ICA survey shows growth in value-based pricing models for Canadian agencies

While most Canadian agency contracts are still paid based on rate cards and billable hours, more than 47% have some value-based pricing strategies with their clients—up considerably from just 21% in 2017—according to a new member survey from the Institute of Communications Agencies.

That trend line is good news for the ICA, which is calling for the industry to “rip up billable rate cards” and adopt more value-based pricing models where remuneration is aligned with client objectives, such as sales figures or engagement.

However, most agency remuneration is either variable fees based on time billed (79.4%), or fixed fees (73.5%).

The over-reliance on inputs like billable hours, roles and rates is antithetical to producing the best work, said Leah Power, the ICA’s executive vice-president of agency operations.

“The agency is going to try to increase those [inputs] and the clients want [the agency] to reduce them,” she said. “Looking at that model, how can you have a relationship when the foundation of how you’re existing in the partnership is that ‘I’m trying to do one thing and you’re trying to do another thing.'”

The ICA conducts its pricing survey every two years to help establish benchmarks for the industry. The survey examines average hourly billing rates by position in different departments, as well various pricing models and factors involved in formulating billing rates.

This year the ICA asked more questions about value-based compensation models, releasing some of the findings in the report “Agency Progressive Pricing Report” in order to generate awareness and start conversations around alternatives to traditional billable rate cards.

While fixed rate arrangements are still the norm, value-based methodologies are better for both clients and agencies, said Power. “[Clients] want to have the resources on the agency side to fulfill their strategic brand and operational goals and objectives,” she said. Values based systems build alignment between agency and client goals and objectives.

“It’s finding some motivator or way of incentivizing both parties so that you’re working towards the same goal. The way contracts are being structured around billable rates, you are working [towards] opposite goals.”

Some of the ICA suggestions in the report include:

  • “Approach every compensation dialogue with the question ‘How can we align our economic incentives?'”
  • “Make it clear you don’t view compensation as a zero-sum game. Instead of fighting with procurement for a bigger slice of the pie, identify and discuss ways to make [the pie] larger.”
  • “Don’t let the buyer direct the conversation to talking about your costs. Be deliberate about continually bringing the topic back to discussing expectations, objectives, desired results and solutions.”

While the survey found growing adoption of value-based models, it also revealed a procurement driven trend toward more onerous payment terms, sometimes reaching 120 days. “Payment terms abuse by clients serves only to degrade the partner relationship and erode trust,” states the report.

In terms of blended rate increases, corporate management rates were up by 34.1% from 2017, planning and research was up 21.5%, creative was up 2.6%, media was up 2%, client services was up 2.1% and digital production was up 4%.

David Brown