I’ve worked for and with many different agencies over the years and one thing that seems to always be on the agenda for review is the pricing model, and rightly so. It’s one of the most important things for an agency to get right and has an impact on every aspect of the business. The obvious impact is on client satisfaction and agency profitability but it also affects your team and how they go about their work and how you market your services.
I think focusing on pricing strategy is justified and agencies should be constantly testing and iterating to create a bigger impact on profits and provide a transparent and robust service for their clients. The days of set fees and large margins for agencies are long behind us and I think that has forced a lot of agencies to up their game and avoid complacency.
So what are the main pricing strategies out there? There are three categories that I think cover most of the different variations and all have positives and negatives.
Project-based pricing or the fixed fee model is when an agency estimates the cost of a project based on the work required and the employees needed for delivery and then a buffer fee or margin is usually included. The fixed amount is often billed to the client in increments with a percentage upfront, percentages at various milestones and a final amount due on completion of the project.
This model also includes retainer based work as typically, the agency scopes the number of tasks or projects to be completed within a monthly fee. This divorces price from an hourly rate and allows the agency to keep any profits made from efficiency improvements in delivery.
The fixed fee model works well for clients who have a budget to adhere to and want to project exactly how much the work will cost and when payments will be required for cashflow purposes. The downside is that projects change and evolve as the agency and client begin to work together and the original plan and cost estimate can become inaccurate quickly. This can result in unrest in the relationship as the agency either have to submit additional invoices to the client or reduce its own profit on the project.
This sort of pricing requires the agency to be able to scope very accurately or risk underestimating and eating into their profit on a project. In my experience, there are always challenges that impact project milestones and this model will create friction when those things happen.
The relationship downsides don’t stop there either. The agency may feel reluctant to suggest new creative or innovative ideas during the project as they could delay milestones or completion dates and therefore payments. Additional requests from the client can be misinterpreted as trying to get work for free if the tasks were not included in the original brief/scope. The biggest sticking point in this model is the definition of ‘done’! If the client and the agency have different ideas of what ‘done’ looks like, payment debates can start and the client may feel that the agency is more concerned with simply finishing the project, than finishing it to a high standard.
Hourly rate pricing is when an agency exchanges time for a set price and is probably one of the most common structures in agency land. The agency either decides on an agency-wide or ‘blended’ hourly rate or the rate is dictated by the specific employee’s seniority, position or talent.
Many in the industry don’t like the hourly pricing model as it focuses on the agency, rather than results or value that will be provided to the client. The hourly rate doesn’t always encourage agency efficiency either which is another common criticism; the longer the agency takes to complete the work, the more it gets paid!
Tracking the time of employees can become a tiresome and demotivational process for them and can sometimes come ahead of more productive tasks during scoping and the management of projects. Agencies can also struggle to predict profits and cash flow when using an hourly pricing model.
This model can cause issues on the client side as well as the agency, especially if project costs start to be debated in terms of validity. If the discussion becomes about if a task should take 5 hours or 8 hours, the focus is shifted away from the more important things; the work! I also feel that I foster good working relationships with my clients and don’t want them to feel that they can’t pick the phone up and have a conversation with me or my team for fear of being billed.
Of these three pricing structures, this is the one I have seen and experienced the least. Pricing your services on performance or the results of the work aligns the agency and the client’s goals which is a big positive because both parties are motivated to succeed and share the risks and the rewards.
Clients no longer need to be concerned with the agency’s costs, and the agency is then forced to acutely focus on the end product and its effectiveness rather than the day to day productivity of its team members. This very advanced pricing model definitely encourages agencies to look at the bigger picture and focus on outcomes and can be highly effective at increasing profits for the business but it’s certainly not all good news.
First, the agency must be very confident about delivering results to risk the exposure of a structure like this. The agency team must determine what is valuable to the client which in most cases with be conversion rate, and then find the best way to track and measure the results in a robust and transparent way.
Most clients will be interested in this customised approach to pricing as they will be more inclined to buy results, than hours or projects but it requires a very different mindset and approach from the agency, especially as you’re more than likely paying the majority of your team in terms of deliverables rather than performance.
In my opinion, agencies would do well to step away from obsessing about ‘creativity’ and ‘originality’ in their approach and begin to focus more on what it takes to deliver improved results for their clients, but I think widespread results-based pricing is a long way off at the moment.
Whichever model suits your business objectives and you decide to adopt, it’s clear that constant review and iteration is important and small improvements to your pricing strategy can have a significant impact on an agency’s financial health. Ultimately, an agency has to find a structure that works for them and most of the agencies I’ve been involved with using a combination of models rather than just one. Just make sure you’re always reviewing your strategy to ensure it works for you and for your clients.