Ignore agency pricing at your own peril.
The right pricing model doesn’t just regulate agency profitability. In fact, it 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, the wrong pricing model could send the agency spiraling down a dark path of unfair compensation, endless arguments with clients on what you’re owed, and general mayhem.
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.
Stale pricing models spell loss. Without regularly testing and optimizing your pricing models, you’re leaving good money on the table.
So with the help of some expert friends, in this article I’ll explore the factors (with associated pros and cons) to consider when creating the right digital agency pricing model, and how you can boost your agency’s profitability
How to Ask Your Clients For a Higher Price
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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 the project takes 5 hours, the agency can invoice the client for $1,000.
Popular Agency Pricing Models
There’s a pricing model for everything, no matter what your clientele or service offerings. Choose for Goldilocks: the one that’s just right for your projects, and the industries/niches you specialize in.
Source: 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 – clients can easily understand how much they’ll be paying for your services. And:
- It can help you attract clients with a set budget.
- You can track overall profitability, team-hour management, and individual project schedules. Great for managing limited agency resources.
- Working on a long-term project that requires a lot of problem-solving and research? The hourly model can yield quite the reward.
However, there are some obvious disadvantages as well.
- It’s harder to scale this model for bigger projects.
- The hourly rate model prioritizes time spent on a project over the value delivered to the client.
- It disincentivizes smart work. Did you complete your projects in less than the forecasted hours? Your efficiency could lose you money.
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. Specify your rates and the basis for calculation in your web development proposal.
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.
Do you offer services like SEO site audits or website development, with clear deliverables and well-defined endpoints? Project-based pricing could be right for you.
- Fixed fees emphasize expertise over hours spent on the project. So it rewards speedy turnaround time and value for the client.
- Untethered to time, the model is easier to scale for larger projects than hourly rates.
- Clients can enjoy the option of testing 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.
According to Andrew Kruse, founder & director of Lantern Digital, fixed fees are fuss-free:
“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.”
That said…
- If you end up spending more hours than you anticipated on a project, you’ll still make the same profit.
- Despite being straightforward, project-based rates can be hard to justify to clients on a strict budget. The model isn’t transparent about how much clients will be paying by the hour, which can lead to anxieties about overcharging. Talk about these details in your request for proposal!
For project-based pricing to work in the agency’s favor, 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.
3. Performance-based Agency Pricing
Now this one’s for the seasoned agency confident in its own ability to deliver.
Can you tie your work to a clear, specific, and measurable outcome like lead generation? You could charge based on successfully achieving that outcome. So if you run a social media campaign for a client, you could charge a percentage of all sales generated from social conversions.
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 good:
- The best thing about using this model is that it relays your surety in your own services to clients.
- Plus, it can be easier to convince clients to work with you when you’ve got a stake in their success.
- It’s also quite scalable.
The bad:
- If you don’t deliver, you don’t get paid. The clients have all the leverage here.
- This model is extremely work-intensive. Not for the faint of heart.
For Jeremy Moser, co-founder of digital brand mention agency uSERP, this agency pricing strategy is a no-brainer:
“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 Agency Pricing
Retainers are for the agencies that like to plan it all out. 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. It’s important to clearly state here whether the weekly/monthly hours would expire or roll-over to the next period.
For the latter, you’ll deliver client services within a specified amount of time. Once that’s done, you’ve held up your end of the retainer.
What’s good:
- Retainer pricing is heavily value-based and client-friendly. The agency is incentivized to improve service efficiency and quality to retain clients.
- 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.
But:
- It can be difficult to charge new prospects a client retainer.
- Beware of mismanaging your hours, especially on deliverable-based retainers. Your profitability could be dealt a severe blow.
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.”
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5. Value-based Agency Pricing
No agency pricing model is more lucrative than the one based on value. Totally divorced from the hours you spend on the project, value-based pricing is immensely scalable.
Clients don’t pay based on either hours or deliverables, but according to the value you bring to their business. Your services are directly tied to a client metric like revenue or profit.
But there’s a catch. To effectively utilize value-based pricing, the agency has to bring something totally unique to the table. Specialize in content marketing or logo design? This model’s probably not for you.
However, say your agency specializes in promoting virtual musical events through digital marketing and advertising, and you’ve generated six-figure sales for a number of these events (nice!). You’ll find virtual event planners lining up 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:
- “Value” is a subjective concept that can only be convincing in the most quantitative terms. Your prospects need total clarity on what you’ll bring to their business.
- That means you’ll need a track record of generating enormous value for past clients.
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, 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. “I wanted no-hassle billing, and up-front information so that everybody could be on the same page before signing up,” he says.
For Milosz Krasinski, Managing Director at Chilli Fruit, this is the strategy of choice.
“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.”
Agency 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 |
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| Project-Based Rates | Charge a flat fee by the project |
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| Performance-Based Rates | Set a fixed price per metric and charge as it is achieved in real-time. |
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| Retainer | Pre-negotiate and receive an upfront fee based on either set number of time or deliverables |
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| Value-Based Pricing | Price your service based on the client’s and your own perception of value |
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When to Charge Your Clients
Cash flow is a crucial part of your overall agency pricing strategy. I’ve already touched upon the appropriate time to charge your clients based on your pricing model. 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. But there are other important 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.“
Learn more from Jan Koch as he shares the techniques to sell a WordPress maintenance retainer to your clients.
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 smooths 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.”
Effective client management your clients continue using your services in the long term.
Changing Pricing Models
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 can’t 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. Look into automation tools that help with client reporting, and streamline client and staff management.
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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. Check out this Cloudways webinar video on getting high value clients for your marketing agency.
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.
