How to Set Your Agency Fees: 5 Agency Pricing Methods
An agency operating in a competitive industry always has to come up with ways to deliver more value to customers and clients. Adding value to a business relationship is not just one of the ways to stay ahead of the competition and retain the most valuable customers. It also affects the agency’s bottom line. But value means little unless the agency has an efficient way to price its work products.
How, what, and when an agency charges its clients dramatically affects the overall business relationship. To ensure that your agency rates aren’t unrealistic, you need to look at your pricing options very closely and find an agency pricing model that works best for you and your client base.
1. Hourly Pricing
In its simplest form, hourly pricing is a result of an equation where the number of hours worked is timed by the price of an hour, netting the price that should be billed. Hourly pricing is usually more complicated than that. A digital marketing agency pricing model that relies on hourly prices, for example, will usually use different rates from several people who work on the project simultaneously. Especially if outside talent pricing needs to be accounted for in the digital marketing agency pricing.
Hourly pricing, like any other pricing method, has its advantages. The reasons why hourly pricing would be a good choice for agencies include:
- It facilitates charging for overtime hours;
- It protects the agency from frequent and sudden changes of the direction of the project;
- It protects the agency from scope creep;
- It allows agencies to easily add or remove additional team members, including outside talent while minimizing the chance of over- or underpaying them.
On the other hand, hourly pricing has clear disadvantages, which include:
- The requirement to closely monitor and track billable hours;
- The need to give the client an insight into the billable hours and the work activity that occurs during them;
- The level of transparency needed for hourly pricing might put unnecessary pressure on the team members;
- At its core, hourly pricing incentivizes more hours spent working, not delivering the most work in the least time possible;
- Hourly pricing can drastically limit the agency’s profit because of a finite number of working hours.
The hourly pricing method has plenty of pros and cons for the agency and the client alike. It requires an increased level of supervision and transparency, but it also protects the agency from many common issues that can occur during a project. At the same time, it allows clients a greater insight into pricing, but it makes it also often requires them to set a cap on the total of hours billed.
2. Project (or Fixed-Fee) Pricing
The project, or fixed fee, pricing is arguably the favorite pricing method of agency clients. Why? Because it’s simple and straightforward. For example, an advertising agency rate card gives an easy insight into the typical ad agency fees. The client can easily access the advertising agency rates and make an informed decision.
It’s also simple for the agency. A staffing agency pricing model based on project pricing makes it easy to give a quote based on the estimate of the costs and the markup for the work on the project. The client can accept or refuse it, but either way, they can do it with little time wasted.
Fixed fee pricing does away with many of the common drawbacks of hourly pricing, and it adds other benefits as well:
- Agencies aren’t under the watchful eye of their clients as much when using fixed fee pricing;
- It’s easier to compete for jobs when agencies can give a decent estimate of the total costs for the project;
- Fixed fee incentivizes speed and quality — the quicker an agency can finish the project, the more time it has to devote itself to another one;
- The deliverables, as well as the rates, are negotiated up front, which can be a safeguard against scope creep and additional requests for work outside of the original contract;
- Fixed fee pricing allows agencies to ask for a part of the fee upfront.
But fixed-fee pricing is still not a perfect pricing method for agencies, because it has some shortcomings. These include:
- Making a profit using fixed price is highly dependable on the agency’s ability to gauge a fair price for their work. Unexperienced agencies are in constant danger of losing clients because of overcharging, or losing profits due to undercharging;
- There is no mechanism in place for charging for additional work — every addition needs to be negotiated;
- Agencies need to break up large projects into stages and negotiate payments per stage if they need a steady flow of funds;
- Any issues that happen during the work need to be assessed for their impact on the workload and addressed in a renegotiation of the price.
Fixed fee pricing is a great pricing method for an established and experienced agency working on a contract with few variables and unpredictable happenings. But when something unexpected happens, or when the client decides to change the direction and the scope, the agency needs to go back to the negotiating table and work out their fees again.
3. Mixed Pricing
Agencies that want the best of both pricing methods can negotiate a hybrid pricing method that uses fixed prices as well as an hourly. For example, a social media marketing agency pricing can include a fixed quote for a determined scope of the project but stipulate an hourly fee for any unexpected circumstances, and changes of goals or scopes.
Likewise, the social media agency pricing model can include a flat fee adjustment for their original estimate of the hours needed to complete the project. It can also use it as a penalty for out-of-scope work the client demands, on top of the hours billed.
Either way, using the mixed pricing method, or supplementing one method with the other, can be very useful when dealing with clients who are unreasonably demanding or ask for work that wasn’t defined in the contract. Even agencies that are staunch supporters of one pricing method over the other might consider using the other method to ensure their clients aren’t taking advantage of them or locking them up in a never-ending project.
4. The Retainer Agreement
Agencies and freelance talent alike can provide work based on a retainer agreement. Retainers are very common in the legal professions, but creative agencies are also often kept on a retainer. The agreement is seemingly simple — the advertising agency commits to being available every month for a certain amount of work for the client.
The client pays the agency a certain amount of money on a monthly or yearly basis whether they use the agency’s services or not. When the advertising agency cost goes over the retainer, the advertising agency price list comes into effect and the clients are charged accordingly.
Working on a retainer agreement has plenty of benefits for an agency:
- A guaranteed income every billing cycle, whether there’s work to do or not;
- Predictable amounts of work, as defined in the retainer agreement;
- Reduced need to chase after new clients every month;
- Clients appreciate the predictability and reliability provided by a retainer agreement.
The retainer agreement also comes with some drawbacks, including:
- Agencies need to model their schedules so that there’s always enough time to work for the client that has them on retainer;
- Clients will expect the agency to be available for work with little to no notice in advance;
- The retainer agreement might lock agencies in bad contracts with bad clients if not careful;
- The profitability of the retainer contract is highly dependent on setting strong terms that dictate how much work the client can expect, and how much the client has to pay if they exceed the work covered by the retainer;
- Clients appreciate retainers because agencies often offer them at a lower rate, and lower retainer rates might lead to loss of profit.
The retainer agreement can often seem like a gamble for both the agency and the client. Still, as long as the parties know each other well and can come to a good agreement, a retainer agreement can solidify a mutually advantageous relationship.
5. Value Pricing
Value pricing is one of the trickier pricing methods an agency can use. It also requires a more intricate agency pricing model. Instead of pricing based on hours or set fees, or any other type of input that goes into the project, the client eventually gets billed based on the value they get from the work performed.
Even though value pricing isn’t a good fit for every agency, it has some benefits:
- It strongly incentivizes quality of work products because the more value the agency delivers, the more money it can potentially earn;
- Clients might perceive this type of pricing as performance-based, which might be appealing to them in some cases;
- The agency has more freedom to set its prices and it can expand its client base to those who otherwise wouldn’t be able to afford them.
However, the misgivings of value pricing can often outweigh the benefits:
- It can be difficult to correctly estimate the value of the work;
- The agency has to take on a lot of risks;
- Circumstances beyond the agency’s influence can reduce the value of the work and the agency’s profit.
Value pricing can be too risky for some agencies. For others, who are confident in the value they provide and have a reasonably easy way to calculate it, value pricing can have a great effect on their bottom line.
Agencies, clients, and the type of work the clients need can all dictate the type of pricing method an agency uses. When choosing a pricing method, agencies should focus on picking one that provides the most benefits for their clients and themselves in a specific situation. Agencies should also feel free to experiment with different pricing methods and mix them when appropriate. There’s nothing wrong with having an agency rate card and working out an hourly rate. But it’s important to keep in mind that the best pricing method is the one that rewards the agency the most while ensuring the clients’ needs are met.
Max is a SaaS enthusiast and loves actionable content that provides direct value.