Whether you’re new to the digital marketing agency game or are an established marketing agency, one of the most important decisions you’ll make is how to price your services to clients and what is the right digital marketing agency pricing models for you.
Doing it right means that you’re properly valuing your time and skills and maximising your agency’s profitability. Doing it wrong means stalling your agency’s growth, working more for less, and potentially straining your relationships with clients.
Of course, there are no ‘one-size fits all’ pricing methods. Just as your agency is unique and dynamic, so too will your pricing method need to be shaped to what makes your agency special – your values, clients, services and areas of expertise.
There are pros and cons to different methods, as well as some that should be avoided entirely.
Here are 5 digital agency pricing models to get the ball rolling!
At first glance, this method seems fine – exchanging your agency’s time for a predetermined hourly rate.
The problem with an hourly rate pricing method is that it sets up your and your clients’ interests as oppositional from the get-go. From an agency’s standpoint, the incentive is to spend more hours spent working to increase the profitability of the project, which is the opposite of what the client wants (i.e. having the most work done in the least amount of time).
This can lead to a strained relationship with your client if project costs swell beyond estimates, or if they mistrust the transparency of your measure of hours and the work done in them.
And the logistics of this method quickly get more complicated.
Do you charge the same hourly rate for everyone at your agency (a ‘blended’ rate), or set different rates for team members based on hierarchy or expertise? How do you go about the tedious task of recording every hour worked by different agency members, especially if your client is concerned about where their money is going?
Put simply: Whether you run a digital agency or a marketing consultant, just skip the hourly rate method for a less cumbersome method.
Percentage of Spend
In this model, the agency is paid based on a percentage of ad spend. The money paid to an agency increases as the client’s budget for ad expenditure increases, allowing the agency’s profits from the contract to grow as the client’s business grows. This is the main ‘pro’ of this method.
However, much like the first model, this method also leaves you and your client with oppositional goals.
For example, if your digital marketing agency were able to maximise the efficiency of targeted advertising in a way that meant the client could halve their expenditure on ads but get the same conversion rate for their business, your agency would actually end up getting paid less for doing an awesome job! Hardly seems fair, right?
This model also means that you could end up having to avoid working with smaller companies and businesses simply because their ad spend budgets are too small to mean real profits for you.
The percentage of spend model is something of a relic from an older ad agency world, without the dynamism and efficiency of the digital marketing world today.
Our verdict: give this one a miss.
Flat Monthly Fee
This is a far more reliable way of making revenue than the previous two methods. A recurring flat payment or a set price can help you avoid the pitfalls of the hourly and percentage methods mentioned previously.
A huge bonus is the clarity it affords – customers know from the get-go what they’ll be paying you, and can make an informed decision with no surprises down the track that might strain your relationship with them.
From your agency’s point of view, the reliability of recurring revenue paid monthly is a massive plus. You can have a regular income stream and can focus on your work, rather than trying to chase down many different one-off projects. You also don’t have to worry about being under constant scrutiny by clients who are concerned about work efficiency under an hourly rate.
Unlike the hourly rate method, there’s a strong incentive for agency workers to finish projects faster and smarter, as the quicker one project is completed the more time there is to work on others.
Of course, this method works best as a part of a longer-term contract with a client. It’s a reliable and clear method for both new and established agencies, and gets the AgencySavvy tick of approval!
Flat Fee + Small Percentage
This hybrid pricing strategy gets used when the expenditure for a project is highly variable. Like in the last method a flat fee is charged for agency work, with an additional smaller percentage of spend fee paid to reflect the growth of the client’s ad spend budget over time.
This method is much like the last method we talked about, but with the massive bonus of the reliability of a regular recurring flat payment.
Performance or Value-Based Pricing
The value-based pricing model is can be more complex to put in place but can work well for everyone if it’s done right. Your agency gets paid based on the outcomes and success of your project or campaign for the client.
Clients like it because your digital marketing or advertising agency takes on all the risk and the payoff is reliant on you doing a great job – and above all, clients want to buy results. Of course, in order to successfully sell this model an agency needs to have a track record of producing high-quality campaigns.
The advantage of value-based pricing method is that it aligns the goals of both parties. Everyone wants the project to be completed as quickly as possible with the highest return on investment. Clients don’t need to worry about the costs of a project blowing out, and the agency doesn’t need to tediously keep track of every hour worked.
Remember that a method like this ultimately relies on the client being happy with the results of your work. You need to have a clear definition of what success is from the outset and be confident that you can absolutely deliver results.
Factors To Consider When Choosing The Right Pricing Model
There are a few big things to think about when choosing the pricing method for your digital marketing agency.
- How established or new is your agency?
- Types and range of services you offer
- Types and range of platforms you use
- The capacity of the team to take on work
- The direction your agency is heading towards
- Does it reflect your business values?
Take the time to think about all of these factors when you’re choosing your preferred pricing method.
Best Practices For Pricing Your Digital Agency’s Services
No matter which pricing model you go with, there are a few things you can strategically price your services and expertise:
- Remember that each client is different. Some digital marketing agencies list static service prices on a rate card, but tailoring prices with clients from the start to suit their budget and goals can make sure that you can build trust and get the best outcomes possible.
- Be very clear on the scope of your project from the outset. Make sure everyone is clear on what is and isn’t included in the work you’ll be doing. This is especially the case for ‘adjacent’ services that some clients might expect to be included automatically, like tracking codes or integrating a CRM.
- Give your client options when discussing packages and campaigns, but don’t overwhelm them with choices. Try giving around three options – most people will pick the middle one.
- Try to get a longer-term contract of 6-12 months if possible, as the security and reliability of regular revenue are best.
So to wrap up, a digital marketing and advertising agency who doesn’t price their work fairly risks losing profits due to undercharging or losing clients due to overcharging.
The risks increase for inexperienced agencies who might experience more issues or setbacks during working hours than accounted for. Agency owners, you’ve worked too hard and should avoid this!