Determining the right agency pricing model both determines the profitability of your agency and influences client satisfaction with the entire project. Your model also shapes how you market your firm and your staff’s overall happiness — as well as retention rate.
Many agencies approach their pricing model like a single task: established and then ignored. Instead, your pricing model can and should evolve with your business.
Agencies are best served by consistently revisiting and optimizing their pricing models to positively impact their profits. See how below.
What is an agency pricing model?
An agency pricing model, at its most basic, is a choice about what your agency wants to charge its clients for. The model you choose is affected by what your clientele understands and is willing to pay for. Another consideration is if you are happy to sell them certain services.
For example, maybe you have clients who easily understand and are willing to pay for work by the hour. Maybe you’re happy to do that, so you charge that way.
But what if you find yourself negotiating with a client whose goal is achieving more conversions? They don’t want to pay for hours; they want to pay for results. Do you now plan to charge for value as opposed to hours of work to land this account?
Types of Agency Pricing Models
There are a variety of pricing models to choose from, each with its own unique benefits.
To evaluate which agency pricing model could be the best fit for your firm, consider the following four options.
What are the different pricing models?
- Hourly Rate Pricing Model
- Project-Based Pricing Model
- Value-Based Pricing Model
- Performance-Based Pricing Model
Hourly Rate Pricing Model
The hourly rate pricing model is when an agency charges the client based on the price of one hour of work.
A firm can calculate an agency-wide hourly rate by averaging together the value of one hour of work completed by each team member.
Or if your client only needs one service, such as content writing, they charge the client based on one hour of their writer’s work.
Hourly Rate Pricing Model Advantages
This model is straightforward and easy to explain this value to clients. If five team members command an average of $200 per hour, that’s where you start your pricing calculation.
The hourly rate model revolves around an agency’s costs rather than value to the client, who is meant to be the hero.
This model also places the agency’s profit in opposition to the client’s coffers. The longer the agency takes to complete the work, the more it gets paid.
If the client’s trust is damaged, they can begin to question how much work the agency is actually doing, what they are really paying for, and if it is worth the cost to continue with your agency.
Project-Based Pricing Model
The project-based pricing model comes into play when an agency estimates the cost of a project by first calculating the number of hours required to complete the project.
They then multiply that by the hourly rate per employee (or the agency-wide hourly rate) to determine where to start the client’s calculations.
After tacking on a buffer fee or margin to protect profits, this final fixed amount is billed to the client in increments — usually 25% to 50% upfront with the remaining balance due at project completion.
Project-Based Pricing Model Advantages
This model works well for clients who have a budget to adhere to. They will know exactly how much their project will cost and when they will need to submit payments.
There will be no financial surprises, and the timelines are a known entity.
Project-Based Pricing Model Disadvantages
Projects often change and evolve as the agency and the client work together. Early estimates become inaccurate, and additional work without additional pay cuts into agency profits. You may even need to submit additional bills to the client.
This model can also limit creative gains. Even though excellent ideas may pop up along the way, they usually require more time, eating into profits or frustrating clients with additional payments.
On the opposite side of the coin, additional requests from the client could be interpreted as the client trying to get work for free.
What’s more, agencies may feel accused of caring more about getting the project over with quickly than producing a high-quality product.
Value-Based Pricing Model
In this model, the agency has to determine what is valuable to the client — such as leads, traffic, conversion rates, etc. The team must then prove success to receive payment. The more value they place in the result, the more you can charge them for it.
To sell this agency pricing model, firms need to show a history of producing the intended outcome during the sales process in order to build trust.
Some clients will be hesitant about this more advanced and customized pricing model.
If you can keep their attention focused on the value, many prospects can be convinced to spend more for what they really want than they would spend on hours of work or a complete project.
Value-Based Pricing Model Advantages
Pricing your services on the client’s perceived value aligns the agency’s and the client’s goals. Both parties become incentivized by the end result due to the shared risks and rewards.
Clients no longer need to be concerned with the agency’s costs. Then, the agency can focus on creating an effective product rather than the team’s hourly productivity. Plus, the creative process is no longer impeded by premeditated financial limits to the project.
This pricing model has proven to be highly effective at increasing an agency’s profits by giving the client exactly what they believe to be very valuable at the higher price they are willing to pay.
Value-Based Pricing Model Disadvantages
If you can’t deliver the results your client is paying a premium for — and prove it — you won’t get paid. Be certain that you and your team are up to the task before you onboard the client, or you may work very hard for nothing.
Performance-Based Pricing Model
This model takes balancing the give-and-take of client needs vs. agency needs to a new level. Both sides don’t just get what they believe to be a fair deal, they truly dig deep for a win-win, as discussed here by Benson Shapiro of Harvard Business School.
It is a deep, long-term collaboration requiring clear and broad communication from conception to well past launch.
Risk and reward are shared in dynamic ways, and the only real rules are what you agree upon at the start of the project, and the agreements you make as the project unfolds.
Performance-Based Pricing Model Advantages
Big rewards for long-term projects where both client and agency are able to keep their eyes on the prize and openly engage the issues each party encounters along the way.
This model creates opportunities to share the risk when creating something entirely new, where neither party may know exactly what kind of Franken-product they’ll end up with.
As long as the goals are clearly measurable and clearly met, the relationship thrives and the win-win is forged.
One example of this model at work is when a client offers an agency a reward for delivering performance ahead of schedule. It’s a risk for an agency to invest extra time and effort in order to hurriedly find, price, create, coordinate, and execute on so many moving targets.
It may not align, and it may not pan out. If it does, though, that risk could be rewarded with bonus payment from the client, who in turn gets the performance they want ahead of schedule. A win-win.
Performance-Based Pricing Model Disadvantages
Overall, it is a slow process, but as the saying goes, “To go fast, go alone. To go far, go together.”
Choosing the Right Agency Pricing Model
Even small improvements to your pricing models can have a significant impact on your agency’s financial health.
In fact, a study done by pricing experts at McKinsey and Company and published in Harvard Business Review found that a 1% price improvement results in an 11.1% increase in profits.
Closely managing your pricing can make a big difference for small and growing firms, and doing it right becomes even more important when looking to invest in new team members or additional resources.
Here are the key steps to take when choosing the next pricing model for your organization.
How do you choose an agency pricing model?
- Determine your values. What do you want to sell?
- Evaluate your clients. What do they want to buy?
- Decide by profitability. Charge their way, or convince them?
Determine your values.
What do you want to charge for: man-hours, completed projects, demonstrable results, or something else? Will charging this way produce the revenue you need to complete the work more profitably?
Evaluate your clients.
What do they want to buy? Do they draw a hard line about what they want or can they be persuaded?
Understanding the larger arc of your clientele is a big help in choosing the agency pricing model that will draw more profit into your business.
Decide by profitability.
Do you want to charge their way to increase the odds of getting the sale? Sometimes just getting the business is the most profitable move for an agency, and that’s okay. You need to do what you think is best for your bottom line.
If that means choosing your agency pricing model based on what your clientele is ready and willing to say yes to, start there. You can always reevaluate and change your model down the road.
Establishing Your Agency Model
The time has arrived for you to become a pricing model expert and take control of how you charge for your services.
Whichever model you decide is the right one for your company, goals, and clients, be certain to follow up with the related tracking and reporting. You’ll need it for proof of concept to your C-suite.
Most importantly, the trends you find can help you decide when it’s the right time to reevaluate and possibly pivot to improve profits. Ready, set, price!