It’s healthy to be concerned about your marketing agency pricing model and whether or not you’re getting it right.
The truth is, there’s no one pricing model that’s going to work for every marketing agency. In fact, most digital marketing agencies should adopt multiple pricing models based on the type of service and project that’s being delivered to the client.
Think about it, why would you price the design of a logo the same way you would price the management of a company’s Facebook Ads? The only way to price these two deliverables the same would be to charge on an hourly basis.
But you shouldn’t do that, and this article will outline why you shouldn’t do that, and how to get your marketing agency pricing right from the start.
So, what are the different marketing agency pricing models and which should you consider using?
In this article, we cover the four most popular pricing models, as well as marketing agency pricing best practices.
- Project-Based Pricing Model
- Hourly-Rate Pricing Model
- Value-Based Pricing Model
- Retainer Fee Pricing Model
- Best Practices for Marketing Agency Pricing
Project-Based (aka ‘Milestone’) Pricing Model
Project-based pricing is an easy to understand pricing model for both the agency and the client. The complication for the agency, however, is being able to accurately scope out each project and the time it will take to deliver.
Typically, a fixed-scope project is billed on a milestone basis, which means payments come in increments. One way of doing this could be 50% up-front and then have the final amount due at the completion of the project.
To set rates for a project, you’ll need to figure out how many hours you think the project will take to finalize.
Pros: Project-Based Pricing
- Easy to understand the model for both the agency and the client.
- Agencies profit off of their own efficiency, because they’re experts at the services they offer and can get projects done quickly. If you charged at competitive prices on an hourly basis, you’d actually be losing money by being efficient.
- Clients like being able to predict both the cost and time of payments for each project. Agencies like being able to predict revenue and when it will be received.
Cons: Project-Based Pricing
- If you underestimate the time it will take to complete a project when you set your fixed prices, you’re going to be less profitable.
- Even if properly scope out a project, things always change. Clients often want to make updates to what it is they want to be delivered, and this can cause relationship issues if not handled properly.
When should a marketing agency consider a project-based pricing model?
Agencies that specialize in an area where deliverables are predictable, such as the design of logos or cover images, pricing those items on a project-based model makes lots of sense.
If agencies are smart about how they price their services, project-based pricing can be a win-win for the agent and the client. This is because the agency makes more money than they would if they charged on an hourly basis, and the client gets an expertly done project delivered quickly.
However, if you lack experience scoping projects, and you work too many hours, you significantly reduce the amount of revenue earned per hour. Be sure to either educate yourself on how to properly scope projects.
It’s important to work closely with the client when scoping out each project when you’re using a project-based pricing model. Make sure that what’s expected of the agency is clear from the beginning, and you can reduce the damage done by unexpected changes requested by the client.
Hourly-Rate Pricing Model
Hourly-rate pricing is another straightforward marketing agency pricing model.
It’s simple, the agency sets an hourly rate for their services either across the company or by the individual(s) contributing to the project.
If the hourly rate is agency-wide, then all agency individuals contributing to a project cost the client the same amount across the board per hour. And if the hourly rate is on an individual contributor basis, then each individual will cost the client an amount determined by factors such as their level of experience and talent.
For example, for an agency-wide hourly rate of $40/hr where two marketers are working on a project, each hour will cost the client $80. And if hourly rates are based on an individual’s experience and talent level, where Bob is valued at $55 per hour and Virginia is valued at $65 per hour, each hour will cost the client $120.
Pros: Hourly-Rate Pricing Model
- Clients like hourly rates because they’re easy to understand and it becomes simple to predict how much they’ll pay per month.
- Agencies have the potential to make more money on complex projects such as web design. However, this is also a negative, because you risk upsetting the client.
Cons: Hourly-Rate Pricing Model
- Results and value to the client are not emphasized. Instead, the cost to the agency is emphasized.
- Agency is incentivized to take longer to finish a project because the agency will then make more money.
- The ability to predict profits and cash flow for the agency becomes more difficult.
- It becomes risky for the marketing agency to estimate project costs due to the unpredictable nature of how long a project may take.
When should a marketing agency consider an hourly rate pricing model?
An hourly rate pricing model is best for digital marketing agencies that work with clients who have a tendency to change their mind or require lots of edits/revisions. By agreeing to an hourly rate, you can avoid things such as scope creep.
Additionally, consider hourly pricing if you’re an agency that’s just getting started and you’re not sure how long a certain project is going to take. Or, consider hourly pricing even if you’re an experienced agency, but you have a project or part of a project that’s hard to predict the time and scope of.
Ultimately, the hourly rate model is a bad choice for most marketing agencies because the incentives to the agency actually work against the wants and needs of the client.
However, if you do choose an hourly rate for your marketing agency pricing model, keep in mind that you’ll need to compensate for overall business operating costs in addition to the amount you’ll pay each individual working on a project.
Additionally, always inflate the estimated cost of a project in order to avoid the uncomfortable situation of where a project takes longer than expected and ends up costing the client more than they had expected.
Value-Based Pricing Model
Value-based pricing could also be referred to as results or performance-based pricing.
With a value-based pricing model, both the agency and the client become incentivized by the end result due to the shared risks and rewards.
Clients don’t need to worry about the costs, and the agency can focus on delivering high-value products.
Value-based pricing is, however, the most complicated model, which not surprisingly contributes to why value-based pricing has also proved to be highly effective at increasing an agency’s profits.
Here’s how it works…
The agency needs to determine what’s valuable to each client, such as the number of leads generated from Facebook Ad campaigns or landing page conversion rates.
Therefore, the agency has to be able to track and measure their performance, which can be complicated when it comes to obtaining access to the backend and dashboards of the client.
So, this will take more time to establish, and clients aren’t always the quickest to provide all the things needed for an agency to be effective. However, if you really care about the success of your clients, you should want to have access to these things regardless. Not to mention, the potential profits are worth your time and minor frustrations. To keep in line with the values you offer, you can consider warehouse management systems and control your inventories properly.
Pros: Value-Based Pricing
- The goals of the client and the agency are aligned. Higher potential profits for the agency, and therefore quality work being done for the client.
- Clients like being able to measure results and having the ability to hold the agency responsible when outcomes don’t meet expectations.
- Eliminates confusion around how well an agency is performing.
Cons: Value-Based Pricing
- The agency is on the hook to perform.
- Value-based pricing can be hard to sell for the agency.
- If your client has a poor performing product, it’s going to be hard to meet their expectations.
When should a marketing agency consider value-based pricing?
Value-based pricing models work well if you’re a performance marketing agency. It really only makes sense to introduce results-based pricing if outcomes are indisputable and backed up with data.
So, if you’re an advertising agency, value-based pricing almost has to be included in your pricing model.
Additionally, if you’re confident in your abilities to produce high-value results for your clients (and you should be), performance-based pricing can be a great way to build trust in a relationship, and increase your profits. This is especially true if your client’s product is attractive and you think it’ll be easy to drive traffic and conversions.
As the agency, you do need to perform, but the client can’t deny the results when there are reports and data to show.
Most prospective clients will find value in this pricing model if you explain it to them well. The better the outcome is for the client, the more you’ll increase your profits. It’s that simple.
Retainer Fee Pricing Model
Some form of a retainer are popular among marketing agencies because you’re paid up-front and the client can easily budget out retainer fees for each month.
Retainers are pre-negotiated and paid up-front by the client for either a:
- Specified time period, or a
- Pre-defined number of deliverables.
If you’re working on a time-based retainer, agencies and clients agree on a set number of hours to be worked each month. For example, if your client agreed to a 40-hour-per-month retainer at $125 per hour, the monthly retainer fee = $5,000.
Time-based retainers can be specified differently. The agency could set the retainer in stone, where a client must use all hours each month. Or, an agency could allow the client to roll over hours to the next month if they’re not used.
If you have a deliverables-based retainer, the agency and the client agree to what will be delivered each month, such as 5 blog posts, 10 images, and 10 SEO backlinks. The issue with a deliverables-based retainer is that the agency is on the hook to get those tasks done.
This can cause problems at the end of the month if the agency is behind, or if the client decides they don’t like something and want it changed. So, when determining how much your agency can actually deliver each month, pretend like there’s only 3 weeks instead of 4. This way, you’ll give yourself a buffer for any complications that arise.
Pros: Charging a Retainer Fee
- Good for agencies because it gives them a recurring revenue stream from clients.
- Clients like retainers because it helps with budgeting and accounting.
- Agency gets paid up-front, which eliminates the uncertainty of other pricing models.
Cons: Charging a Retainer Fee
- Some clients don’t like retainers because they view them as an additional expense that’s hard to hold the agency accountable for.
- Signing new clients to a retainer fee isn’t always easy, and you may need to negotiate when a retainer fee will go into effect with clients that want to try you out first.
When should a marketing agency consider adding a retainer fee to its pricing model?
Retainers could be difficult to pitch to clients if you’re just getting started and working with clients without large budgets.
However, it’s important to have some form of a recurring revenue stream for all companies, and retainers can provide that for you. So, depending on how established your agency is, or how confident you are in being able to sign a new client, adjust your retainer fee accordingly to avoid potential objections.
Or, if you do publish your pricing publicly, be sure to make your retainer fee clear, and this will naturally weed out prospects that you probably wouldn’t want to work with anyway.
Lastly, consider waiving a retainer fee for the first month with prospects that you think would be a valuable client to add to your portfolio.
Best Practices for Marketing Agency Pricing
Here are 5 awesome tips and best practices for marketing agency pricing.
#1. Use multiple pricing models
Different services need to be priced differently in order to maximize your profits.
If you’re running ad campaigns for clients, use value-based pricing. If you’re unsure about how long a project is going to take, consider proposing hourly-based pricing.
Furthermore, always try to secure some form of a retainer in order to guarantee you’ll have a recurring revenue stream every month.
#2. When to display marketing agency pricing publicly
Too many digital marketing agencies are afraid to put their pricing on their website.
And that makes sense because it likely depends on the services being rendered, and therefore pricing can become very complicated.
If you’re an established agency with referrals as your number one source of new revenue, you’ll probably do better by not displaying your pricing publicly.
However, if you’re out prospecting for new clients and you’re not well known or established, we highly recommend addressing your pricing publicly. The reasoning here is similar to why a SaaS company displays their pricing and then has a “contact us” option for enterprise-level clients.
You don’t want to waste your time talking to prospects that don’t have the budget or are going to object to your marketing agency pricing model.
One of our agency friends uses the following language on their agency pricing page for social media services:
“Our most ideal client is coming to us with about $3,000/month to spend on our services, and ~$3,000-$10,000 in advertising budget.”
Then they go on to list out:
- When you would want these kinds of services
- Why the pricing model makes sense, and
- What the client will receive in deliverables.
The goal here is to be completely transparent and to attract the right kind of clients to your agency.
#3. Do competitor marketing agency pricing research
Regardless of which marketing agency pricing model you choose, competitor research is going to be essential to your success. It allows you to see the pricing margins in your niche and shows you where you fall in the market.
By identifying at least 10 closely aligned competitors’ pricing models, you can see if you’re overvaluing your product, or selling yourself short. If a competitor company has private pricing, just go undercover and ask for a quote using an unbranded email or phone number.
Prospects are going to compare your services against your competitors, so this is a must.
#4. Avoid month-to-month sales contracts to increase retention rates
It’s hard to say no to clients when your agency is just getting started. However, flaky clients can cost you big time because they churn quickly, and the time you’ve spent getting them to sign is a net loss.
In every industry, there are ways to identify which clients are likely to churn. In our research, one of the main indicators has been with clients that purchased month-to-month contracts as opposed to 6 or 12-month contracts.
So, consider the following if you’re a performance marketing agency:
Require a 10% fee on ad spend of month-to-month clients, 8% for 6-month clients, and a 6% fee for year-long client contracts. This incentivizes clients to stay with you longer, and it also demonstrates confidence, as well as experience.
Here’s how we calculated the fee structure for our ad spend levels…
|Client Size||Low Budget||Medium Budget||Large Budget|
|Fee (Percent of Ad Spend)||10%||8%||6%|
When we did our churn research, something fascinating emerged from the numbers.
High-churn customers were almost always month-to-month customers. These customers typically churned 2x more than all the other clients.
What did we do to improve client retention?
Easy. We eliminated the month-to-month option.
Sure, you’ll get fewer clients in the door, but the ones you do get will stay longer. Improving client retention by providing long-term value and generating consistent revenue is the best way to scale your marketing agency.
#5. Differentiate your product offering from the competition
One of the biggest challenges for marketing agencies is finding services to offer that differentiate themselves from the competition.
There are literally tens of thousands of marketing agencies in the United States alone, so you need to stand out.
The #1 thing brands said they wish their agency did better? Adopt new marketing technologies to gain a competitive advantage.
Customers.ai has helped our many agency partners:
- Get higher retainer fees
- Increase client retention
- Get revenue share as an affiliate partner
- Expand services offered
- Get leads from Customers.ai Agency Directory
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