When we were transitioning into an inbound marketing agency in 2012, I spent hours and hours reading articles and books and reviewing other inbound agencies' websites. I wanted to know what the best of the best were doing. They were the experts, and I wanted to be successful in this new type of agency as quickly as possible.
Now, we've made more mistakes over the years than my pride would allow me to admit here. But there is one mistake that was extremely costly and the result of my initial "study the experts" approach: tiered pricing.
It's a pricing approach that many agencies still practice, but it is a bad -- and costly -- program.
How Inbound Tiered Pricing Works
This is the way most inbound agencies were packaging and pricing their services:
Roll inbound marketing services into retainers
Publish packages and their prices on website
Offer inbound service scaled over three levels
Request a one-year commitment
Some might dress this approach up with different names or styles, but they all result in a tiered pricing retainer structure that equals something like fast, faster, and fastest.
For example: With a $4,000-per-month retainer, a client could get four blog articles, two promotional email sends, daily social media posting and monitoring, search engine optimization, web services, and an ebook or whitepaper every quarter. Some agencies offered more for less or little sprinkles of something extra like press releases, infographics, or video services.
If the client wanted to reach his goals, he might choose the "faster" option. For $7,000, he could get eight articles instead of four and so forth. If a client was really excited about the inbound marketing "thing," just triple everything. Not a problem. We will make you famous for $10,000 per month.
Agencies typically discuss a few different benefits of the tiered-pricing approach:
Packaging your services allows you to generate recurring campaign commitments.
Combining multiple services into one lump sum helps you get away from the traditional agency model of the billable hour.
Your services shouldn't look like a Chinese menu clients can pick and choose from.
During the sales cycle, you should work hard on identifying prospects' goals, plans, and challenges so you build demand to fill the gap.
The larger the gap the greater the opportunity you will have to upsell clients into an option to move faster so they can hit their goals.
If you landed on the bottom tier, you can move clients to the middle or top by providing ROI and proof of concept.
So, we implemented tiered pricing. We sold a ton of small retainers with nearly identical scopes of work. This had a few implications for our growing agency:
Nearly every new client we encountered wanted to start small and see if we could prove our worth.
As campaigns progressed, we struggled to upsell into higher tiers because their needs didn't simply revolve around the concept "same shit, only faster".
We weren't able to handle critical campaign elements like sales materials, integrations, or lead scoring without quoting by the project.
We bled ourselves out providing all kinds of free services to maintain "happy" clients with hopes they'd appreciate our efforts and expand to a larger retainer.
I know at least half of you can relate to my struggles. (The other half are calling me an idiot right now.) I realize these struggles didn't completely revolve around the fact that we had tiered pricing on our website, but I'm positive it set the wrong expectations. I'm sure the agencies I looked up to didn't make as big of a mess of things as I did, but I have also noticed that many agencies don't list tiered pricing packages on their website anymore.
The Problem With Tiered Pricing
Tiered pricing puts your agency and your offerings into a small box.
If you are considering this approach, you should first consider a few questions:
How do you deal with additional needs as they come along?
What do you do when clients have capable internal resources that can handle certain components?
How do you scale up only some of the elements from fast to faster and determine the correct pricing?
How do you present yourself as an agile and scalable resource when you only have three options?
Another major problem I recognized was that the tiered pricing system didn't really fit well with what I understand about the sales cycle.
I have a background in sales and had previously represented companies before that had similar pricing models, so I understood the difficulty this structure caused in the sales cycle. Obviously, this prior knowledge didn't stop me. I was a bit starstruck. I respected the agencies that were clearly successful running this system. And I wanted to be just like them.
This is how I think about the sales process at an agency: Every prospect is attempting to get more for less. This is their job. So naturally, the lowest tier is the most natural fit. In addition, most prospects are fighting an internal challenge of convincing leadership that this "new age concept" of inbound marketing is a legitimate solution to their problems. They have a limited understanding of the elements, how they work together, and what it takes to be successful. Agencies have to spend the time educating them, competing against other firms, and dealing with the prospect's sense of urgency to meet his goals. They don't want to be locked into a year for an unproven marketing approach.
On the flip side, sales people need to be empowered to upsell whenever they have the opportunity. With tiered pricing that's published for anyone to see, new business reps don't have a lot of flexibility in building custom options. Agencies also have a hard time selling a small scope of work for $4,500 when it's listed at $4,000. Your upsell options are strictly centered around your tiers, presenting the challenge of convincing prospects that faster will be better without any real proof.
So how do we turn the tables and set us and our new clients up for success instead of burn out?
How We Overhauled Our Service & Sales Model
We based our new model off a combination of agile methodologies and value-based pricing concepts.
The foundation of our new system is still the desire to divorce the billable hour, something I learned from reading The Marketing Agency Blueprint. To divorce the hour as well as tiered pricing options, I got some fantastic insight from my brothers at Kula Partners. From their experiences adopting the agile methodology, I decided the story point concept would help us properly quantify the value and effort involved with each service. We created a hybrid pricing system by:
Defining the differences between onboarding points, recurring campaign points, and the necessary points to complete one-time projects.
Building everything into our diagnostic and planning presentations to illustrate how our process would lead to long-term success.
Developing an entirely different proposal format incorporating a marketing plan, campaign timeline, and story points.
The early results have been encouraging: Our prospects love the sense of control and flexibility they have in building their own campaigns. Our close rates and onboarding fees have increased, while we have also stretched the timeline from 30 days to 45 days. In addition, we've been able to build demand through marketing for additional services and project work, which clients are actually now paying us for.
I believe the results can be attributed to our ability to address three big issues that fast, faster or fastest just can't solve:
Expectations and processes are clearly outlined with answers to the most common objections built directly into the proposal.
The scope of work is more flexible. We work with clients through the sales cycle to identify the appropriate campaign elements to focus on at each phase of our relationship.
The path for expansion is set. Whatever starting package we come up with includes an appendix of additional services with point values ready to implement as the campaign matures.
It's early, but I'm excited at what we've learned and what we've built to counteract the issues we created as we developed our pricing. It's also a complete work in progress. We continue to improve the materials and pitch as we receive feedback and uncover additional opportunities. I'm less confident in the idea that we've discovered the right answer than the fact that tiered pricing was definitely not the answer for us. The problems it created made us too rigid, too predictable, and too cheap. We sold what we could on the front side and went from the frying pan to the fire by gifting services to clients over and over again.
I've learned a lot of lessons building a business, and this one's no different. You do your best to identify problems, come up with ideas, implement, and test them. You learn what works, what doesn't work, and then you adjust. Rinse and repeat until you get it "right." With pricing, it sets the stage for your sales process and delivery process so the issues are magnified beyond most anything else we encounter in this business.
There's no single solution to the pricing issue. But following the crowd on this issue is never the right approach.
What problems have you experienced with tiered pricing? What pricing models have worked for you? Let's discuss in the comments.
Editor's Note: Has tiered pricing worked for you? Why? We'd love to have you share you opinion and insights with the Agency Post community. If you're interested, contact us at email@example.com.
Originally published Jul 2, 2015 7:00:00 AM, updated February 01 2017