In Pursuit of the Best Agency Pricing Model
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Agency pricing models have long been a subject of debate and experimentation. Reasons for this are many.
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 monetary gains, 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?
Types of Digital Agency Pricing Models
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.
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 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.
Project-Based Pricing Model
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.
Martijn Pillich, Hike one
“We saw that our seniors were underpriced, so we changed our pricing model thanks to the data we got in Productive. We then learned very quickly that some of our clients are happy to pay more if they can get more experienced people. But it’s that kind of thing that you don’t really think about if you don’t have those numbers in front of you.”
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 Model
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.
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.
Productized Agency Services
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.
Mat baxter, ceo of huge
“The productization model is a radically different model. It’s a more stable model, it’s a more margin accretive model, it’s more generally stable for client relationship model than we’ve had in the past.”
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.
— Advertising Agency Pricing Models
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.
Key Creative Agency Pricing Model Insights
A recent BenchPress report by The Wow Company, which included pricing insights from over 600 agencies based in the UK found that:
- Agencies that use value-based pricing were more likely to see fast growth last year (increase in fee income of over 26%) and were more profitable (they had the highest gross profit percentage)
- Those who offered 3 pricing options were twice as likely to have high conversion rates (above 60%) and 50% more likely to have a typical client value in excess of £100K in year one
Which is the Most Common Agency Pricing Model?
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.
What to Consider Before Choosing an Agency Pricing Model
In reality, not every agency can afford to apply value-based pricing to charge all their services, even if this agency pricing model can bring an increase in profits. We will almost always choose from a mixed bag of options to find a balance between perceived value, market dynamics, and client expectations.
Recent statistics show that the most common pricing model is using blended rates—and this isn’t the best option for creative service businesses to be at the cutting edge.
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.