How to Price Your Agency Services to Maximize Profitability
Life has taught us that talking about money is taboo. Let’s break these antiquated boundaries and discuss agency pricing.
There are many ways to approach the process of establishing the price for your services. So especially if you’re a newcomer to the agency world, you’re going to need some assistance to figure out which path will lead you to higher revenue.
Here’s what’s to come:
1. Types of Pricing
There are 5 popular ways to go about agency pricing,. so take a careful look to understand which one matches your agency.
One common agency pricing model that first comes to mind is the project-based one. You can charge a fixed price for each of your projects.
This type of agency pricing works best for services that have tangible outputs. Content marketing and website development are perfect examples, where you produce clear deliverables within a certain amount of period.
A reasonable way to calculate your project-based compensation is to calculate the roundabout amount of labor time and other additional costs that may arise for such types of projects and factor in a margin for unanticipated occurrences.
Project-based agency pricing can be a double-edged sword. On one hand, your fee isn’t determined by the number of labor hours and is more flexible. On the other hand, if a project takes up more time than expected, you might end up losing additional work hours, meaning money, over it.
The simplest of all agency pricing models is the one based on hourly rates. It’s easy to calculate both for you as an agency and for your clients.
When choosing this type of pricing scheme, two options present themselves:
- Blended rates: Here you have the same rate for all employees of your agency. To establish a blended rate for your services, you have to calculate the average hourly fee of all your employees and the estimated hours they’ll be working on a particular project.
- Specialist rates: As the name suggests, with this option, your rate varies depending on which employee will be assigned to the project. This gives you more flexibility, as it allows you to factor in individual competences of your employees and accounts for experience, seniority, etc.
Whichever of these two options you choose, keep in mind that these rates are for consultants. Administrative or business development work that other employees will perform isn’t billable, meaning your agency is paying these expenses, not the client. You can take these costs into consideration by adding a profit margin to the average hourly rate.
A downside to this model is that it’s rather rigid and doesn’t allow for rewarding exceptional performance. As an agency, you take a risk that your work will be undervalued.
This type of agency pricing, like the project-based one, is not attached to your hourly rates and offers more scalability.
To offer value-based fees, you need to have a solid understanding of your clients, the present situation of their business, and what their ultimate goal is. Say, for example, your client’s striving for a 25% growth in revenue. Your job is to guarantee that your agency is going to make this happen.
Once you have a client’s trust that you can help achieve those numbers, they’re pretty much willing to invest anything in your services because of the value it provides them.
For this, the services you’re providing ideally need a direct link to whatever metric your client wants to increase. In other words, there needs to be a palpable impact of your services. This will be hard for design agencies, for example, because there’s no easy way you can prove that the visual content you create has an impact on revenue.
If you’re a digital marketing agency, on the other hand, you’ll be able to showcase growth in leads and conversion rates, solidifying your necessity for the client.
Be that as it may, the bottom line is that this agency pricing model is hardest to sell. So make sure you find a good niche, where you have high chances of standing out and making a name for yourself.
An agency pricing based on milestones means that both the agency and the client agree on a certain milestone that the agency has to achieve for the client within a specific amount of time. Once this milestone is reached, the agency receives their fee based on this achievement. The sum of the fee is based on the total amount of time spent on this project and everything done to reach the milestone.
What’s great about this agency pricing model is that it’s based on meritocracy. The clients pay for what they get and enjoy great freedom when it comes to deciding whether a milestone is reached. Another thing that’s very useful is that most agencies provide their clients with a checklist with criteria to use as a basis for the approval process.
A downside is that there are no fixed prices, which can either be a blessing or a disaster for both agency and client. The fee calculation alone can be a headache because of the varying amounts of time spent on each milestone, and the client has to approve the total sum for each milestone before paying it.
This type of client involvement in milestone approval can also lead to endless discussions about the output of your agency. So, every time a client finds something that’s not coherent with the checklist, you can assume that a long dispute is coming your way. That’s why some agencies refrain from taking on projects from clients that insist on this pricing model.
2. When to charge
Once you’ve figured out which agency pricing model makes more sense for your purposes, it’s time to decide which channel to use to charge your clients. Here are three options for you.
For a value-based agency pricing model, the most common way to charge clients is upfront. In other words, they’ll be paying the full sum upfront before your agency even begins to work on the project.
The opposite of upfront payment is payment on completion, meaning that you’ll charge your client only once your work on a project is complete. Clients, of course, welcome this type of payment solution because they can make sure they’re happy with the agency’s performance before they pay.
For agencies, on the other hand, it’s a bit less preferable, given that there’s always a risk that a client refuses to pay forcing you to renegotiate.
50% upfront, 50% on completion
If none of the above-mentioned methods works for you, you need to find a middle ground. If you opt for the 50% upfront and 50% on completion agency pricing model, both the agency and the clients are making a compromise and meeting each other in the middle. With this method, both you and the client have a security net. You have a deposit, while the client gains some control over the project output.
3. How to improve your agency’s profitability
Once you’ve chosen the best agency pricing scheme that fits your goals, you need to make sure that your choice is fool-proof and optimize it to increase profitability.
One mistake that agencies tend to make is overservicing. What is that exactly? It’s when an agency puts in extra work unnecessarily just to prove to clients how dedicated and reliable they are. But what it ultimately leads to is you throwing hours of hard work and an unspeakable amount of energy straight out of the window.
How can hard work be a waste, you ask?
- You undermine the value of your work, always showing that you need to go out of your way to achieve the results you promised.
- You put your employees through hell for nothing, making them work extra hours that you might not even bill afterward.
- Spending so much time on overservicing existing clients will overstrain your employees’ workload capacity, ultimately leading to a loss of profits.
So, whatever you do, avoid servicing your clients unprofitably. At the end of the day, it does more damage than good.
Some things are better when outsourced. Why? Because outsourcing allows you to get high-quality work at a low cost. If, for instance, you outsource work in the field of web development (or eCommerce development, email campaigns, etc.) to a company that’s specialized in that exact department, you’ll get the job done professionally without having to worry about employee-related costs (salary, training costs, employee benefits, etc.).
You save a lot of time and a ton of money because as an agency, you won’t have to spend resources on specializing in a field that’s completely foreign to you. And, in most cases, you can’t even guarantee that the results will be to your satisfaction. That’s why find an outsourcing partner that you trust, and you’ll surely become more cost-efficient.
Another recommendation for optimizing your profitability through your agency pricing is to upsell.
Upselling is when you persuade a client to upgrade their current service package by either extending the list of services they purchase or by choosing a premium version of the services they’re already using.
Why is this a great way to increase your profitability? Because it’s always easier to upsell to existing clients than to sell to someone who doesn’t know your agency and isn’t acquainted with the quality of your services.
From another angle, upselling isn’t just great for financial reasons, it’s also great for your agency-client relationships. An upsell can also mean an upgrade of a simple and rather non-binding agency-client exchange to a long-term partnership.
But in order to upsell, you need to know the art of pitching. Take a look at the following article that will provide you with some sales pitch examples to boost your imagination.
Should agency pricing be transparent?
Absolutely. People’s curiosity about the basis of the price they’re paying knows no boundaries, it doesn’t matter what the services or products are.
Back in 2015, the Business Insider declared that price transparency is the new trend now. The article was referring to the retail market emphasizing that more and more people are questioning the prices behind the products.
The same can be said of agencies. Have you ever heard of “kickbacks”? It’s when an agency accepts money from media companies to maintain a certain amount of ad buys for a specific period of time, regardless of the fact that those buys aren’t always ideal.
Moreover, discounts earned from this type of conduct aren’t even returned to clients, even though most of the time it’s contractually agreed upon that they should.
Does hourly rate give a clear pricing structure in a digital agency?
Yes. One of the benefits of hourly rates is that they’re clear and straightforward. They’re also more easily sold to clients because people know upfront what to expect and don’t have to be afraid of hidden costs, etc.
This type of agency pricing is ideal and extremely profitable for projects that take a lot of time to solve. Software development comes to mind.
On the flip side, you need to be aware that hourly rates don’t allow for a lot of flexibility, leaving employees with no incentive to work fast, given that that would put a cap on their fee.
Generally speaking, hourly-based agency pricing is perfect for agencies that deal with clients who have little sense of commitment and keep changing their minds about the endgame of a certain project. An hourly rate, in this case, helps you avoid losing money unnecessarily just because the client is indecisive.
How do marketing agencies evaluate their work?
There’s a myriad of ways to evaluate your work in a marketing agency. The most important one is to not shy away from asking for the price that your work is worth. The biggest mistake you could do is to make it your mission to undercut existing prices in your market.
Firstly, it won’t give you the ultimate success you’re striving for because there will always be a newcomer to the market that will undercut your low prices. Charging less can under no circumstances be your unique selling point. It can be a temporary fix at best.
Secondly, never underestimate the psychological effect of pricing. Imagine yourself traveling to a foreign country. You want to buy quality products but aren’t acquainted with the local brands. How do you figure out which stores to buy from? The ones that don’t have the cheapest prices. Because in our minds cheap prices are always linked to low quality.
Thirdly, use the power of testimonials, awards, or any other methods for showcasing the stamp of approval from external sources to provide social proof of your competency and your services’ value.
So, find your unique selling point, and don’t be afraid to ask for a price that reflects your value, even if you dread facing competition that offers the same or even lower prices.
After getting acquainted with 4 different agency pricing schemes, which one do you think works best? What’s your thinking on the topic of price transparency? An absolute must or overrated?
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