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Are you pricing your agency services the right way?

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As businesses, agencies have the grave burden to make profit with which they can generate growth and help the team thrive. With that in mind, pricing your agency services is arguably the most difficult part of founding and running a successful business. Get those wrong, and you’re certainly setting yourself on the right path for a wide range of disappointments.

Pricing your agency services the right way is fundamental to attracting (and keeping) the right clients and business partners. The Institute of Practitioners in Advertising (IPA) regularly publishes reports and guides on the topic of agency pricing, and for good reason – one of their most noticeable ones being The Price of Success, back in 2017. I recommend checking that out as soon as you can.

Most popular agency pricing models

If you are just starting out as an agency, or even if you are in need of taking a step back and reconsidering your business model in the Covid crisis, here’s a quick and useful guide on the best agency pricing models, how they work and who they are most suited for.

Hourly-based

Perhaps the simplest model requiring the least amount of marketing research and planning, the hourly-based model is the easiest to implement and it is strictly tied to the time your team spends on any given project.

It is especially good for beginners just starting out in the industry, perhaps as they build up their business and start attracting clients. Much like freelancers, in a way.

There are two popular ways to charge by the hour: on a blended rate and specialist rate. The blended model takes into consideration all the employees and flattens their rates calculating an average – which is then applied to the whole agency for the project at hand. In other words, say you have two employees, one making £20 an hour, the other one making £30. Your hourly fee will be £25/hour, which you will then use to calculate the expected hours each will spend on the project.

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Image credit: Andrey Tsapko

The Specialist fee is, conversely, the opposite concept. You calculate different rates for individual employees and sum them all together, then calculate the hours each will spend on the project. This enables you to account for the seniority of your staff and the most experienced players in your team. It can work if you are a large agency – probably not so much if you are a smaller player.

With both types of rates, it is common to give an estimate of the time needed to complete the project – however, this comes with some risks. If you spend less or more time than agreed working on the project, your final fee will be reflected – and if your estimates were largely wrong and you end up going well beyond the deadline, you risk losing a client.

However, as mentioned, the hourly-rate model is excellent for those businesses that are just starting out, and it’s the simplest model to work out. Next up is project-based, which is hopefully where you’ll be headed after your first few clients. 

Project-based

A project-based fee is based on deliverables and relies on a series of factors that are not necessarily dependent on the time you will spend on the project. It is useful when you’ve already had your fair amount of clients to work for, as it requires more confidence in setting out goals and plans to see the project to completion.

The easiest way to calculate a project-based fee is to look at the amount of time needed to complete the project, then add any overheads and a profit margin to ensure the model is sustainable. You can use a day rate for your team, include material costs and add a 20% for profit, for instance. How you go about it is truly up to you.

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Image credit: Ricardo Einloft

However, as mentioned, project-based fees require you to have an excellent understanding of how long a project will take, and therefore require more experience to be put into practice. Being based on a fixed fee, the project-based model is not connected to the time your employees actually spend on the project, but usually to an estimate – meaning that you won’t make up the costs of delays if your estimate was wrong.

This is why it is usually best to start with an hourly-based model and then move onto project fees, to build up some business confidence before going for the big flat numbers.

Value-based

If you are a small agency focused on a niche service, the value-based model may be perfect for you. It is the most difficult model to sell, but also one of the most desirable for both clients and agencies.

The value-based model is independent from time and resources, and even projects to an extent. It is based on concrete deliverables and changes in your client’s bottom line or profit. If you can (and are absolutely certain you will) deliver a change in hundreds of thousands of dollars to your client’s bottom line, they can’t say no to your offer.

This model quantifies your agency’s value in relation to your client’s profitability. Value-based fees are the most scalable model and require a fair amount of shared risk between agency and client, as you are both buying into each other’s success to generate profit.

I should specify however that you are not making money based on your client’s performance on the market. You are merely putting a price on your services, giving them a value based on a set of clear deliverables – which are discussed in advance. However, if you can sell your services as bringing an extra million in profits to your client, you can easily enter the six figures for your own fee.

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Image credit: Fermin Cimadevilla

Performance-based

Tied to performance is instead the, well, performance-based model. This is too based on a set of clear deliverables, but this time, your fee and revenue is affected by very specific metrics, not just profits.

A performance-based model is excellent for marketing and social agencies, as deliverables will often be clearer in those cases. You can set a fee based on lead generation, sales, online advertising, clicks, acquisitions and more, and the better you perform on the field, the higher your fee can be when the time for payment comes.

It is, however, necessary to establish a few aspects at the beginning of the business relationship. You will want to set clear conversion metrics and agree on the value of each, as well as establish a clear payout timeline and tracking methods to ensure your performance is measurable.

Contrary to other models in this list, it is uncommon to receive an up front payment in the case of performance-based fees, as they are often dependent on the actual results that your services bring to your client – and therefore may be affected by a better or worse performance as you move along.

It must be noted however that performance-based models are incredibly risky with smaller clients who have not yet established themselves on the market. Some of these may even try to lure you into a performance-based model, knowing perfectly well that they may save some money compared to more fixed fees. It is only recommended that you adopt a performance-based model with larger, more established clients to make sure all your work pays off as it should.

Retainer fee

Perhaps the most popular and desired pricing model for agencies. A retainer fee is a flat, often periodical fee (monthly, quarterly etc.) that the client usually pays up front to secure your agency’s services. It is much like ‘booking’ some of your team (or all of it) to work on a set of deliverables over a longer period of time. Usually, to land a retainer fee agreement is a big deal for any agency, as it means many costs will be accounted for and you’ll also be able to keep a client for the long term.

Retainer fees are usually not dependent on single projects and are instead focused on services for a fixed amount of time. Clients will purchase a certain amount of hours per month from your agency, and you will establish in advance what kind of deliverables you will be working on – be it social posts, images, video content or other deliverables.

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Image credit: Anna Ivanyuk

A retainer fee is usually paid up front for the upcoming period. It is, however, quite risky for the client, which is why striking a good deal is so challenging for many agencies out there. A client needs to trust your services and know that you will deliver your promises – which can be quite hard to prove if you haven’t worked together before. For this reason, a retainer fee deal usually comes after having worked on a few projects with your client, during which you’ll have proved how reliable, professional and effective your team can be.

There is also an argument that a retainer fee can hurt your agency in the long run. According to Blair Nicole Nastasi, Founder of Media Moguls PR who appeared on Forbes, “a retainer seems like a great idea because you can accurately predict how much revenue you’ll bring in every month,” but what happens when a project gets delayed or a client is late in signing off? Your time is technically booked, and presumably you will not have worked with many other clients at the same time. As desirable as a retainer fee can be, it may also hinder your agency’s growth.

Still, though some clients seem to be losing trust in the undelivered promises of retainer fees, they also love it for budget management reasons, as it is a fixed, predictable amount to include in your yearly budget – which is also the reason why agencies love it so much. It is like having a certainty in this increasingly uncertain landscape that is the creative industry.

Do keep in mind, however, that retainer fees tend to be quite pricy for clients. In the case of sudden cuts to the budget, they are usually the first thing to go. Consider them appropriately!

How to calculate your fees

Now that we have discussed the different kinds of pricing models, it is time to try and understand how you can calculate the fees you are going to ask your client. If it’s an hourly rate, it’s quite easy to find a baseline – however, there will always be additional costs to include.

You can separate these costs into fixed and variable overheads. These are, respectively, the costs that will always remain constant in your agency, and the ones that may vary with each new project. All of these will be unique to your agency, so it’s quite hard to lay down a model that can work for everyone – but this should work as a start!

Consider fixed and variable overheads to calculate your ideal fees.

Fixed overheads include rent, salaries, taxes and insurance. Rents may not be as relevant for many agencies in the new normal, especially with some moving to entirely remote working – but the majority is expected to still keep their offices or relocate to new ones, and so rents will still be a part of the equation for a long time. You will have to calculate your fixed employee salaries, and of course, all the company benefits, insurances and taxes that come with them.

These fixed overheads are set to remain constant in the foreseeable future – though you will of course have to account for new employees as they join the team.

A bit trickier may be to calculate the variable overheads instead. These will be the freelancers needed to complete each project, costs in utilities (which will vary greatly with a hybrid workforce), equipment needed for specific projects (this is especially true of production agencies), and of course all the software tools your team uses to carry out their job. Be it accounting software, project-management software, the Adobe suite or others, there will be software costs which may even vary each month, especially in this era of subscriptions.

And of course, you want to make sure you are including profit into the picture. Calculating agency profitability may require an entirely separate piece by itself, and it’s not as simple as slapping a few dozens of percentile points to add up to your project fee. Unfortunately, this is something that you will have to understand with your team. Where do you want to be in five years? What is the perfect roadmap to get there, and what do you need to make in terms of profits to ensure that happens?

It is somewhat agreed, however, that a good profit margin sits in the 11%-20% range. Make of that what you will.

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Image credit: Harry Whatrup

Which pricing model is the best for your agency?

Pricing your agency services certainly isn’t easy and it’s not something you should underestimate for sure. From it depends the entire profitability of your business, the wellbeing of your employees and essentially your entire future. No pressure.

However, and this is the time for a clichéd conclusion, by now you’ll have guessed that different models work for different agencies and there is no one-size-fits-all solution for all the businesses out there. Yet, it is true that, if you are just starting out, you should perhaps consider sticking to the hourly-rate or the performance-based model, which are more easily measurable and don’t require a whole lot of experience to be pulled off.

Nothing prevents you from changing your fees with future business opportunities, of course. Once you build up some client experience and a solid portfolio of work, you will be able to change your pricing model to something that makes you feel more comfortable with your team, resources, skillset and capabilities. And with time, who knows? You may even be able to land a retainer fee with your dream client. I most sincerely hope you do.


Header image: Andreas Krasser
 

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