Given the threat to commission-based revenue, we push producers/agencies to move to more of a fee-based compensation model, and one that focuses on offering new solutions to their clients. When challenged in this manner, two of the more difficult ideas for them to get comfortable with are asking to be paid for those non-insurance solutions and determining the appropriate fee.
There are basically two ways to establish a fee.
The first is sort of a cost-based accounting approach.
Determine the following:
- Amount of agency fixed costs to be allocated
- Amount of variable costs that will be incurred
- Cost to service the account (account manager hours (x) appropriate hourly rate)
- Producer compensation
- Agency profit
This is certainly an acceptable way of calculating a fee, but be prepared for the prospect/client to challenge every variable in the calculation.
Of course, you don't have to tell the prospect/client the details included in establishing the fee. You could just tell them the final price as you would in a project-based approach; just make sure you have demonstrated the value of the solution.
Which leads to the second way of establishing a fee: a value-based approach.
When meeting with a peer group recently, one of the members shared a story that demonstrates why this makes sense.
The story was about the early days of FedEx. They were just getting started and barely making it as a still relatively small operation. Their conveyor system broke down which effectively shut down their operations. Their very survival depended on getting the system back up and packages delivered.
They called in an engineer who did a walk-through of the system. He then walked over to a control panel, took out a screwdriver, and adjusted a screw about a quarter turn. They flipped the power switch and the entire system came back online.
When asked how much he was owed, the engineer responded, "$10,000". When then asked if $10,000 wasn't excessive for turning a screw he responded, "Oh, it's only $1 for turning the screw, the other $9,999 is for knowing what was needed and getting you back online."
In the big picture, that $10,000 was an absolute bargain.
Agencies get hung up in the same way as the manager at FedEx. They fail to place value on what positive impact a solution can have on the business of their client. They don't see the value of their ideas, advice, and resources. They struggle with the fact that other agencies are giving stuff away.
1,000 engineers could have walked in with a screwdriver and the potential to fix the problem. However, it was the one who was able to diagnose the problem and had the knowledge of exactly how to use the screwdriver that delivered real value.
Once agencies realize their value isn't in a "screwdriver", but in their ability to diagnose the problem, and then use the screwdriver effectively, they will be able to ask for $10,000 with the same confidence as the engineer.
In case you're wondering what "screwdrivers" you have in your toolbox, go take inventory of the so-called "Value Added Services" you are giving away for $1 (or likely for free). Figure out what problems those services can potentially solve, learn how to diagnose those problems, and commit to effective utilization of the "tool", and a whole new world of how to get paid will be yours.
Photo by nitsuki