You can only charge what someone is willing to pay. What they’re willing to pay, however, can depend a lot on how your agency positions its services from day one.
Not many agencies start out with perfect pricing -- you discount, misquote, or simply throw out a number to land the account. The pricing process is an evolution, which is why many firms find themselves needing to raise their pricing once they've seen some success. Once you add staff, find office space, and are more able to provide valuable results with better technology, the small margins on those low retainer accounts begin to disappear. No one can build a growing company giving work away for free.
Pricing Lessons Learned: Deliverables-Based vs. Value-Based Retainers
We broke into the marketing retainer space with a deliverables-based model. This isn’t an ideal situation, but it’s an effective way to get your foot in the door when you’re growing an agency from the ground up. It’s easier to win clients this way. However, this approach can create some problems down the road.
Most of the difficulty with a deliverables-based retainer model comes when you go to renew your annual contracts. Since you have been selling based on deliverables, your client is wired to expect more deliverables for an increased retainer price or a lower price for less deliverables.
An example: Our agency built a new website for a client as part of the initial retainer package. The problem presented itself when year two rolled around. We didn’t need to build another website -- the work was already done. This left our client thinking that our services were going to cost less while still providing the same month-to-month content deliverables. That’s a major headwind for an agency trying to build a book of business. Ideally, you want retainer numbers trending in an upward direction.
There are a couple different solutions you can consider to overcome this problem. The one we recommend is to transition to a value-based retainer model. In other words, sell your services like this: “It costs X amount to work with us on a monthly basis,” instead of, “For X amount per month, you get Y and Z.” You can still provide a rough estimate of your tangible deliverables, but it’s important to emphasize to your clients that they’re getting more value for your services than it costs them. As long as this remains the case, there’s no reason for them to go anywhere else. The added benefit to this approach is that if you hit it out of the park for your client in year one, you have a great foundation to increase your pricing during follow-on contracts.
How to Price Your Retainers
This above discussion brings up an important issue: How do you price your retainers? In our experience, it’s prudent to start by selling a few accounts at sub-marginal rates to gain market share. When you’re just getting started, the fact of the matter is that you’re in need of cash flow to keep the lights on. The downside to this strategy is that too many sub-marginal sales will kill your company.
In the beginning, we landed accounts quickly with low pricing -- it works. From there we started to reach a little bit with our pricing in hopes of hitting a few accounts out of the park. As a consequence, we missed out on some accounts we probably could have priced more realistically. Over time, however, our prices tended to fluctuate towards a medium somewhere in between. That is, our prices iterate towards the true market value of the services they represent. If you’ve been working in the marketing world for a while, you’re probably able to fetch a better price for your services (because you’re providing a better product). If you’re just getting started, your retainer numbers might have a lot of room for improvement because you’re still developing your skills.
Don’t be afraid to put a high value on high-value services, but at the same time, don’t overcharge if you’re not yet the expert you hope to be in the future. As your skills improve, your value to a client will improve. That’s why it’s so important to have a value-based retainer model. Now that your firm is getting more efficient, you want to have a tailwind driving your retainer numbers up. The value-based model is exactly that -- a tailwind and an enabler.
4 Options for Increasing the Size of Your Retainers
Let’s say you’re a new agency providing marketing retainer services for your clients. You’ve had some success in the first year, and it’s coming time to renew a 12-month contract with a client. In the past year, however, you’ve discovered that your services are worth more than you previously charged, and your company has decided that future retainers will be at a higher price. Perhaps you underpriced the first contract, or your capabilities have since expanded significantly. In any case, what are the available options for handling the new dynamic with an established client? We suggest four different options:
Option #1: Grandfather the Account
Depending on your relationship with the client (how far back it goes, whether or not you have good camaraderie and a level of trust built up, etc.), you might consider keeping prices steady and making up the difference in new retainers and project work instead. While this approach will not increase your net income, it may pay dividends in other ways. For instance, customer referrals might increase, or you might be able to leverage the relationship for positive reviews online.
Pros: Your client feels happy, gets a good deal, and will probably help to promote your services. Plus you get to keep his or her business.
Cons: You lose out on extra cash.
Options #2: Offer Different Pricing Options
If you have some flexibility in your pricing model (and you definitely should), one way to simplify the renewal period is to offer more than one retainer package when it’s time to sign up again. Think of it like platinum, gold, and silver retainer packages. This enables you to attempt an upsell, keep the same contract (see option #1 above), or offer a smaller amount of work. For instance, if the price point is already at your client’s cap, you can substitute higher margin work into a new proposal so that cost-effectiveness improves.
Pros: Your client gets options that work for the changing needs of both businesses (yours and theirs).
Cons: This can feel a little bit like the Goldilocks tale -- too high, too low, too many choices!
Option #3: Raise Your Retainer to Your New Prices
This option is only recommended if you have zero interest in building long-term relationships or keeping happy customers. This approach requires a plan of action for communicating the change to your current clients and transferring them to the higher price.
Option #4: Sell Your Client on a Higher Retainer
Obviously, this is the ideal situation. You maintain your current customers, and you end up getting paid more as the relationship develops. Your client is receiving excellent service, so they obviously want to do more work with you.
Here’s how to make this option more likely: Line-item the work you’ve done. When you provide full marketing services for a company, it can be difficult for them to envision everything that is happening on their behalf. Even if they don’t request line-item pricing on invoices, keep track of this work. It’s a tangible representation of the value you bring to a company. Even small tasks tend to add up. You fixed a form, added a search bar, troubleshot code for 24 hours to find a single character out of place, created a custom image, etc. You get the idea. Aside from proving value to your client, keeping track of tasks large and small can help your organizational efficiency as well.
Then, compare your signed initial proposal to your tracking documents to show the client where you have gone above and beyond. Use this to upsell. Be able to show results. This is the most critical part of your sales call -- for any industry, any company, anywhere. You should be giving your clients quarterly reports to begin with, but you certainly need a year-end report that proves your worth. Your client’s goal in outsourcing their marketing department is to get better, more cost-effective results than if they had hired a full-time in-house marketing staff. Even if you’ve been sending quarterly reports to your client on a regular basis, the call to upsell a retainer needs to show specifics (e.g., how many leads were generated, how many of these translated into new customers, and how much revenue did the new customers generate for your client’s business.).
Finally, be forthright and confident. Everyone appreciates honesty, so be straightforward in your discussions with existing clients when terms are changing. If you’ve worked hard and done your job well, your clients will likely agree to meet you on the new terms.
If you’re in this position, congrats. It’s a good problem to have. If you have other ideas about how to raise your retainer and maintain a great client relationship let us know in the comments. Did we mention bribery yet?