I was queuing to get my morning coffee the other day. In front of me a woman was doing the same – she ordered a small cappuccino. With chocolate on top (don’t get me started on that). Her cappuccino was £2.45 whilst my skinny flat white came to £2.90. 45 pence more expensive. A price difference of 18.4%.
They were both the same size. Small. As far as I could tell they had the same amount of coffee and the same amount of milk. They took pretty much the same amount of time to make.
This got me thinking about why I was prepared to spend 20% more for the same ingredients but prepared in a slightly different way. Maybe I preferred the taste (I do), maybe I’d fallen for the hipster barista hype and thought the flat white better represented my lifestyle (I don’t think it does, but who knows?)
But the cold, hard fact was I was paying more money for the same ingredients because my perceived value of my flat white, which had slightly smaller bubbles, meant I was prepared to pay a premium.
So I did what most people do when their curiosity is piqued. I googled “why does my flat white cost more than a cappuccino”. And back came the responses. There was some slightly spurious justification that making a flat white required a higher level of skill from the barista.
The cold, hard truth is that my coffee shop charged me 20% for my hot milky coffee because I was prepared to pay the premium. The flat white premium tax.
This led me on to one of my favourite topics; can agencies use different pricing techniques to increase their prices? Imagine the effect on your Agency if you could raise your prices by 18.4%.
Nice daydream or achievable goal? To be effective I think the following conditions need to apply;
- Use the same people, doing pretty much the same things
- There is no point being able to charge 20% more but we have to employ people costing 30% more.
- Package the service and/or the output
- There has to be a point of difference between your previous approach. If we can combine a mixture of technology, process and output under a product/programme title that answers a particular client need then we are far more likely to be able to charge a round sum fee that is not directly related to a fee estimate.
- There needs to be a market and a market perception that the new product/service is valuable
- Does it answer a question; solve a problem; reduce costs; generate more revenue? Does it, simply, have a better report? Combining our core skills, knowledge and expertise in conjunction with technology to answer a client problem is a great place to be.
I’m not saying it’s easy but Agency margins are always going to be under pressure. We work in an oversupplied market so we need to be imaginative in how we sell our services.
Developing a price stack that has a variety of pricing techniques of which the above is one will be vital if we are to remain profitable. Be more flat white and less cappuccino.