In Pursuit of the Best Agency Pricing Model

Agency pricing models have long been a subject of debate and experimentation.

Which type of pricing model will make that client happiest? Which pricing structure will ensure we’re making enough profit? What percentage of our work should we keep on retainers? And lately: should we consider switching to productized services?

Executives and managers understand the various agency pricing models out there. After all, they’re the ones quoting. As profitability is undeniably vital for an agency to survive—and thrive—creative service businesses will often tailor their pricing based on the specific needs of a customer. That’s also where a lot of value-based pricing ideas get killed.

While agency leaders recognize that their purpose extends beyond increasing agency margins, it’s paramount to find pricing structures that can strike a balance between value and client satisfaction, but still maintain a steady increase in revenue.

This is why the wheel keeps getting reinvented, and why the most commonly applied agency pricing models are continually reevaluated.

So which model for agencies is the best? Which one is most popular? Is there even a single best pricing model we can or should apply? 

What a business should charge for its agency services, or the pursuit of an ideal pricing model, aren’t an endpoint, but a continuous journey. Choosing the right pricing will depend on expertise, scope of work, industry norms, and preferences of both an agency and its clients.

Traditionally, agency businesses have focused on the following pricing structures:

Check out a detailed breakdown below.

Hourly billing is a straightforward agency pricing model. It provides transparency and accountability. It allows clients to track an agency’s efforts and costs. It’s suitable for projects with uncertain scopes or ongoing support, where professional services time tracking is essential.

Billing by the hour is tricky, though. Clients often get concerned about the efficiency of the agency’s work. Hourly billing can lead to unexpected costs for a client if the project takes longer than projected. From an agency’s side, there could be a lack of incentive to complete tasks quickly. 

All of this can lead to a slightly tense relationship, where uncertainty and doubt reign, instead of creative output and value. Optimal as an agency pricing model? Perhaps not. Necessary? Sure. 

Here’s more on fixed prices vs. hourly rates.

Next we have the project-based pricing model, a flat fee for an entire project or a specific scope of work. This agency pricing model offers much more clarity and predictability than hourly rates. It allows clients to plan their spending in advance and encourages agencies to deliver projects within specified timelines and budgets.

But beware of scope creep, because scope creep will happen. The challenges that come up in accurately estimating a project’s scope, which leads to cost overruns, is unfortunately commonplace. Agencies aren’t the only party to blame here, though, as they often face difficulties if requirements change during a project.

As project-based fees are determined based on an estimated timeline, resources, and expertise, this pricing model is really best for projects that are well-defined and have a very clear scope of work.

Read how Hike One got more clarity with Productive.

Retainers provide a consistent revenue stream for agencies, and consistency in revenue is something we all like. Retainers also allow for building stronger relationships with clients by providing ongoing services.

Under a monthly retainer agreement, clients pay a fixed monthly or quarterly fee to retain the agency’s services over an extended period of time. The agency allocates a certain number of hours and resources each month to work on various tasks or projects for a client.

The retainer model may result in unused hours or the underutilization of resources. This may cause potential financial inefficiencies. On the flip side, there’s also a risk of clients feeling locked into long-term agreements.
 
As an agency pricing model, retainers should be considered and implemented with certain clients and for certain types of projects, but it’s definitely not the only and best option out there.

Performance-based pricing ensures that agencies are accountable for achieving specific outcomes and goals. Clients pay for tangible results, such as leads or conversions, providing a clear return on investment (ROI).
 
In a performance-based model, agencies are compensated based on achieving specific pre-defined goals or KPIs. Defining appropriate metrics and measurement methodologies can be challenging, leading to disagreements on what constitutes success. It may not be suitable for long-term branding or awareness campaigns where immediate results are not easily measurable.

There’s also the option of mixing and matching performance-based pricing with another model, such as a retainer. For example, the first part of the fee would be a flat retainer (covering costs + a buffer of 5-10%), while the second would be based on target metrics.

This balances risk and reward so that you can have guaranteed income, with the possibility of earning extra in case a project goes exceptionally well.

With the value-based model, agencies charge fees based on the perceived value they bring to the client’s business. The pricing is determined by factors such as the agency’s expertise, the potential impact on the client’s revenue or brand, and the uniqueness of the services provided.

The value-based pricing model allows the agency to charge a price based on the value it provides to the client. This model is best for projects that are not well-defined and for clients with a budget that is not a constraint. The downside of value-based pricing is that it can be difficult to quantify the value provided to the client.

Productization refers to the process of creating standardized products that can be sold to multiple clients. Recently, this model is gaining popularity. This model seems best for projects that have clear and predictable outcomes.

Source: Max Baxter, CEO of Huge for The Drum

The productization of agency services include reduced risk for both the agency and the client, increased efficiency, and the ability to sell the same product to multiple clients. Productizing agency services can streamline operations, scale efficiently, and allow agencies to target specific market segments effectively. Still, it requires careful planning and market research to ensure the packaged services align with client expectations and market demand.

A cursory search through the web will show you that many industry professionals and consultants are pushing value-based pricing as the top strategy for profitable agencies.

Why is that?

Well, in theory, there’s a lot going for this strategy. It’s true that retainers and hourly fee pricing put clients and agency desires at odds; while the client wants to see results and efficiency, retainers support complacency, while hourly pricing implicitly incentivizes the agency to stretch their work out to increase income.

In an ideal world, value-based pricing is the perfect solution. It ensures that agencies are engaged but also fairly compensated for the actual value their services provide to the business (and not just the hours or resources they’ve put in). Businesses can also profit from a model so focused on goals and results, rather than plain deliverables.

As with everything, it depends.

Value-based pricing does work, but it doesn’t work for everyone. For an agency with an established brand, it’s easier to both a) gauge the real value of their work, and b) convince the client to buy into it.

However, newer or smaller companies might struggle. Without data on similar projects, it might be hard to provide an estimate that isn’t a low-ball or high-ball amount. Additionally, there’s probably nothing setting you apart from the competition in a significant way to justify additional expenses.

To provide an example, only about 17% of consultancies go for value-based fees for reasons such as:

Source: Why Do Only a Few Consulting Companies Prefer Value-Based Pricing?

All of this is to say that value-based pricing isn’t the perfect, one-size-fits-all solution that it’s sometimes presented as.

Now that we’ve covered the basics, we’ll discuss hourly rates, the most common pricing strategies, and tips for profitability across specific types of agencies.

According to a survey by SoDa & Productive, project-based pricing is still king in digital agencies, with just under 50% of total revenue derived from fixed fees. Retainers make up 44%, hourly-based 30%, value-based 10%, and commission-based 1% of total revenue.

To improve profits, Promethean Research advises marketing agencies to:

We also have a guide on how to manage marketing projects, so check that out to learn more.

Besides the above mentioned pricing models, advertising agencies tend to get a bit more specific by applying commission-based pricing.

Commission-based pricing aligns well with an agency’s incentives with a client’s goals, as the agency’s compensation is tied to the success of advertising or marketing campaigns. Advertising agencies get a percentage of the media or advertising spend that the client allocates. The commission rate varies based on the size of the budget and depending on  specific services provided.

This model can create conflicts of interest if the agency focuses on maximizing the commission rather than the client’s overall objectives. Clients might have limited control over their budget allocation.

The staffing agency pricing strategy includes adding a markup (comprised of labor costs and service charges) on top of an employee’s hourly wage.

According to the American Staffing Association, a staffing company with an hourly rate of $17 would need to charge a minimum bill rate of $25.76 (or a markup of 50%) to cover operating expenses, labor costs, and achieve the national average net profit of 3.3% or $0.85 per hour.

The average markup ranges from 50% to 75%, but it can go up to 100% depending on location, the particular service offering, how in demand it is, and other factors affecting labor costs.

According to a survey by Visual Objects, social media marketing is one of the main preoccupations for small businesses. Over 70% set some budget for social media marketing, and a quarter dedicate 10% to 30% of their advertising budgets.

If you want to hire an agency to get the most out of your social media management (or you’re benchmarking competition), here are the prices you might find in an ad agency rate card:

The prices usually vary according to the social media channel and active platforms advertised on, type of content and service, engagement criteria, and location of agency—for example, the US and Canada share an average hourly rate of $100-$149, while the UK has an average rate of $150-$199.

A recent BenchPress report by The Wow Company, which included pricing reports from over 600 agencies based in the UK found that:

Most agencies that took part in the BenchPress Pricing benchmarks survey use a blended hourly rate. More precisely, 68% of agencies under £1m in revenue use blended rates, while 45% of agencies with £1m+ revenue charge this way.

The rest of the respondents use tiered pricing, i.e. different hourly rates for each team member, and those that apply tiered pricing charge more and make more profit.

Additionally, an insightful survey by Productive shows the distribution of agencies according to recurring revenue: it’s found that more than half of the participating firms reported that 50% or more of their revenue is recurring.

Recurring revenue provides financial stability and is attractive to potential investors or buyers, but putting all your eggs in one basket can be risky. That’s why businesses need to consider their client concentration—anything below 25% is considered good.

To learn more, check out the 2023 Global Data Report on Agency Valuations.

Setting the right service price and strategy is one part of the equation; the other is billing your client to ensure a steady cashflow.

Here’s a quick overview of billing models and how they’re utilized:

Another important factor for profitability is when and how you’re recognizing your revenue. To learn more, check out our article on project revenue recognition and revenue operations guide.

Here are some things that we haven’t covered in the previous sections but are useful to consider for improved business operations and strategy:

Making sure a prospective client is the right fit for your agency is the basis of a fruitful relationship. If you’re not clear on business goals and client expectations, this can spell disaster for even the most well-organized projects.

Here are some criteria that you can apply to ensure a great client/agency fit:

Although retainers can be a great way to ensure a consistent cashflow, they can also turn unprofitable if left unattended. Agency fees are driven by multiple factors, such as rising wages, inflation, and increasing operational expenses.

According to the U.S. Bureau of Labor Statistics, there has been a 4.4% increase in wages and salaries and a 3.7% increase in benefit costs in the previous year. This directly impacts agency expenses.

All of this is to say that retainer fees should be revisited at least annually, but doing so on a quarterly basis is even better. By maintaining continuous and open communication with the client, you can switch the narrative from “How can I benefit my agency?” to “How can I provide a better service?”.

If possible, underline the value you’ve already provided to the client — for example, a report that shows an increase in traffic to their website and lead conversion. You can also introduce your new capabilities or offer additional value-adding services.

Using three levels of services (each priced accordingly) is a strategy frequently used in the SaaS industry, but it can be applied to something like productized services.

The middle tier is the one most clients will go for — which is why you want to make this one your regular price, with all of the bells and whistles that go with it. The higher tier should be priced up for some additional services, while the low-price tier should be a stripped-down version that covers the essentials.

Let’s consider a web design project management example:

This strategy should make clients more willing to accept your regular rates while still providing options for different needs and budgets.

There are various ways to optimize costs internally. This can include:

1. Managing Utilization Rates

The staff utilization rate is the main metric for gauging how productive your workforce is. You can analyze performance across projects or individual teams to pinpoint trends. If a team is logging an uncharacteristic amount of non-billable time on a certain project, this can signal issues in your work streams.

If there are no process bottlenecks, you can consider if there are communication breakdowns with the client, such as frequent change requests.

2. Employee Retention and Engagement

Having a highly engaged workforce can be very significant for your agency’s finances. According to research by Gallup, engaged employees are more productive, more sensitive to customer needs, and pay more attention to maintaining processes and standards. All of these behaviors can result in a 23% difference in profitability.

Focus your workload management strategies on addressing these main factors for disengagement, as reported by McKinsey:

3. Automating Workflows

Finally, professional services automation is another significant factor. According to research by Zapier, 79% of workers believe they could be working more efficiently.

Implementing automation tools can streamline repetitive tasks, reducing the need for manual intervention and minimizing errors. To provide an example, you can set up custom automations so that parts of your workflows are completed automatically—a task is updated, and a message is sent to Slack to the right channel.

These little actions can add up to free up employee time for more creative tasks and reduce the need for constant multitasking. That’s without mentioning other benefits, such as more reliable data and real-time reporting.

Learn what it means for a business to be cost effective vs cost efficient.

So, what’s the ideal agency pricing model?

Perhaps unsurprisingly, there is none. Or, better said, the ideal pricing strategy is the one that works best for your agency at a particular time. Whether you go for hourly-priced, project-based, or value-based structures or any other, each has its particular benefits and uses.

There’s no denying how crucial your pricing is to your profitability. So, let’s not forget to keep questioning what the best pricing strategy would be for your digital marketing agency, as your next potential clients ask for quotes.

And if you need to pull complex agency data to support this process, there’s Productive. Book a demo today.