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How to Boost Profits with Your Agency Pricing Model

November 18, 2021

16 Min Read
Agency Pricing Models

Ignore agency pricing at your own peril.

The right pricing model doesn’t just regulate the profitability of your agency; it could potentially accelerate its growth. In fact, the pricing model affects just about every aspect of your agency: from client service and satisfaction, to project management, financial stability and marketability, to employee happiness and retention.

Conversely, choosing the wrong pricing model will send the agency spiraling down a dark path of unfair compensation, endless arguments with clients on what you’re owed, and general instability. Clearly, the agency pricing model shouldn’t be as overlooked as it often is.

But it’s quite common for agencies to set a pricing model at the launch, and then forget all about it. And that just sets them up for competitive disadvantage.

If you’re not regularly testing your pricing models and optimizing them for improved profitability, you’re leaving good money on the table. Stale pricing models spell loss. When you understand how to best price your agency’s services, you pave the way for profitability, scalability, and growth.

In this article, I’ll explore the factors (with associated pros and cons) you need to consider when developing the right digital agency pricing model.

Which is the Most Common Agency Pricing Model?

Agency pricing refers to the basis a digital agency uses to charge prices. The hourly pricing model is the most common of these; agencies set an hourly rate, and clients are charged per hour. So if the hourly rate if $200, and 5 hours are worked on a project, the agency can invoice $1,000 to the client.

Diversity in service offerings and clientele has led to the development of several pricing models so agencies can choose what fits the projects they prefer, and the industries/niches they specialize in.

webfx seo pricing chartSource: WebFX

Here are some of the agency pricing models you can opt for.

1. Hourly Rates

The hour-based model is the simplest and the most popular among the agencies. In fact, it is the first model most agencies consider when starting out. Simply set the hourly rate for each service, and charge the client for every hour spent on a project.

The obvious advantage of this model is how straightforward it is – it’s easy for clients to understand how much they’ll be paying for your services. It can also help you attract clients with a set budget. The hourly model can also be useful when managing limited agency resources since it simplifies the tracking of overall profitability, team-hours management, and scheduling and planning individual projects.

Plus, if you’re working on a long-term project that requires a lot of problem-solving and research, it can yield quite the reward.

However, there are some obvious disadvantages as well. It’s harder to scale this model and apply it to bigger projects, for one thing. The hourly rate model also prioritizes time spent on a project over the value delivered to the client. Plus, it disincentivizes smart work, as the agency could actually lose money if the projects get completed in less than the forecasted hours.

Of course, whether the hourly model is right for you or not really depends on your agency. Agencies that have just started out will be likely to find it a useful model, while more established places may prefer to use hourly rates for select services. When submitting a web development proposal, for example, make sure you specify the rates and the basis for calculation.

Note: since you don’t spend every hour at the agency working on projects, make sure to charge enough to compensate for non-billable hours – like the time you spend on business development or admin work. Track and allocate hours you’re spending on the appropriate project; no documentation, no pay.

2. Project-Based Rates/Fixed Fee

As the name suggests, this model involves charging clients a flat fee for the project. Agencies estimate the total number of hours required for a project (including non-billable hours), and multiply it by an hourly rate.

Project-based rates can be a good choice for services with clear deliverables and well-defined endpoints (such as an SEO site audit or website development.) The nature of the model emphasizes expertise over hours spent on the project, and so rewards speedy turnaround time and value for the client.

That said, if you end up spending more hours than you anticipated on a project, you’ll still make the same profit.

The model is easier to scale for larger projects than the hourly model since the money coming in isn’t tied to time. Clients tend to like this model as well, as it lets them test out your services before hiring you for a wide scope. It does mean you need a relationship manager or salesperson to constantly upsell services for sustained profitability.

While project-based rates are usually straightforward, they can sometimes be hard to justify to clients on a set budget. These clients can worry about being overcharged because the model doesn’t tell them how much they’re paying by the hour. If you’re submitting request for proposal, do ask about these details.

For project-based pricing to work in the agency’s favor, you need to be clear on the time you spend on a project, as well as expected and unexpected costs. Reserve this model for use after you’ve finished a few projects and have a good idea of the costs associated with the milestones.

According to Andrew Kruse, founder & director of Lantern Digital, this model is fuss-free and effective:

Generally, we use fixed quotes based on estimated work days. Our clients expect to receive fixed quotes based on work days, so we follow the industry standard. It allows us to be fairly transparent internally and externally with our pricing. It’s simple to understand, and easy to measure results after project completion.

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3. Performance-Based Pricing

This is the preferred model of agencies that are confident in their ability to deliver. If you can tie your work to a clear, specific, and measurable outcome, like lead generation, you could try out the performance-based model.

Here you charge based on successful performance of the work your clients have assigned you. So if you run a social media campaign for a client, you could charge a percentage of all sales generated from social conversions, for instance.

To charge according to performance, agencies need to establish: their conversion metrics, how the conversions will be monitored, and the value of every conversion. Most agencies using this model will charge an upfront payment and the performance fee on top of that.

The best thing about using this model is that it indicates your surety in your own services to clients. Since you’re sharing the risk with the client, it can be easier to convince them to work with you. It’s also quite scalable.

The downside, of course, is that if you don’t deliver, you don’t get paid. The clients have all the leverage here. Plus, this is an extremely work-intensive model that requires a lot of effort to drive results.

For Jeremy Moser, co-founder of digital brand mention agency uSERP, this agency pricing strategy works:

Our agency uses a very basic, straightforward pricing model of deliverables. We focused on a pay for performance model where our clients only pay directly for the mentions we get for them. As a digital PR agency and founders from PR backgrounds, we were sick of retainers that plagued the industry. Instead, we charge just for the press that we get our clients, with no retainers.

The most important factor in developing our pricing model was value. How can we make it easy for a prospective client to say yes? By eliminating risk. Simplifying our model to focus on only increasing costs as value equally increased.

CEO Julian Goldie shares a similar view about the pricing of their SEO services. According to him, the model is also useful for obtaining high-budget clients.

So the pricing model I use is pay-on-performance – that means it’s practically risk-free for my clients. If I don’t manage to build links for their website, then they won’t pay anything. They pay a fixed amount for every link I build, based on their monthly budget.

For me, I wanted to position my company’s expertise and quality.

So I’ve increased my prices high enough to ensure that I deter clients that are only interested in paying the cheapest prices, as they can be difficult to work with.

I also wanted to optimize the amount of trust I build with new clients, and that’s why my prices are paid on performance only.

4. Retainer Based Pricing

A lot of agencies use the retainer model, where the fee is pre-negotiated and paid upfront. Retainer pricing is based on either an agreed-upon duration or a set number of deliverables.

In the case of the former, the client prepays for the number of hours at the agency’s hourly rate. An important point here is to clearly state whether the weekly/monthly hours would expire or rolled-over to the next period.

For the latter, you’ll generally be delivering a range of services for the client within a specified amount of time. Once you’ve delivered on those, you’ve held up your end of the retainer.

Retainer pricing is heavily value-based, as the agency is incentivized to improve the quality and efficiency of their services in order to retain clients. This makes the model quite client-friendly. Clients also benefit from being able to budget easily.

On the agency side, since the fee is paid upfront, there is a predictable, guaranteed source of income every month. It’s also very easy to scale using the retainer model.

However, it can be difficult to charge new prospects a client retainer. Additionally, if you mismanage your hours, especially on deliverable-based retainers, you could face extreme problems with profitability.

The pros outweigh the cons of charging a client retainer for Eagan Heath, owner of Caravan Digital:

We sell our services on monthly retainers, which are based on the ongoing services we’re providing clients.

This helps us grow our monthly recurring revenue and scale our team.

Just make sure you’re charging enough and going after big enough clients. We focus less on upselling and cost optimization, and more on retaining 80% of our clients year-over-year. Some months we put in a ton of work to improve an account so our margins might dip but our retention will hopefully increase.

5. Value-Based Pricing

Perhaps the most lucrative agency pricing model is the one based on value. Since this is totally divorced from the hours you spend on the project, it’s one of the most scalable models you can use.

Clients don’t pay based on either hours or deliverables. Instead, they’re charged according to the value you’re perceived to be bringing to their business.

Agencies using this model need to thoroughly understand their clients and what they need. Your services are directly tied to an increase in a metric like revenue or profit. You’ll also need a track record of generating enormous value for past clients.

To effectively utilize value-based pricing, the agency has to bring something totally unique to the table. If you specialize in content marketing, for instance, or logo design, you’ll probably have a hard time adopting this model successfully.

However, say your agency specializes in promoting virtual musical events through digital marketing and advertising. If on average you’ve generated six-figure sales for a number of these events, you’ll find a number of virtual event planners more than willing to pay you a handsome amount for the value you’ll bring them.

The value-based model totally aligns the agency’s goals with the clients – you’re both sharing the risk and reward, and are both motivated by the end result. Thus, this approach prioritizes effectiveness, adaptability, and value above all else.

If your agency’s services are in demand, this model derives the highest profit margins. But since the idea of “value” is so subjective and difficult to define, it can be difficult to convince your prospects of what you’ll bring to their business.

The pricing model has seen a lot of change at Saylor Company. Eventually, value-based pricing was concluded to be the right fit. Drew Saylor, co-founder, and CEO, says:

We use a value-based pricing model. This allows us to command higher fees based on the success of our efforts. It incentivizes and rewards us while providing a great benefit to our clients.

We typically use the design and development of a website as a loss leader to open the door to SEO and marketing services that are much more profitable and see long-term client retention. We charge a one-time setup fee to help cover our initial workload to start SEO or paid advertising campaigns and then move on to a retainer with added performance-based bonuses. This has helped us make more sales, but also allowed us to make more money on the vast majority of our accounts.

When we developed our pricing model there were three main factors we considered. First, we wanted to make sure we were pricing in a way that would make sales easier without getting into a race to the bottom. We wanted to make sure we weren’t driving away medium or small businesses with large up-front costs.

Second, we wanted to be able to grow our earnings with the client. This allows us to consistently maximize our earnings with each client.

Last, we wanted to make sure we were creating positive relationships with our clients to ensure long-term retention. In comparison to the fixed price model, we used in 2014 we’ve seen an increase in client retention and satisfaction.

We have unique pricing for every client based on the competitiveness of their industry, the monetary value of their product or service, and the time we need to invest in their project.

6. Mixed Rates

As the introduction to this piece said, however, your pricing model should be continually tested and evolving. No pricing model exhibits this more clearly than mixed rates, where agencies mix up two or more models according to the different needs of their clients.

You can customize your rates, like d3fy’s William Cobb, who uses a month-to-month productized service subscription model. Custom invoicing for custom projects are also available to their clients for additional work. He says, “I wanted no-hassle billing, and up-front information so that everybody could be on the same page before signing up.”

For Milosz Krasinski, Managing Director at Chilli Fruit, this is the strategy of choice. As he says,

I own and run a business that offers outstanding SEO and marketing services to clients around the world.

When I first started my business, I was using a time-based pricing model, however, I quickly realized that this was quite hard to quantify; particularly for short-term projects.  These days, I use a performance-based pricing model for short-term projects as this is easy to scale and the metrics used have a positive influence on my clients’ business and, therefore, on the reputation of my brand.

For longer-term clients, I use the recurring pricing model with a discounted annual price plan. This is great for my business as it brings in lots of steady, long-term contracts.

When implementing my price models, the factors I took into account included a desire to build a network of long term clients and to generate a steady income.

Nat Miletic of Clio Websites concurs:

We use a number of pricing models for our projects. We have an hourly cost, a project cost for new website implementations, and monthly maintenance costs. The hourly rate is static and transparent, as is the monthly maintenance cost.

Project costing varies based on the size and complexity of the project. I recommend that newer freelancers and agencies focus on hourly costs initially since project-based costing is harder to implement successfully.

The primary factors to consider when developing a pricing model are: a) competition research. What are some of your competitors charging for similar services, and b) Industry averages in the area you are serving.

Mixed rates are also right up Gary Johnson’s alleyway:

I use a client focused pricing model. Which is to say that the primary factor I take into consideration when determining how I price services is my clients. I want to make sure that they can understand why I’m charging what I charge, when I charge it. I also want to make sure that it is actually the best possible deal (cost to value wise) they could be getting for this service.

Second to that would be making sure that the pricing model actually allows me to cover costs and get paid.

That being said I use a wide variety of pricing models. Sometimes it’s just a one-time project fee, sometimes it’s more of a retainer type fee, sometimes it’s a set recurring fee, and sometimes it’s just hourly.

Pricing Models: A Summary

Here’s a summary of the agency pricing models mentioned in this piece, for your convenience.

Agency Pricing Models How it Works Pros Cons
Hourly Rates Assign billable rates to each hour spent on a particular service
  • Straightforward
  • Easy for clients to understand
  • Helps you manage resources efficiently
  • Extremely easy to scope work
  • Works best for agencies starting out
  • Difficult to scale
  • Prioritizes hours spent on the project over the value
  • No payment for an hour you can’t invoice the client
  • Limit to how much money you can make on a project
Project-Based Rates Charge a flat fee by the project
  • Straightforward
  • Easy to justify to clients
  • Greater emphasis on value
  • Easy to measure results
  • Clients might balk if your project price is too high
  • Slow work eats away at profitability
Performance-Based Rates Set a fixed price per metric and charge as it is achieved in real-time.
  • Extremely scalable
  • Can be highly profitable
  • No payment if you don’t deliver
  • The client has the upper hand
  • Extremely work-intensive
Retainer Pre-negotiate and receive an upfront fee based on either set number of time or deliverables
  • Predictable source of income every month
  • Easily scalable
  • Easy to track
  • Easy to justify to the client
  • Difficult to charge new clients retainer
  • Mismanaged hours can result in poor profitability
Value-Based Pricing Price your service based on the client’s and your own perception of value
  • Arguably easiest to scale
  • Most lucrative model
  • Best way to align agency goals with client goals
  • Value is subjective and can be hard to define
  • Not effective for agencies without a unique advantage over competitors

When to Charge Your Clients

Cash flow is a crucial part of your overall agency pricing strategy. This article has already touched upon the appropriate time to charge your clients based on the pricing model you use. Let’s delve into this in some detail.

Charging upfront

Convincing clients to part with their hard-earned cash upfront may well be the opposite of taking candy from a baby. This kind of payment collection is incompatible with the hourly model, and only really works for retainers or project-based pricing strategies.

On Completion

While charging on completion can help demonstrate to clients your commitment to and confidence in delivering, it’s the riskiest mode of payment collection. Stories abound of clients attempting to renegotiate, or outright disappearing after the project is completed.

However, it can definitely help new agencies land clients when they’re starting out. So it’s suited to agencies using hourly and project-based rates.

Agencies following the performance-based pricing model usually charge on completion.

50% Upfront, 50% On Completion

This is the best of both worlds. By charging a percentage upfront, you can cover your upfront costs. At the same time, your client has the security of knowing they’ll only pay once they’re satisfied.

This kind of pay collection works for the project, retainer, and value-based pricing models. Agencies using the performance-based model will often charge an upfront payment and the performance fee on top of that.

Boost Your Agency’s Profitability

The agency pricing model you choose is directly linked to your bottom line. Apart from choosing the right pricing strategy for your agency, there are other ways to improve your profitability. For instance, you should prioritize superior customer service, build a stable pipeline of leads, and ensure your website is supported by the right hosting provider.

In this section, let’s glance at four ways to boost your agency’s profitability.

How to Upsell Clients

Upselling clients can be the difference between growth and stagnation.

When you offer additional or premium services to existing clients, you get to profit off them without accruing new customer acquisition costs. For instance, if you’re selling WordPress development services, you can encourage your client to purchase a premium service bundle that offers them more value.

Clio Website’s Nat Miletic is a proponent of this technique:

My agency focuses on profitability by outsourcing tasks that are not our core competency, keeping our costs low, upselling certain services like SEO and affiliate products, client retention, and client referrals.”

Gary Johnson has a similar viewpoint:

Upselling, when done right, is really just understanding the clients wants and needs and then pairing them with other services offered. A lot of times small business owners are weary about digital marketing or web designers so in order to show your value it’s best to just start by getting a quick win with one small service and then moving onto others.

And if you are actually listening to them and helping them understand their problems it will just flow naturally into other services you offer.

Retaining Clients

It costs a lot more, and takes a lot more time, to acquire new clients than it does to retain existing ones. Client retention also affords you more referrals, which smoothes out the sales process.

As Drew Saylor of Saylor Company says:

We are able to use a combination of optimization and client retention to improve profits on any project. Using a value-based pricing model helps us retain clients by making sure they’re only paying what they feel they should during down months and fostering a trusting relationship. When we first started in 2014 we worked on a set monthly fee and found that it tended to leave either us or our client in a position where one party was unsatisfied.

By engaging in effective client management, you can make sure that more and more clients continue using your services in the long term.

Changing Pricing Models

You should constantly revisit your pricing model to ensure it’s working for your agency. In the beginning, for instance, you can start with an hourly model that’s easier to sell, even if it’s not the most lucrative. As you gain more clout, you can switch to a value or performance-based model, depending on your needs.

Your pricing model should never be set in stone. Keep evolving it to enhance your profitability.

One great way to change your pricing model without upsetting existing clients is by adopting a multiple-tiered pricing approach. As Brice Gump of Major Impact Media says:

We use a two tier retainer model: you can choose the lower monthly retainer or the higher monthly retainer. It makes managing our clients incredibly simple.

We tried everything: hourly, custom billing by project. All of it led to a ton of work to create and design a proposal for a new client. Now we have simplified it by having one service offering at two different levels of service and when a new client signs up they can choose between Option A or Option B. It goes on a recurring monthly subscription and we get paid up front for the work we do.

Cost Optimization

Make sure you have an in-depth understanding of all of your agency’s costs, and find opportunities to optimize them. For instance, you should look into automation tools that help with client reporting, and streamline client and staff management.

As Drew Saylor says:

We also maximize our profits by optimizing our campaigns and SEO. Not only do we earn more on more efficient accounts, but we also have the flexibility to adjust budgets as needed to make sure we’re hitting goals or to set us and our clients up for greater success in the future.

And according to Gary Johnson:

Cost optimization is also a really great way to not only, usually slightly, up profits but more effectively increase client retention by providing more value in relation to their current cost. This is done by internally reevaluating how that service is delivered and getting that cost lower so the savings can be passed on to the client or at the very least so you don’t have to raise prices year after year.

Looking at cost optimization this way is definitely a way agency owners can reinvest back into their business for continued growth. Of course, sometimes cost-optimization means adding a little extra profit onto what you make, but again, this is usually small unless you have a lot of clients on that service.

And even then, it might be best to show your clients just how much you appreciate their continued trust and support and give it back to them in one way or another.

Conclusion

By determining (and constantly evolving) your agency pricing model, you set your agency up for increased profitability, growth, and client satisfaction. Now that you’re well-versed in what each model entails, you’re well on the way to pricing your services appropriately and raking in the profits.

Q1. What is an agency rate?

The agency rate refers to the hourly rate charged by agencies. You can calculate this through the total hours invested or the hours invested by specific agency resources.

Q2. How much should agency fees be?

While all agencies are free to charge what they believe is fair, agency fees are generally set to match the current market rates.

Q3. How much do design agencies charge per hour?

Design agencies generally charge an average per hour rate that is close to the current market rate.

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Manal Y

Manal works in digital marketing at Cloudways, where she shines up content primarily by torturing the Oxford comma. After hours, you can find her rambling about books, movies and music, and ranting about media and politics to anyone foolhardy enough to listen.

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