Determining how much to charge clients is a key choice to make. Building an agency involves inquiring aspects like branding, digital marketing, search engine optimization, etc. Despite the challenges involved, the agency pricing model must be part of the consideration of agency building as it is part of what will make or break it.
The pricing model affects different aspects of an agency and determines profits, who to hire, the pitch, etc. There is no one-size-fits-all model to use. Rather, the model used should fit both you and your clients.
It goes without saying that a wrong model will lead to losses, unfair compensation, customer dissatisfaction, and brand instability.
The following four pricing models can be considered by agencies based on what best fits them.
Hourly Pricing Model
This is simple model involves clients paying the staff’s time based on the hours spent on a project. It is simply trading time for cash. This involves setting an hourly rate and charging the client based on every hour worked.
It is calculated by determining the hourly rate if it is $100 per hour then 5 hours will equal $500 based on the project.
- It is simple and straightforward to calculate since it is just establishing the number of hours worked and paying the agreed price for each hour.
- It is easy to explain and sell to clients, i.e. it attracts clients with a fixed budget.
- It can be lucrative and can entice clients who value your services.
- It is useful when managing limited agency resources for instance project management and tracking the number of hours worked.
- Priority is given to the time spent on a project over the value of clients’ work.
- It is difficult to scale and apply to bigger projects which may take more time.
- There is no incentive to work harder or faster to complete the project since less time spent equals less pay.
- Exceeding the estimated number of hours for a particular project can cause problems with the clients.
This model is best for beginner agencies that may not know how to price their work. It is also a good model to use when working with clients who often change their minds or may need a lot of edits on their work.
Fixed Fee or Project-based Pricing Model
The agency places a fixed price to complete a project. It is done by estimating the total number of hours needed and multiplying it by the hourly rate per employee or agency and adding a buffer. Usually, payment is made in increments i.e. a 50% down payment and a final amount due at the end of the project.
- It is easy to understand.
- It allows clients to compare different agencies based on the thought-out proposals.
- Allows the agency to sell themselves and showcase their previous work done through the client portfolios.
- It is potentially more profitable than the hourly pricing model.
- It focuses on deliverables or expertise application on the project since the agency still makes profits regardless of the number of hours spent.
- Can be hard to justify to the clients based on the budget since the client may feel overcharged also called sticker shock.
- There is the estimation problem as the model may not work in the agency’s favor due to lack of clarity of time and unexpected costs.
- The element of scope creep comes in whereby, the project’s dimension expands in the process i.e. new ideas to be incorporated coming up and this might eat into the profits or create an additional budget.
- It limits the client-agency relationship since the agency may be reluctant to propose new ideas that will improve the final product or outcome to avoid confusing the client or incurring extra costs or losses on profits.
This model is good for clients with a budget to follow and want to know the cost of a project and its payment model. Agencies desiring to use this model should use it after finishing a few projects and have a good idea of the cost associated with the milestones achieved.
It is also a good model for agencies specializing in specific projects such as web development and can be able to estimate the length of a project.
Performance-based Pricing Model
This is a preferred model for agencies that are confident in their work and demonstrate specific, measurable, and deliverable outcomes. The agency’s work is tied to specific outcomes such as increased sales and clients are charged based on the performance of successful work.
Agencies establish the conversion metrics with the clients and the value of each conversion by monitoring the same.
- Clarity on matrices can motivate the staff leading to investing in the success of the project.
- It is an easy model and open to sell as clients like paying for results.
- If successfully done it can be profitable and lucrative.
- The model demonstrates surety in your work to the client by sharing the risks and expected outcomes hence it’s easier to convince them into working with you.
- Non-performance equals no pay therefore the client has all the leverage in this model.
- There is no guarantee of results.
- A lot of work is done to drive results therefore it’s a very work-intensive model.
This model is good for agencies working on clear measurable outcomes such as sales and can demonstrate delivery of work using measurable metrics.
Value-based pricing model
This is arguably the most lucrative of all pricing models. The client pays based on the value demonstrated by the agency to bring to their business regardless of the hours spent.
It is important to have a clear understanding of the client’s needs and showcase a track record of generating huge value for previous clients in order to build trust.
- The risks and rewards are shared by both the agency and client due to the alignment of mutual goals hence both parties are motivated for end results.
- Priority is given to the effectiveness, value, and adaptability of the project.
- A well-established agency that offers demandable service will result in high-profit margins.
- The definition of “value” is vague and subjective. It is therefore hard to convince clients what you are offering.
- This model is not immune to the scope creep element.
- There is a need to have a proprietary advantage over your competitors in the market, therefore it is good for well-established companies only.
This model is best for agencies that are considered experts in a specific area and calls for a uniqueness for effective application.