What Is the Most Profitable Agency Pricing Model?
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When it comes to finding the ideal pricing model for an agency, there’s no one-size-fits-all.
It’s quite the contrary.
Your agency’s pricing model needs to work in favor of your agency in particular.
You need to count the growth you aspire to and know what that means in terms of hiring and onboarding expenses. You need to take your agency’s overhead costs into account (which include education and training). You also need to make sure that your team has a balanced workload, the option to take time off whenever, and that their salaries can grow. Plus, are you sure you aren’t causing burnout for your team? How about your clients, are they happy? Then there are also industry best practices…
But let’s get back to the core: pricing models and the profit they should bring.
What Are the Most Popular Agency Pricing Models?
Agency pricing models are usually set based on:
Project or fixed fees
Time and materials or “day rates”
Increment or fixed fees
Value-based fees or fixed fees
Incentives or performance-based fees
In November and December of 2021, the Society of Digital Agencies (SoDA) and Productive surveyed 169 agencies around the globe. Agencies wanted to benchmark themselves, assess their business performance, and identify where the industry was headed.
Most agencies that participated were digital agencies (41%), integrated agencies (14%), and consulting agencies (13%). Over 80% of the agencies were based in Europe and the US, while the remaining 20% were a mix from across the APAC region, Latin America and Africa.
In the global agency landscape study, 72% of agencies stated that they predominantly work on project-based or fixed fees. In a smaller study conducted by SoDA across 71 agencies a year earlier, the distribution of revenue derived from project-based or fixed fee agreements accounted for almost 50% of total agency revenue.
So, What Is the Most Profitable Agency Pricing Model?
Out of the same sample of agency leaders from 2021, 82% are confident that 2022 will deliver even more profitable growth than 2021. But how? How do agencies expect to invest in growth by continuing to use mainly this pricing model?
Experience shows that working on a fixed fee isn’t the most profitable option out there for agencies. We all know how scope creep works and how resource planning easily gets tricky. Add in a few dozen projects and inflation higher than in over half a century, and you’re facing eroding profit margins.
While everyone talks about value-based pricing, research shows that it’s not the most popular option. Maybe it’s more important to understand why agencies choose the project-based pricing model over others. Below, we offer a few suggestions.
Agencies Fear Losing Clients
One of the possible reasons that agencies choose to work on fixed or project fees (which isn’t a best practice, but seems to be a frequent one) is that agencies fear losing clients. They’re thinking: if we change our pricing model (or pricing in general)—we may lose work, i.e. income.
Though the agency business took a quick dip into chaos at the start of 2020, it picked itself back up stronger than ever in 2021. Instead of letting fear guide agency pricing models, looking at data and creating potential growth scenarios will show which agreements with clients to modify.
Martijn Pilich, Managing Director at 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.
“Profitability Isn’t Our Thing”
Agencies in 2022 simply aren’t looking into their profitability enough. Only 14% of agencies stated that they have an integrated platform that gives them real-time insight into their key metrics, according to the same sample of 169 agencies.
Despite these agencies often being capable of delivering state-of-the-art digital products for clients, they generally lack sophisticated platforms that can help them forecast their profitability.
This leads to another paradoxical claim often heard from creative agencies: “Profitability isn’t our thing”.
Maybe it isn’t what they want to focus on as trailblazing creative folk, but it needs to be because only a healthy financial situation is what fosters further creative work.
Agencies Are Insecure About How to Charge
Many agencies ask themselves: how much should we charge for our agency services?
Addressing current financial challenges such as inflation, hiring from a global talent pool, fuel prices (and overhead costs) rising all call for pricing that will bring profit.
If agency rate cards aren’t set up right, different pricing models may seem less financially viable, but rate cards help agencies set clear expectations—especially towards potential clients.
Ilija Brajković, CEO of Kontra
In order for a company to be profitable, a worker must cover the cost of his annual salary, times three. This is popularly called one salary for you, one salary for the company (overhead), and one salary for the boss (profit). The fact is, agencies have a lot of hours that are non-billable, which still need to be covered.
What Agencies Can Change
While confidence is running high for business leaders at the start of 2022, the same agencies are battling with challenges such as fostering a sense of belonging, employee well-being, finding and hiring talent, and keeping operational efficiency high.
Looking into financial data, evaluating where room for improvement exists, and having honest conversations with clients is the only way to move forward during a time when agencies are in a good position to bargain.
For more global agency trends, download the 2022 agency landscape report.