Published in Jul-Aug 2015
|.Illustration by Creative Unit.|
Floyd Mayweather earned $105 million last year. Felix Arvid, Sweden’s foul mouthed video game reviewer earns around nine million dollars every year from YouTube videos. Kim Kardashian announced that she will not bestow a product endorsement for anything less than one million dollars. That is one side of the story.
In 2014, on average, US teachers earned $41,250. UK nurses earned £23,049. Programmers at Google earn from $48,000 to half a million dollars a year, depending on their seniority. That is the other side of the story.
It may sound unfair, yet Mayweather, Arvid and Kardashian can defend themselves about the money they are making, and that too legally. The question is what is their actual worth? How are these fees being calculated? Are they working as much as they are earning or are they overpaid?
The same goes for several social media agencies with big names. Social media account management comes with a price tag. The bigger the agency, the higher the fees they charge for the same (or similar) activities that a smaller agency would charge for half the price. Like an unknown actor who will charge much less for a role in a big film compared to an established actor; and because both cases are considered subjective and qualitative, no clear and effective pricing methodology is in place.
There are two sides to this equation. The client side and the agency side. Clients want to have everything at as low a cost as possible. Agencies want to make as much money as possible. Both are right and both are wrong and this is primarily because no one actually knows social media as yet.
Agencies are wrong when they look for short term gains rather than look for the bigger picture. Clients are wrong when they look for absolute cost instead of looking at what value they are getting for their money.
The Harvard Business School’s Value Stick Model focuses on two things; the customer’s willingness to pay and the supplier’s eagerness to charge. What happens in between is your revenue. To increase the value of your business, you need to either increase the customer’s willingness to pay or reduce the supplier’s eagerness to charge. In the case of social media agencies, the supplier side carries less weight because social media is more or less free; they can, therefore, focus on increasing the customer’s willingness to pay more.
The Agency: What is your worth?
First things first… get rid of standard packages and tariffs. Almost every social media agency website I came across while researching this article, has a fixed set of packages. Platinum, Gold, Silver, Premium, Ultimate, Deluxe, Pro, Starter, Basic. They all sound like hotel rooms with different sized beds. In a very short time, this pricing method will become obsolete, if not already.
Charging by the hour is the easiest and most common way to go. You track the hours it takes to work on a project and bill accordingly. Other common methods include charging per project or a monthly retainer or a combination of both. The problem is that the quality you put in those hours is not evaluated. More often than not,
I have worked less hours with better output compared to the tasks where I spent more hours. What if the work that is being done is worth more than the amount on the hourly rate?
For most social media agencies, especially small scale ones, the ‘freemium’ model should be the way to go. The term freemium was coined by Jarid Lukin in 2006 and it is a combination of free and premium, whereby a basic service or product is offered for free and as the customers become used to it, additional features come at a premium.
It might sound absurd to some social media agencies to offer free social media management to their clients. After all, it is a business not a charity, right? However, there are some mind-boggling stats showing the conversion of free to premium users in other segments. For example, in the network security software industry, the conversion from free to premium is over 40%. It does go down to lower levels when the seller is dealing with critical mass and is relying on a high level of subscriptions, like LinkedIn for example, where the majority of people use basic accounts, with only two percent using the paid option.
Two percent of 277 million subscribers (end of 2014) equals over 5.5 million premium users, which is more than the population of 134 countries of the world. Two percent is pretty good.
Agencies need to keep in mind that social media management is not a one-off job. If the free service is valid for a month and impresses customers, the agency can easily recover the effort and cost incurred during the free first month of service. This is based on the assumption that one is dealing with educated and business savvy clients who can see the effectiveness of their social media efforts. By going freemium, you actually increase the customers’ willingness to pay, resulting in high value for your agency.
There will always be people advising you to charge less so you can build up a client base. However, keep in mind that no matter how much you charge, some people will think you are charging too much and others that you are charging too little. The challenge is finding clients who will pay what you decide you are worth.
The Client: What is the ROI?
Again, first things first… brands need to stop allocating a fixed (or a percentage of their) budget to social media. Breaking news… strategy comes before the budget. The budget is only a function of what one wants to do and once you know this, there will be several agencies which can do this within different sets of budgets. Brands also need to understand that a social media budget is not a must. Plenty of brands are not suited to a Twitter handle or a Facebook page, and ‘likes’ do not define the success of a campaign or brand.
The best examples are the recruitment departments in most major companies. When you apply for a job, they ask you where you saw the job advertised and this is similar to the ‘purchase intention’ of a product and what triggered it. There is no harm in doing a pre and post analysis on the purchase intentions of your social media audience before running a campaign. In chronological order, you ask your Facebook fans about their purchase intentions, monitor the results, run your campaign and do another round of analysis. After eliminating the bias from both analyses, there will be at least some indication of growth and ROI.
The bottom line is that social media is still at a nascent stage. The problem is that it is changing rapidly and experts cannot keep up. The moment you think you are an expert in Facebook, Twitter comes along which is a completely different medium. While you are learning the ropes on Twitter, Pinterest and Instagram are already mainstream.
As a client, a single agency may not be the solution for all your social media platforms and all social media platforms will not be suited to your brand. Choose your platform, choose your agency, never start with the budget and always quantify the impact instead of going for the lowest cost or the most cost effective option. As an agency, pick a price and own it. Be ready to sacrifice short term in favour of the long term. Be ready to go freemium. Be confident about how much you are worth, do an amazing job, and you might be surprised by how much clients are willing to pay for your abilities.
Sami Qahar is a Dubai-based Pakistani looking for excuses to write. Aurora gives him a few. email@example.com