reclearly billing more than 200. If you think of the solo creativeperson who goes out on his or her own, they're subsidizing theclients so they're not billing for all of the time that they'reactually spending as you pointed out at the beginning.
So they run into this maximum of how much they can based on thefact that they're subsidizing their clients. And it's probablyaround ... What do you think it is? Like what do you thinksomebody's earning, just say in kind of gross sales, before theyhave to hire that first person?
DAVID:They probably should never hireanybody until they're at the quarter of a million dollar range, soabout 250 I would think. When you hire somebody before that, you'rereally restarting the clock and now all of a sudden you'respreading this income that you've generated across more and morepeople. I don't see much connection between billings per full-timeequivalent and the size of the firm. In other words, some of themost profitable firms are smaller but not always. So when I saystarting, I don't necessarily mean the business is young, I meanthey're starting on this path of entrepreneurial experience andsuccess. So many firms could be 20 years old and they've neverbroken that 160 category per employee. So it's just something aboutlike how do I get over this hump? And it may take people two yearsor it might take them 20 years or they may never get over that humpat all.
BLAIR:Yeah. So you have these threecategories of you're below 150 in AGI per FTE and then the middlecategory, where I see a lot of it too, you're stuck at 150 to 160.And I would say it might even be a little bit lower than that, 140to 160. I don't know where the line is, you're drawing at 150 to160. And then beyond that 160, once you tend to break free of that160, then you kind of gain momentum again and it's easier to getout into the 200s and even 300s and that's almost always becauseyou're moving to a value-based pricing. Is that right?
DAVID:Right. Or you're very, veryconfident. But usually, yes. It's about value-based pricing.
BLAIR:Yeah. All right, the next categoryis succession. So in a starting firm, it seems a little bit ironicthat a firm that's in the starting category would think ofsuccession. Because if you're just starting out and you're thinkingof getting out, then something's not working therefore you don'thave anything to sell, do you?
DAVID:Well, again, I'm not talking justabout chronology, I'm also talking about how successful they'vewalked this road of entrepreneurial success. And so many firmsreally are ... You have a 20 year firm and really they don't have20 years of expertise under their belt, they have 20, one yearperiods under their belt. They don't operate like a 20 year firm,they just had the same one year 20 times, that's what I mean bystarting.
BLAIR:It's Groundhog Day 20 days in arow.
DAVID:Exactly, right. And these are thefirms where they're not just remarkable per financial performanceand therefore nobody on the outside is going to be all thatintrigued with buying the firm and yet the principal is tired.They're tired in part because of the lack of financial performance.If that wasn't the case, they probably wouldn't be that tired sothey have to settle for either just closing the firm or gettingalmost nothing for it by selling to employees. That's that firststarting phase of entrepreneurial success.
DAVID:And then in the second one, in thisexisting phase, they sell or merge within the industry. And you andI have seen huge changes here. There aren't many firms who areselling to the holding companies because the holding companiesdon't have all that much extra money and those purchases are sotypical and the principal is not that interested in it but that'swhat happens in this existing phase.
And then in the thriving phase, they get rich by selling in avery nontraditional sale. So it might be a consulting firm thatbuys them or it might be a huge digital firm that buys them. Orthey could sell themselves to a client or maybe a roll-up in somerare circumstances. So it's just interesting to think about thesethree different categories that firms tend to think about from asuccession standpoint. I put this on the list 'cause I do so muchsuccession work and I see people strange expectations about whatthe firm will be worth. And they have this very glorious ideasabout what somebody else will be pay for the firm and I have tohave an awkward conversation. It's like, "You know, this has beenmore of a lifestyle business for you. You haven't made a lot ofmoney, you've not made a lot of profit, there's not much to sellafter you leave." But that's fortunately not true of every firm. Alot of firms are very, very saleable these days which is great newsfor them.
BLAIR:And it reminds me of JohnWarrillow's book, Built to Sell. It's a business noveland the owner of a design firm is fed up and he goes to hisbusiness advisor or his accountant and says, "Okay, I want to sellthe firm." And the guy laughs at him and says, "You've got nothingto sell."
DAVID:Yeah, a great day in his life tofind himself.
BLAIR:So he helps him navigate tobuilding a business that is built to sell. It's actually a greatbook and well worth reading.
DAVID:Yeah. All right, so I am going todo something here. Are you ready?
BLAIR:I'm always ready David. What areyou going to do?
DAVID:Well, I'm going to flip this on youand I want you to come up with three categories around pricing.
BLAIR:Oh yeah, that's easy.
DAVID:Okay, well you should have somethoughts about this, you just wrote a book. So whatare the three categories for pricing that you see out here?
BLAIR:Essentially, you have three thingsthat you can sell and I think the three categories really mirrorperfectly your categories of starting, existing and thriving. Inthe beginning, you are selling time, you are selling the inputs oftime and materials. And then when you get to the next level whichyou're calling existing, and I'll just say it's the next level inpricing, is that's when you're selling outputs of deliverables. Soinstead of charging based on the time, you're charging based on,I'll put in air quotes, the market value of something. And you'restill counting your inputs of time and materials but you'reessentially pricing based on what the market will bear and you'reprobably commanding a premium.
The client is getting price certainty. So instead of saying it'sgoing to be $200 an hour and we'll finish when we'll finish, you'remaking an estimation of the number or hours, probably a range, andthen you're pricing it in the higher range and the incentives arefor you to come in a bit below that. So your AGI per FTE is goingto go up. You're trading a price premium for price certaintybecause you're selling the deliverables, the campaign, whatever theoutput is.
And then the third level is when you let go of both of thosethings and you're selling based on the value that you help create.So you're pricing based not on the inputs of time and materials,not on the market value of what you think the market value is, thatservice or that output, but based on the revenue gains or costreductions or other emotional forms of value that your solutionwill help to deliver. And very often when you do it properly, it'sreally almost fully untethered from the inputs of time andmaterials. So those are the three levels of pricing. First you'reselling inputs, then you're selling outputs then you're sellingoutcomes or value.
DAVID:So if somebody's in the firstcategory of selling inputs, can they skip the second step and goright to value?
BLAIR:Oh yeah, absolutely.
DAVID:Okay. Oh, that's interesting.
BLAIR:Yeah, and so we talked about thevalue conversation before and if somebody hasn't listened to that,they might want to go back and listen to that episode. Really, thebig shift that happens when you learn to conduct a good valueconversation is you completely let go of the solutions and ifyou're letting go of solutions, you're letting go of cost. Soyou're actually setting price before you even think ... And this isthe trick that you've got to learn to do. Before you even thinkabout what it is that you would do for the client. And when you'reable to do that, when you're able to set price before you thinkabout your solutions, let alone your cost, then you have made thattransition to the next level.
DAVID:I hope people will go back thereand listen to that one. It's called "Mastering the ValueConversation," April 4th. That was a really interesting one.Allright, this was fun.
BLAIR:Hey, I'm driving here, this was funDavid.
DAVID:No, I'll tell you if it's fun. Ifit's ... We should do one like: what's starting, existing andthriving to do a podcast together? What are those three categories?I don't think we want to do that.
BLAIR:Oh god, yeah. Yeah, we're stillstarting. Hey, when we reconvene (we're going to record again in afew days)we're going to talk about the X factor. Now, I'mgoing to send you some homework on this, I'm going to ask you tothink about your most successful clients and what did they have incommon. And then we're going to talk about that in the nextpodcast.
DAVID:Okay.
