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. While there’s no one size fits all approach to agency pricing, it’s important to know how to price fairly while retaining quality.
Running an agency is about making the most of your billable hours. From sticking to clients that fall within your ideal client profile, or investing in an automated reporting tool, you'll need solutions that save you time each month.
The bottom line is that you’ve got important decisions to make–time is money!
And that’s where choosing the right agency pricing model comes in. A famous McKinsey study found that increasing price by 1% translates into an 11% increase in profits–whereas increasing output by the same amount only resulted in only a 3.3% increase. That’s food for thought.
So read this article, take a look at your books, and see if your agency needs a little price adjust! It may well be worth your dime–and time.
This guide to agency pricing is organized as follows:
Agency Pricing Models
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.
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.
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 who are desperate for any work. The pricing can be a race to the bottom to win a contract. –Brian Robben, the CEO of Robben Media
Types of Hourly Rates
There are two types of hourly rates you can set for your agency:
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.
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.
The Pros and Cons of Hourly Rates
As with all things, there are a few ups and downs to consider.
Simple and straightforward– it’s easy to reference and send quote clients
If your agency doesn’t correctly estimate the time to complete a project, it may result in losses and reflect poorly
Helps in defining which types of projects or clients to pursue
Has the possibility to put a cap on your agency’s earning potential
Gives your agency more autonomy over how time is spent
May be difficult to estimate completion time for newly offered agency services
Agency Tip: Keep in mind that there will be other hours that you’ll need to put in that aren't considered billable hours (like administrative work and business development, for example). To account for this extra work, consider adding a margin to your usual hourly rate.
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Another common type of pricing model for agencies is charging a fixed amount for each project.
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. –Brian Robben
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.
The Pros and Cons of Project-Based Pricing
Before deciding on this type of agency pricing, here’s what you should know.
Works well for projects with clear deliverables (e.g., content marketing services, website development)
Difficult to estimate the cost of projects your agency hasn’t had previous experience in
Income isn’t tied directly tied to time– more scalable than charging per hour
If a project takes longer than expected, your agency will still make the same amount
Agency Tip: If you decide on this pricing model, have a good understanding of how long it’ll take to complete. It’s also a good idea to consider any unexpected variables that could lengthen the delivery date. To avoid any blindspots or oversights, complete several projects (perhaps on an hourly basis) before charging a fixed price to clients.
In this pricing model, clients are charged based on reaching a particular target, which works well for some agencies. A few of the common performance-based pricing models include lead generation, sales, and online advertising.
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 is 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.
Examples of Performance-Based Pricing
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.
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Parameters Needed for Performance-Based Pricing
In order to charge based on 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
The Pros and Cons of Performance-Based Pricing
Let’s explore the distinct advantages and disadvantages of performance-based pricing.
It’s often easier to sell since you’re sharing in some of the risks
You may have to rely on client delivery for some output if they’re not using your agency for all parts of a marketing campaign
Shows that you stand behind the effectiveness of your services
There may be a significant lag between the initial client onboarding and achieving the necessary results to receive payment
Agency Tip: Save this pricing model for larger, more established clients to minimize your risk of subpar client delivery (if you’re relying on them for some parts of an overall marketing campaign).
Charging clients a retainer for your work is another pricing model that can offer much more scalability than other models. In fact, agencies will often start with an hourly or project-based model, and then on successful completion of the initial work, move to a retainer.
We don't have any specific pre-packaged pricing; rather, we spend time recommending services 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 and assures them that they can reach out frequently without feeling as though they're being billed for it. – Steve Ryan, RyTech
Retainer-based pricing is generally paid upfront and can come in two forms:
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.
Don’t lose track of your client’s goals, especially when pricing is at stake. Keep tabs on goal progress through AgencyAnalytics–it’s free for 14 days.
Pros and Cons of Retainer-Based Pricing
Let’s dig a little deeper to understand the ins and outs of retainer-based pricing.
Monthly income is predictable
Challenging for onboarding new clients who may not be familiar with your agency’s services–they may be hesitant to commit
Fees are usually paid upfront, which also works well for cash flow
May not work well for clients with ad-hoc requests or deliverables that can be completed in a short timeframe
Clients may feel more comfortable reaching out without worrying about being billed for it
Some clients don’t want to be ‘locked in’ for a given time period, especially if their business isn’t as steady or established
Agency Tip: If you’re working on a retainer based on time, this often means that your client is prepaying for a set number of hours based on your hourly rate. When negotiating a time-based retainer with clients, clearly define whether all of the hours must be used each month, or if they can roll over to the next time period.
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 client's bottom line, the client likely won’t care how much time it actually takes you to perform the service, they simply want the result.
Pros and Cons of Value-Based Pricing
Last but certainly not least are some advantages and disadvantages of value-based pricing.
Clients may be more willing to pay upfront based on perceived value
Some clients may be skeptical about putting out significant capital
Works well for clients with long-term, high-level goals
May be difficult to communicate the value of a service if it doesn’t directly tie into your client’s goals
Not as time-sensitive as other agency pricing models
Clients may be anxious or impatient if results aren’t achieved in a particular time frame
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Of course, you don’t need to pick only one of these pricing models and can always choose to offer several models that suit each client's needs.
As Ashley Sterling from Loop Marketing puts it, "Our pricing models are structured out for different client types and needs. 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."
Agency Tip: Remember, agency pricing models are never fixed! Test one initially and evolve it over time.
When To Charge Your Clients
Determining your pricing model based on profitability is a crucial part of running a successful agency, but there’s also another key component that’s often overlooked in the early days: cash flow.
As Fundbox shares:
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 are a few ways you can charge clients:
1. 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.
2. 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.
3. On Completion
While this can be the riskiest 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.
Agency Tip: 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. Evaluate your options and decide what works best for your agency.
How To Improve Your Agency’s Profitability
Now that we’ve discussed the different types of pricing models, as well as when and how to charge clients, let’s talk about how to scale by improving your agency’s profitability.
As discussed in our guide on Upselling Clients, the ability to effectively upsell is often what separates fast-growing agencies from those that stagnate.
Upselling refers to offering existing clients additional services or 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.
“We work in a lot of different areas with our clients, but it’s usually not all at once. When we recognize they’re successful with one type of advertising, we’re able to make valuable recommendations to them. We’re not in it for the short term. We’re interested in our client’s long-term success.” - Mark Jamieson
One easy way you can do this each month with AgencyAnalytics is with our SEO Rank Tracker 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.
Once you tweaked their interest enough for them to ask, "Hey, does your team offer SEO services?" you can use the pre-built SEO proposal template to whip up a professional and polished SEO proposal that definitely answers that question with a resounding "Yes, we do!"
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.
“The client doesn’t care if you’re spending $1,000 and they’re making $3,000. As long as we add the right tactics and show them a return on investment, they’re going to be happy.” - Mark Jamieson.
Succinctly Communicate Your Agency’s Value
The biggest question clients have about their marketing campaigns often involve their return on ad spend (ROAS). Communicate your agency’s value through reports that include an executive summary.
This is where you explain the targets for that month, what you’ve achieved, and the goals for next month. By demonstrating that you’re overdelivering on the targets you set each month, you might be ready to increase your prices for new or existing clients. Check out our article on how to ask your client to increase their PPC budget.
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 agency structure and project management workflows.
For example, as discussed in our guide to automated reporting, relying on non-scalable reporting methods (such as manual spreadsheets) 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.
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:
Since all of 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. Customize what they have access to by adding custom user permissions.
Aside from accessing all of 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.
As you scale your agency, streamline your staff management with agency tools by creating unlimited client and staff accounts and customizing user permissions.
Assign Tasks & Track Workflows
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 ensuring your success over the long run. A few of the most common types of agency pricing models include:
Charging a retainer
After you’ve made your decision and put things in motion, you’ll need a steady way to track revenue, manage client campaigns, and monitor the data that really matters.
That’s where an automated client reporting tool like AgencyAnalytics comes in. From data visualization to custom dashboards, keep all your agency operations under one roof! Data-informed decisions will help you to make pricing adjustments, see what’s most profitable, and make improvements where necessary.
Streamline agency operations, track profitability, and provide maximum value to your clients. Try AgencyAnalytics free for 14 days–no credit card required.