When you build a digital agency, the sheer amount of considerations can be overwhelming. While most of the decisions can be taken with due diligence and research, setting up a viable pricing model can be a difficult task.
The reason behind this is simple when it comes to agency services, there is no standard price or commission percentage that all agencies work with. The prices can vary from outright exorbitant for some agencies, to others whose pricing makes you question the integrity of their services. Coming up with a pricing strategy that is profitable but still doesn’t scare clients away can be a challenging task and an equally important one. Let’s look at the three most common pricing models that agencies currently use:
Hourly Rate Pricing Model
The hourly rate pricing model, as the name suggests, charges the client for the hours dedicated to their project. Since most digital marketing services have multiple moving parts and involve a team of experts, this pricing model can take two forms:
- Blended rate: This is the popular method of applying an hourly pricing model. The blended rate model charges the client for the average hourly rate of the talent pool dedicated to the project.
- Specialist rate: As the name suggests, this pricing model charges the client for the hourly rate of individual experts involved in the project. More experienced, talented resources obviously cost more but deliver higher-quality work. This model can turn out cheap in many cases.
For both pricing models, the agencies are also expected to send an estimate for the time it will take to complete the project.
The hourly rate pricing model may seem like a great thing from an agency’s perspective, it is not so great when it comes to forming long-term relationships, for two reasons:
- The hourly pricing model does not guarantee any kind of results. For many business owners, the idea of digital marketing is a form of marketing that will drive quantifiable results. If by the end of the project, they don’t see the desired results, they will definitely be dissatisfied. This does not imply that agencies always use this pricing model to their advantage, but no discussions about results can definitely cause confusions.
- In case the project time (and thus, the cost) exceeds the estimate provided earlier, the client may start wondering whether he is really getting the worth of his money.
Project Based Pricing Model
This pricing model is similar to the hourly rate based pricing model. As the name suggests, the project based pricing model charges the client for the completion of a specified project. This project is better than the hourly rate based pricing model as it can be modified to create a recurring revenue stream for services like SEO and social media marketing that take time to show effect.
While the project-based pricing model does provide online marketing agencies with the advantage of being able to forecast their own revenues and growth, the same can backfire if the estimations are not absolutely on point. Moreover, if you are truly doing good work for your clients, their work, along with yours, is eventually going to become more demanding. While a revision of the agreed price is a solution, the same can be difficult to negotiate.
While the project-based pricing model is ideal for short-term projects such as the development of explainer videos, short-term projects are not suitable for agencies that have professionals on their payrolls. Creating a recurring revenue system should be the primary goal of every agency. The only way to ensure a client keeps coming back for more is to add value.
Result Based Pricing Model
Possibly the most advanced and adaptive pricing model, the result (or value) based pricing model is a popular choice for some of the most innovative agencies. The pricing model works by charging the clients a certain amount (or in some cases percentage) for achieving specific results. The pricing model is adaptive because it can be aligned directly with the immediate and long-term goals of a client.
Even the client can be worry-free about wasted marketing dollars as the incentives of the agency will depend on driving results. For the agency, the better results it is able to drive, better the payout. Such a codependence also has the ability to foster long-term business relationships (A.K.A. recurring revenue streams).
While pitching this model can be a bit tricky for agencies that are just starting out, convincing a client to purchase results instead of hours or tasks isn’t always difficult. In fact, if done right, the pricing model can be positioned as the confidence an agency holds in its abilities.
As mentioned earlier, coming up with a pricing structure that demonstrates the perfect balance between too expensive and too cheap is next to impossible. On the other hand, using a pricing structure that incentivises all involved parties is not only easier to pitch, but it’s also a great motivator for producing revolutionary work, something the marketing industry is always on the lookout for.