Yesterday, I had a number of different conversations all about the same topic: how do you decide what to set your pricing at? The question isn’t an easy one by any means, and there are a lot of people in the marketing world whose pricing is actually too low. Let me give you an example. Surveying and research cost a lot of money. Your typical engagement for a research firm can run in the tens, if not hundreds of thousands of dollars. However, research firms earn this money because of the value they create. If you’re facing a billion dollar music industry and paying for some research can help you access 1% more of that market, then paying $50,000 to earn $10,000,000 is a pretty good deal. For those familiar with ROI (earned-spent/spent), that’s 19,900% ROI.

Look how many digital marketers are underpricing themselves and their services. If your work doing SEO helps a client change their website conversion rate from 4% to 5%, what value does that bring the client? If you’ve done your homework, you should know what a conversion is worth. You should therefore know what a 1% increase in conversion will mean for the client financially and can bill accordingly. Here’s an example.

Let’s say you’re working for a car dealership, and the dealer’s net profit on vehicles sold is $3,000. Let’s say their website brings them 200 prospects a month, and of those, 20 buy a car. Let’s say you’re charging them $100 an hour and working for them 20 hours in the month. What would the value be if you increased their prospect conversion by 1%? Here’s what the spreadsheet might look like:

You can see in the chart above that by increasing the website conversion rate by 1%, the client sells 5 more cars a month. That means they earn $15,000 more a month with your efforts. The question you have to ask is not what you cost, but what kind of ROI you want to give to the client. If you billed at $100 an hour, you’d be giving them 650% ROI. If you raised your rates to $150 an hour, you’d still be giving them a very nice 400% ROI.

That’s the secret to setting your pricing. If you know what the ROI of what you do is, you can then ask for a target ROI and sell on that, rather than sell on your cost. You’d be able to sell for more money while still creating lots of legitimate and provable value for your client.

Of course, that’s predicated on two assumptions. The first assumption is that you know what value you can create, and the second is that you can measure it. If you can’t do either, then you’re stuck with setting your pricing based on what you cost and not what value you bring to the table.

Try copying the basic model above and seeing how many different ways you can add value to your clients’ businesses, and then what share of ROI you can give them while still earning a decent amount for yourself.

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With all of the financial world focused on the LIBOR-gate scandal, now’s a good time to examine the concept of yield spreads. In the world of financial services, a yield spread is effectively the comparison of one investment to another. For example, people often compare the yields between the 90 day Treasury bond and the 90 day LIBOR rate as a measure of the level of risk in the economy, one famously known as the TED spread.

The gap between the rates is the spread; in this particular case, the wider the spread, the more risk there is in the economy. That’s why the LIBOR scandal is such a big deal – banks like Barclays were allegedly systematically manipulating LIBOR to make them appear less risky than they actually were.

So how does this apply to your marketing? Spreads fundamentally indicate a disconnect between two different measurements. In the case of the TED spread, we’re not only concerned about the spread itself, which is a snapshot of risk in the current moment, we’re also concerned about the trend of change between the two. A widening of the TED spread indicates that risk has increased, while a narrowing indicates that risk has decreased.

How does this relate to marketing? Think about all of the different metrics and rates of change data that you have access to, and think about how they relate to each other. In the cases of Treasury bonds and LIBOR, these are rates of borrowing, so they’re different numbers for effectively the same activity. What rates might be similar in function but different and important to your organization?

For example, suppose you have an email subscription box on your website and an ability to buy a product on your website. Are you capable of measuring those rates independently? What’s the spread on those rates, and is it increasing or decreasing? Is there some seasonality or cyclicality to the changes in the spread?

Look for increasing and decreasing spreads in your marketing funnel as well – does your lead generation rate diverge significantly from your closed sales rate? If your business typically generates leads at 8% conversion and sales at 30% conversion, then you have a 2200bps spread. Suppose you noticed that over the past few weeks, that spread had widened to 2600bps. Would that be enough of an early warning signal that you should stop to investigate why the spread is widening? It might be – depending on which number is rising or falling, you could uncover changes that would be worth asking about and investigating.

Spreads aren’t the answer to all of your business marketing metrics, not by a long shot. But as they are in the financial world, they can be an important diagnostic measure that lets you know of potential changes in the system, changes that you can be made aware of very early and react appropriately.

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