Just like any other business, the main concern of your digital agency is to make a profit. But in a competitive market such as digital marketing, you’ll need to have the right prices to attract customers.
With that in mind, it’s normal to worry if you’re using the correct pricing model to both gain and retain clients.
Sorry to tell you, but there’s no one-size-fits-all pricing model that works for every digital marketing agency.
Most digital agencies actually adopt multiple pricing models based on the type of service and project being done for the client. You wouldn’t price managing a company’s Facebook ads the same as crafting a company’s digital customer experience strategy, would you?
Thankfully, you can read on to get a clear picture of how you should be pricing your agency’s services. We’ll cover the costs you should take into account, the different pricing models you can use, and plenty more besides.
Costs of Running a Digital Agency
Like running any business, running a digital agency is going to have costs and bills you’ll need to pay. It’s important to take these costs into account before you price your digital marketing services, so you can cover your costs and make a profit.
Some of the costs you’ll need to account for are:
- Office expenses - Depending on if you work from home, an office, or a co-working space, operational costs could include rent, utilities, equipment, maintenance, supplies, etc.
- Production expenses - To provide your services, your digital agency will need to invest in multiple tools and software solutions. These can include CRM, SEO tools, enterprise automation software, office productivity software, etc.
- Employment costs - Maybe as you start you will need just you, but eventually, as you grow, you’ll need to hire people. They could be graphic designers, web developers, social media marketing managers, etc. Their salaries will be a major expense to your company.
- Professional fees - Don’t overlook the other fees of running a business; taxes, licensing fees, attorney fees, and so on.
- Additional expenses - Other expenses need to be taken into account when growing a business. Marketing, directory listing fees, travel and accommodation fees, VoIP for small businesses. All these costs may be variable and will need some extra capital to cover them.
As a digital marketing agency, there are a few pricing models you can use to bill your clients. Different models may better suit certain services and particular clients. Let’s discuss some of the most popular pricing models.
Also known as “milestone” pricing, project-based pricing is the easiest to understand pricing model, for both client and agency. One downside, however, is that it may be difficult for the agency to accurately determine the scope and time-to-deliver.
Usually, a fixed-scope project is billed on the completion of milestones. This means that payments will come in increments as milestones are reached. A typical way of doing project-based pricing is a 50% up-front payment with the final amount due upon the completion of the project.
To set rates for a project, you’ll need to predict how many hours the project may take to complete.
- Easy to understand
- The agency profits off of its own efficiency. The faster and more efficiently you complete a project, the quicker you’re paid. If you were charging an hourly rate you would lose money by being efficient.
- Makes the cost and time of payment more predictable for the client. The agency will also be able to predict revenue and payment date.
- If you don’t predict time-to-completion accurately, you could lose money if the project takes longer than predicted.
- Changes and update requests from clients may interfere with the predicted scope and could lead to strained client relationships.
When to Use Project-Based Pricing
A project-based pricing model is best used when the project scope is easy to predict and you and your agency are experts who are efficient at the services offered. An agency should also have a good relationship with the client so that damage done due to unexpected client changes can be reduced.
This is also a straightforward pricing model, and one of the most widely used. Simply, the agency sets an hourly rate for its services. This rate could be by the individual(s) working on the project or across the company.
If the rate is on an individual basis, then each individual will cost the client a different amount based on their level of experience and talent. If the rate is agency-wide then all individuals working on the project will cost the client the same across the board.
- Hourly rates are simple to understand and simple to predict (in terms of monthly cost). This is why clients tend to like hourly rates.
- Agencies could potentially make more money on more complex projects, such as website building and design. However, taking longer on a project may upset the client as it will cost them more money.
- The cost to the agency is emphasized instead of results and value to the client.
- Efficiency is not incentivized. An agency will make more money if it takes longer to finish a project.
- Predicting profits and cash flow is more difficult.
- Because of the unpredictable nature of how long a project may take, it’s risky for a digital agency to estimate project costs.
When to Use Hourly-Rate Pricing
Hourly-rate pricing is best used when you have minimal experience in scoping projects, your client tends to change their mind a lot, and/or it is hard to predict how long completing a project may take.
Value-based pricing is also called results or performance-based pricing. With this pricing model, both client and agency are incentivized by the outcome as well as sharing the risks and rewards. Value-based pricing is, however, the most complicated model. That does, though, make this pricing model highly effective in increasing agency profits.
With value-based pricing, the agency determines what is valuable to each client. This could be landing page conversion rates, ad clickthroughs, or the number of leads generated from Facebook ads. The agency then charges according to the results it generates for the client.
This pricing model incentivizes both client and agency as the more value an agency generates for the client, the more an agency gets paid. However, this pricing model takes time to establish, and it can be complicated to set up performance tracking and measurement tools, such as site analytics or mobile app testing.
- The goals for the client and agency are aligned. Higher potential profits for the agency means higher quality work done for the client.
- Clients like being able to measure results and then hold the agency responsible for any unmet expectations.
- There is no confusion about how well an agency is performing.
- The agency needs to perform and deliver results.
- It can be difficult to convince clients to sign up for value-based pricing.
- If the client has a poor-performing product, it will be hard to achieve the results they expect.
When to Use Value-Based Pricing
Value-based pricing works best if you’re a performance digital marketing agency with clear and provable data. If you generate results that can be easily tracked, such as using competitive benchmarking, and are confident in your agency’s ability to meet client expectations, then a value-based pricing model could be best for you.
Retainer Fee Pricing
Some forms of the retainer fee pricing model are popular due to marketing agencies being able to be paid up-front, and the client can easily budget for each month, too.
Retainer fees are pre-negotiated with a client and are paid upfront for either a specified time period or a pre-defined number of deliverables.
For time-based retainer fees, an agency and client agree on a set number of hours to be worked each month. These hours could either be set in stone, where the client must use all hours, or the agency could allow unused hours to roll over to the next month.
For deliverables-based retainer fees, an agency and client agree to what will be delivered each month, such as four blog posts, 10 social media posts, and 15 SEO backlinks. This may be an issue for the agency as they are on the line to deliver.
Problems may occur if an agency is behind at the end of a month or if the client wants something changed. Always give yourself a buffer to account for any issues or complications that may come up.
- Retainer fees give agencies a recurring revenue stream from clients, which is good for the agency.
- Clients like retainers since it helps them with budgeting and accounting.
- Retainers eliminate uncertainty for agencies since they get paid upfront.
- Some clients don’t like retainer fees, as they see them as an additional expense that’s hard to hold the agency accountable for.
- It’s not easy to sign new clients to a retainer fee. You may need to negotiate a trial period before retainer fees go into effect with unsure clients.
When to Use Retainer Fee Pricing
Use the retainer fee pricing model whenever possible, since it provides a recurring revenue stream. Although it may be better to use the retainer fee model when you’re an established agency that can afford to turn down new business.
Don’t forget that none of these pricing models are a one-size-fits-all model, and that your agency should use multiple pricing models depending on each project and each client.
But how much exactly should you charge? While we can’t give you an exact number, we can give the simple formula: cost + markup = price.
Most agencies charge a 20% to 50% markup. For each product or service you provide, determine what the costs to complete the project would be and add your markup/profit to get your price.
Apply this price to the pricing model you chose for the project/client, and you have your fee. Stick to your determined price, even if it may result in a service cost increase.
We hope that you now have a much clearer idea of how to properly price the products and services your digital agency will provide. Good luck!
About the author
Koa Frederick is the Senior Vice President of SaaS strategy at accelerate agency, an enterprise SEO agency who exclusively partners with enterprise tech companies to scale their SEO and content marketing. Koa has extensive experience in growing SaaS brands via organic leads and loves to write in her spare time. Here is her LinkedIn.