One of the most challenging parts of building and scaling an agency is figuring out the right pricing model that suits both you and your clients.
As we’ll discuss in this guide, agency pricing varies widely based on a number of factors including the type of service you offer, the niche you’re in, and the size of your clients.
Understanding how to price your services properly can often mean the difference between a profitable, scalable agency and one that struggles to get by each month. In fact, a study by McKinsey found that:
...a 1% improvement in price, assuming no loss of volume, increases operating profit by 11.1%. Improvements in price typically have three to four times the effect on profitability as proportionate increases in volume.
Before we continue, keep in mind that agency pricing models are never fixed, which means you can always test one initially and evolve to another over time.
This guide to agency pricing is organized follows:
Let’s get started.
Agency Pricing Models
The different types of pricing models discussed below each have their own pros and cons, and as mentioned it’s not uncommon to start with a simpler, usually hourly-based pricing structure, and then move towards a more value-based model as you build your agency’s client list and reputation.
If you’re just getting started, charging by the hour is certainly the simplest pricing model as it’s easy for clients to understand, and thus easier to sell.
There are two types of hourly rates you can set for your agency:
- Blended rate: This refers to the practice of charging one single rate for all employees in the agency (i.e. $500 per day). To determine your agency’s blended rate, you generally take the average hourly rate of all your employees and the expected hours of each for the project.
- Specialist rate: A specialist rate refers to setting different rates for individual employees who will be working on the project. Of course, each rate will vary based on the seniority of each employee and the number of hours they’re expected to work on the project.
Even if you’re charging clients by the hour it’s common that you give clients an estimate of how many total hours the project should take. This is where charging by the hour can get tricky — if you tell the client you think it should take 10 hours to finish a project and it ends up taking you 30 hours, you’ll likely run into problems with the client. Either they won’t want to pay you for all the hours you worked, or they won’t want to work with you again.
Also, keep in mind that there will be other hours that you’ll need to put in that aren't considered billable hours, for example for administrative work and business development. To account for this extra work, you may want to consider adding a margin to your usual hourly rate.
Here’s what Brian Robben, the CEO of Robben Media, had to say about hourly pricing:
Hourly is the easiest contract to sign, takes the least marketing skill, and the work stops immediately when you're off the clock. It's far less stressful. And you're held less responsible for results. However, you're often competing against freelancers, some who are overseas, and some are desperate for any work. The pricing can be a race to the bottom to win a contract.
To summarize, charging clients by the hour is the simplest, and most straightforward pricing model for agencies. It can be a great model if you’re just getting started, although since your time is directly tied to earning potential, it can also be quite difficult to scale.
Another common type of pricing model for agencies is charging a fixed amount for each project. For certain types of services, this pricing model can make a lot of sense. For example, if your services have very clear deliverables — such as content marketing or website development — project-based pricing can make a lot of sense.
In order to set a project-based fee, agencies will generally estimate the total labor hours and any associated costs, plus add a profit margin that accounts for any unexpected developments that may arise.
One of the main benefits of this pricing model is that your income is not directly tied to your time, so it can be much more scalable than charging by the hour. This, however, can also be a downside of the pricing strategy because if a project ends up taking much longer than expected, you’re still making the same amount.
A key part of pricing based on projects is that you have a very good understanding of how long each one will take. This also means knowing exactly what the unexpected variables are that could make a project take much longer than expected. For this reason, it’s generally recommended that you’ve completed several projects, perhaps on an hourly basis, before charging a fixed price to clients.
Brian Robben of Robben Media also had this recommendation for agencies:
I recommend marketing agencies start out being project-based and then experiment with a profit-sharing model. Or get creative to do a mix of both payment plans. Whatever the model, if you provide massive value then you can pretty much set your rate, no questions asked.
Performance-based pricing is another model that works well for certain types of marketing agencies. Performance-based pricing is a lot like affiliate marketing, and as such, a few of the common performance-based pricing models include lead generation, sales, and online advertising.
To give you an example of performance-based advertising, here are a few of the most common metrics that you can charge for from Paldesk:
- CPM (Cost Per Mille) is a pricing model based on 1000 impressions from the target audience.
- CPL (Cost Per Lead) charges advertisers a fixed price for each lead submission.
- CPV (Cost per View) is a performance-based pricing model where advertisers pay for each video view.
- CPC (Cost Per Click) is a model where advertisers pay for each click you send them.
- CPA (Cost Per Acquisition) refers to paying a flat rate or percentage of sales based on acquiring a new customer.
In order to charge based a performance, you need to establish a few things at the onset of the working relationship, including:
- The conversion metrics
- The value of each conversion
- How conversions will be tracked and shared with both parties
- The performance payout timeline
One of the benefits of performance-based pricing is that it can often be easier to sell since you’re sharing in some of the risk and standing behind the effectiveness of your services.
Often, this type of pricing model will not be 100% performance-based and will include some form of upfront payment and then a performance fee on top. This can be a very valuable type of pricing model as it typically allows you to cover your upfront costs, but also aligns the agency’s incentives with the client.
One of the main cons of this type of pricing model is that you need to know the client can deliver on their side. For this reason, it’s usually recommended to save this pricing model for larger, more established clients to minimize your risk.
Charging clients a retainer for your work is another pricing model that can offer much more scalability that other models. Retainer-based pricing is generally paid upfront and can come in two forms:
- A predetermined amount of time
- A predetermined set of deliverables
If you’re working on retainer based on time, this often means that your client is simply prepaying for a set number of hours based on your hourly rate. When you’re negotiating a time-based retainer with clients, it’s important to clearly define whether all of the hours must be used each month, or if they can roll over to the next time period.
If you’re charging clients a retainer based on deliverables, this generally means you’ll be providing a range of services working towards your clients goals. For example, a common type of deliverable-based retainer is charging for managing a client’s PPC budget. Here’s why AdEspresso says this model works well:
Agencies that charge a flat rate typically focus on providing value and long-term client retention. Because the client and agency goals are in sync, the PPC partner is motivated to improve quality across a range of indicators and improve efficiency with tools and automation.
One of the main benefits of charging clients a retainer is that your income each month is much more predictable, and often the fees are paid up front.
It’s important to note, however, that charging clients a retainer is often more difficult for clients that you’ve never worked with before. For that reason, agencies will often start with an hourly or project-based model, and then on successful completion of the initial work they’ll move to a retainer.
Here’s what Steve Ryan from the digital marketing agency RyTech had to say about charging a retainer:
At our firm, we don't have any specific pre-packaged pricing, rather we spend the time recommending services to our clients that will maximize ROI and deliver results. Typically, we generate proposals with fixed monthly fees for services delivered. This allows a mutual partnership with our clients to work toward a common goal. It also shows our clients that they can reach out to us frequently without feeling as though they're being billed for it.
The final, and often most desirable type of pricing model is charging based on value. The reason value-based pricing is so desirable is that your revenue is completely detached from your time, making it arguably the most scalable type of model.
In order to price your services based on value, you first need to know exactly where your clients are, where they want to go, and how much that will mean to their bottom line. For example, if you can demonstrate that your services can add an extra $1 million to your clients bottom line, the client likely won’t care how much time it actually takes you to perform the service, they simply want the result.
In order to charge based on value you need to make sure that your offering can actually be tied to a change in revenue, or another value-based metric. For example, if you offer graphic design services it can be challenging to attribute it directly to an increase in sales. If, on the other hand, your expertise is relatively niche and can (ideally) be directly tied to an increase in revenue, value-based pricing can be incredibly lucrative for agencies.
Of course, you don’t need to pick only one of these pricing models and can always choose to offer several models that suits each client's needs. As Ashley Sterling from Loop Marketing puts it:
Our pricing models are structured out for different client types and needs. For example, graphic and website development assistance is billed hourly to ensure accurate pricing and flexibility. For large-scale projects, such as a full website design, we will have a set rate that is based on the project requirements, unique assets, and developmental needs. This rate is based on information gathered before a proposal is completed (website review, integration requirements, etc). By having flexibility within our pricing capabilities, this allows us to customize our rates based on our client's individual needs, and enables our team to focus on areas that ensure our client's success, rather than a "one-size-fits-all" approach.
Now that we’ve discussed the different types of pricing models, let’s look at another key piece of your strategy: when to charge your clients.
When to Charge Your Clients
Determining your pricing model based on profitability is, of course, a crucial part of running a successful agency, but here’s also another key component that’s often overlooked in the early days: cash flow.
As Fundbox puts it:
Positive cash flow is critical for any small business, including creative agencies. Without access to cash, creative agencies are unable to hire additional employees to help take on ever-increasing workloads. They’re also not as flexible when it comes to being able to invest in new opportunities (e.g., partnerships or new contracts).
As discussed in 99designs guide to agency pricing, there a few ways you can charge clients:
Charging upfront: Charging clients upfront is certainly the most desirable when it comes to cash flow, although it only works with certain pricing models. If you’re charging hourly, you can’t charge upfront (otherwise you’d be on a time-based retainer), which means you’ll need to determine a payment frequency. If, however, you’re charging on a project-based or retainer model, charging upfront is quite common for agencies.
50% Upfront, 50% On Completion: Charging a certain percentage upfront and a certain percentage on completion is often a great compromise for both parties. This allows you to cover some of your own upfront costs, such as paying employees, and then you can take profits and cover other costs upon completion. Of course, this type of payout only works if you’re charging on a project, retainer, or value-based model.
On Completion: While this can be the most risky type of payment collection, it can be a great way to land new clients if you’re a new agency. Charging only on project completion shows the client that you’re confident you can deliver on your promises, although there are certainly horror stories out there about clients disappearing or trying to renegotiate once the work is done.
While you will generally want to set an agency-wide payment collection policy, deciding when you charge clients can be a bargaining tool. For example, if you’re pitching a much larger brand than you typically work with, you can always consider altering the timing of payments in order to sweeten the deal for them and land the contract.
How to Improve Your Agency’s Profitability
As discussed in our guide on Upselling Clients, the ability to effectively upsell is often what separates the fast growing agencies from those that stagnate.
Upselling refers to offering existing clients additional services of premium offerings on top of what they're currently paying for. If, for example, you have a client on a retainer for PPC and you see an opportunity for them to rank organically, this can be a great opportunity for an upsell.
One easy way you can do this each month with AgencyAnalytics is with our Competitor Analysis tool, which allows you to identify the keywords that competitors are ranking for in SERPs. You can then include this SEO analysis in your monthly report and provide your own insights into why this could be a good opportunity for them.
Another way to improve profitability is to simply retain your existing clients longer. As discussed in our guide to Client Retention, this is a solid growth strategy as it can save you a significant amount of money. As Jack Choros of Iron Monk highlighted in the guide:
It is 70% cheaper to keep an existing customer than it is to find a new one. While the ratio might be slightly different depending on the business model or vertical you’re involved in, the idea rings true in the agency world.
Aside from saving you time and money, client retention also provides you with a much larger pool of referral partners, which as you probably know, makes the sales process that much easier.
Increase Your Prices or Change Your Pricing Model
As mentioned at the start of this guide, your pricing model is never fixed. This means you can always start with a slightly less profitable, but easier to sell model such as charging hourly, and then move to a more value-based model after you’ve proven you can deliver and have the case studies to show for it.
Aside from completely changing your pricing model, you can also start by testing out increasing your prices. One of the best ways to justify price increases is to clearly communicate the value of your services through your client reporting. For example, as discussed in our guide on Client Reporting, one of the most important parts of your reporting is your Monthly Summary. In this section you can include a summary of the targets for that month, what you’ve achieved, and the goals for next month. If you can demonstrate that you’re overdelivering on the targets you set each month, this means you might be ready to increase your prices for new or existing clients.
Optimize Your Agency’s Costs
Finally, one of the best ways to improve your profitability is to optimize costs. To do so, you should generally look for opportunities to automate your existing project management workflows. For example, as discussed in our guide to Automated Reporting, manually generating reports each month is simply not the most high-value or revenue-generating activity, so it should be automated as much as possible.
To give you an idea of just how much you can save with automated reporting each year, here’s the example provided in the above-mentioned guide:
Let’s say that the agency currently has 25 clients and you’re sending reports on a monthly basis. If each report takes just 5 hours each month and you're paying your staff an average of $35 an hour, that breaks down to $4375 of reporting costs each month, or $52500 per year.
If you know what your current costs for reporting are and want to figure out what you could save with report automation, check out our cost calculator here.
Aside from saving money on automatic report generation, another way you can optimize costs is by streamlining your in-house staff and client management. To do this with AgencyAnalytics you can use the suite of agency tools, which includes:
Client Management: Since all your clients will likely use different marketing platforms, being able to streamline access to all these accounts in a single reporting platform saves a significant amount of time.
Client Communication: Aside from accessing all your clients accounts in one dashboard, you can also integrate messaging tools like Intercom and Zendesk so you can communicate with clients anytime they view your dashboards.
Staff Management: As you scale your agency streamline your staff management by creating staff accounts and assigning them to each client from within the dashboard.
Assign Tasks & Track Workflow: You can also create one-off or recurring tasks for every campaign, assign them to your team, and track their progress. Aside from internal workflow tracking, you can also automatically add completed tasks to your monthly reports so your clients know exactly what you’ve been working on.
Summary: Agency Pricing Models
As we’ve discussed, figuring out the right pricing model for your agency is crucial to ensure your success over the long run. A few of the most common types of agency pricing models include:
- Charging hourly
- Charging a retainer
- Mixed rates
Aside from determining the model that works for you, another key piece of your pricing strategy is to think about when you’ll charge your clients. Typically, agencies will charge upfront, on completion, or a mix of the two.
After you’ve determined your pricing strategy, another part of running a successful agency is to optimize your profitability. There are many strategies to do this, although one of the most effective ways is to optimize your costs by automating as many of your existing workflows as possible.
While your pricing model is an essential consideration to make for all agencies, keep in mind that your pricing strategy can always evolve over time as you build up your agency’s track record and client list.