Mar 27, 2023
Agency Pricing Models: How to Choose the Best Pricing Model + Profit Tips
Shifting from being a freelancer to an agency owner requires you to face several challenges. One of them is deciding the right pricing model to apply for your products or services.
That is why we have listed the six most common agency pricing models to choose from. We will also look at the right time to charge your clients based on your pricing model and some tips to boost your profit.
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Top 6 Agency Pricing Models
Below are the six popular agency pricing models you can use to determine your prices.
|Hourly rate||Charges are based on an hourly rate.||Flexible|
|Difficult to predict|
|Project-based||Both parties agree to a fixed fee pricing upfront based on the project type.||Easier for clients to budget|
Incentivizes a faster work process
|Does not encourage quality and innovation|
Requires more intricate planning and research
|Performance-based||Charges a lower initial fee and then an additional commission as the agency meets performance metrics.||Incentivizes delivering the best results||Hard to measure initially|
Difficult to predict
|Value-based||Pricing based on the service’s perceived value||Allows agencies to charge more|
|Heavily relies on value creation|
Requires deeper understanding of the service’s value
|Retainer-based||The agency charges a regular fee for ongoing services||Provides stability and security to the agency|
Allows the agency to invest more resources and time in a project
|Harder to scale|
May limit innovation or creativity
|Mixed rate||Combines both variable and fixed fee pricing||Flexible|
Allows the balance between pricing and quality
|Harder to monitor different pricing for various projects|
Now, let’s discuss each model in detail.
1. Hourly Rate
An hourly-rate pricing model is a popular digital agency pricing approach that charges clients for services according to the time dedicated to providing them.
One of the popular digital marketing agencies that apply this hourly pricing model is Mighty Citizen. Its hourly cost ranges between $150-199, depending on the service.
For agencies, the hourly pricing model helps provide more accurate estimates of a project’s cost. Furthermore, you can be sure you won’t have to work extra without getting paid.
The hourly-rate model also benefits clients who don’t require long-term or ongoing commitments.
On the other hand, applying an hourly-rate model makes it difficult to accurately predict a final project’s price.
This makes budgeting and forecasting complicated, as clients may spend more than expected due to unforeseen circumstances or changes in scope.
This can lead to tensions between the agency and the client if expectations are not managed carefully.
An hourly-rate pricing model may also incentivize inefficient work practices as more time spent on the project means a higher profit for the agency. Meanwhile, the clients will associate fewer hours and faster projects with a lower bill.
This can lead to wasteful or inadequate spending of resources as both parties are more focused on the amount of time being put into a project rather than its quality.
2. Project-Based Pricing
A project-based pricing model involves a fixed payment for the services you offer on a project basis – regardless of how long it takes or how many resources are consumed.
For example, WebFX, a popular US-based digital marketing agency, applies a project-based pricing model for website design services.
The main advantage of the project-based pricing model is that it’s easy to budget for. Clients know the agency will offer a fixed price, meaning they can plan their project spending accordingly.
It also encourages efficiency by incentivizing the agency to complete projects quickly and effectively to maximize its profit.
However, this agency pricing model might not encourage you to try to achieve the best possible result, making it more difficult to achieve long-term success. This is because you will only get a fixed amount, no matter how many hours you worked or how many resources you used.
This can lead to a decrease in quality and innovation if agencies focus on profitability instead of delivering meaningful value.
Project-based pricing also requires detailed upfront planning and effort to ensure both parties understand the scope of work before providing an estimate and proposal.
This tutorial about how much to charge for a website will help you navigate through calculating the costs of building a website.
3. Performance-Based Pricing
A performance-based pricing model links an agency’s fees to its achieved results. Agencies using this model typically charge a lower initial fee and add a commission as they meet or go over the performance metrics.
The main benefit of the performance-based model pricing is that it rewards agencies for their results, encouraging them to invest more in achieving the best possible outcome for their clients.
The performance-based pricing model also benefits clients looking to get more out of their agency partnerships and wanting to pay only for satisfactory results.
On the other hand, it can be difficult for agencies to accurately measure and track their results, as they may take a long time to achieve. For this reason, the performance pricing model might not be suitable for new businesses.
Additionally, this performance pricing model can create more uncertainty around agency fees, making it harder for you to budget for your services and projects.
4. Value-Based Pricing
A value-based pricing model attempts to consider the perceived value of the agency’s services.
To do so, value-based pricing requires the agency to conduct thorough research and communicate about its service properly with clients since the final price leans heavily on customer perceptions.
One of the main pros of this agency pricing model is that it allows you to charge more for your services if they can provide great value to clients.
For example, an agency that hires certified web developers and designers can charge more for their services because they bring a certain level of expertise and knowledge to the project.
Additionally, value-based pricing allows agencies to adjust their prices as needed depending on the scope of a project and any additional services they provide. This flexibility is useful for meeting client demands while still making a profit.
Agencies can build strong relationships and retain customers over the long term by showing clients that they are getting fair value for the services they receive.
The main disadvantage of value-based pricing is that it requires more research and analysis. This can be time-consuming, as agency owners must determine the perceived value of their services for each client before taking on the project.
Additionally, agency owners may struggle to set prices if they don’t understand their services’ worth well. Therefore, the value-based pricing models are more suitable for more established and experienced agencies that can communicate their value propositions properly.
5. Retainer Fee
A retainer fee pricing model means the agency charges a monthly fee for the service they provide. This model allows the agency to plan and predict its cash flow, as well as secure a steady source of income.
The biggest advantage of the retainer-based pricing model is that it provides stability and security to the agency, allowing it to plan and forecast its budget more accurately.
The retainer model also allows the agency to devote a larger amount of time and resources towards each client project due to the steady stream of income coming in.
However, the retainer fee pricing model also has some drawbacks. One of these is that the agency may be too focused on the contracted services, resulting in limited innovation or creativity.
Monthly retainers work well for digital marketing services like social media content creation or ongoing services like web hosting. For example, the Canada-based digital marketing agency SEOplus applies monthly pricing for their marketing services.
6. Mixed Rates
The mixed rates model is a pricing strategy that combines fixed and variable rates to determine the right price.
The pros of this pricing strategy include the ability to charge a higher price for services with greater value while still ensuring that the agency is profitable. Moreover, adjustable rates can help agencies adjust to market fluctuations or add extra services.
However, this pricing model also comes with several disadvantages. For example, it can be difficult to accurately set the right price that reflects both agency costs and the value of services.
Furthermore, finding the most appropriate pricing structure for each project can become difficult to monitor.
The mixed rates pricing model is a great option for agencies looking to maximize profits while still providing quality services. It gives the agency flexibility when setting prices while ensuring it is profitable.
When to Charge Clients
Aside from deciding the right pricing model for your agency and project type, it is important to know the best time to invoice your clients. Here are the three most common payment timing models to apply, each with its pros and cons.
An upfront charge is a project-pricing model that requires a client to pay a fixed sum of money before the agency starts working on the project. It’s best suited to projects with a well-defined scope and clear deliverables.
This model also works well for clients who know what they need and are willing to pay an agreed-upon fee without worrying about additional costs.
The upside of charging an upfront and fixed price is that it gives clients the knowledge of what their project will cost and helps agency teams plan their resources better. Agency owners can also cover the project’s upfront costs more easily with this pricing model.
Therefore, charging upfront lets the agency and the client create better financial planning.
However, this pricing model may not be as beneficial for projects with a lot of unknown factors since you can’t accurately estimate their costs until deep into the project. Inaccurate estimations can also lead to scope creep along the way.
Upfront charge usually works well with value-based and project-based pricing, letting the agency and client determine the project costs before it begins.
Payment Upon Completion
The Payment Upon Completion (PUC) pricing model requires the client to pay in full after the agency has completed its work and delivered the final product.
This pricing model offers several advantages for clients. For clients, it eliminates any risk associated with paying before delivery of the final product, ensuring that they will always receive what they pay for.
It also allows them to spread out their costs over a longer time, benefiting businesses operating on a limited budget.
For this reason, it might be easier to sell your services with this pricing model.
However, there are some drawbacks you need to consider before charging clients upon project completion. Clients may feel less inclined to pay in full if they’re dissatisfied with the services rendered, as there is no refund policy.
This can lead to payment disputes and a lengthy negotiation process. Agencies also need to bear the risk of providing services before receiving any payment, which can be financially burdensome for smaller businesses.
Split charge pricing is an agency pricing model that can help businesses control costs and eliminate scope creep.
This type of charging model divides the agency’s fee into two parts: a fixed fee, based on a certain amount of work or time, and a variable fee which depends on the results achieved.
The major benefit of split charge pricing is that it aids in managing client expectations and ensuring they get value for money. When clients know what they are paying for, agency owners can better control project budgets and timelines.
However, there are some risks associated with split charge pricing. It can be difficult to plan for unpredictable market conditions, and agency owners may have to decrease their rates to stay competitive.
Furthermore, agency owners can encounter difficulties when trying to assess project deliverables and accurately determine the cost of these tasks.
Best Practices for Boosting Agency Profit
Successful agency owners must know and understand different ways to boost their profit to keep their businesses growing and sustainable. Here are seven tips you can apply to improve your income.
Generate Leads on Different Channels
Having multiple channels to generate leads will help boost an agency’s success. Agencies can capture more opportunities for lead generation and improve conversion metrics by using all possible channels than relying solely on one channel.
This can include digital advertising, content marketing, email campaigns, and other internet marketing techniques.
For example, digital advertising allows you to target specific demographics and locations with tailored messaging. Combining it with the proper usage of social media platforms, your agency can also improve how it communicates with audiences.
Content marketing is another great way to generate leads and build relationships with potential customers. Agencies can capture potential customers’ attention by creating valuable content such as blog posts, whitepapers, and videos.
Email campaigns are also an effective way to reach customers with timely offers and reminders. Businesses can create personalized campaigns with higher conversion rates by understanding a customer’s needs and interests.
Utilizing these channels in tandem with each other is a great way to improve your agency’s B2C and B2B lead generation.
Improve the Utilization Rate
Another effective way for agencies to increase their profitability is to improve their utilization rate. The utilization rate measures how much time employees spend on billable tasks versus non-billable tasks, such as business development and client retention activities.
By improving the utilization rate, an agency can more effectively use its resources and better capitalize on business opportunities.
To improve your utilization rate, focus on four main areas: time tracking, task delegation and prioritization, process improvement, and staff development.
Create and implement a system that allows employees to easily and accurately track their time. You can use project management tools like Monday.com, Wrike, and Toggl Track to make the process easier.
Agencies can ensure that employees spend more time on billable work by delegating tasks to the appropriate staff members. It also makes it easier to ensure that each team member takes on the right tasks at the right times.
Consider reviewing work processes regularly to identify inefficiencies and then work to streamline them. This will help employees save time and focus on the tasks that will bring in more revenue.
Finally, staff development is important for improving the utilization rate. By training employees regularly, agencies can ensure that they are up-to-date on the latest tools and techniques, which will help them complete tasks more quickly and efficiently.
Aside from attracting new clients, good client retention is also important in boosting profits and sustaining your business.
Retention strategies can range from offering additional services, such as maintenance after a project is completed, to providing value beyond the scope of the initial agreement. Here are some client retention tactics agencies can use:
- Utilize client feedback – helps identify areas of improvement and implement changes throughout the client lifecycle. Doing so will ensure that clients are satisfied with your services and remain loyal to your agency.
- Personalize client engagements – tailor client engagements according to individual needs and preferences to make clients feel valued and respected. Consider offering client-specific services or customizing client packages according to their budget, timeline, and specific goals.
- Develop relationships – establishing strong relationships with clients is essential for client retention. Get to know your client’s team, industry, and business objectives to provide better advice and meet client expectations.
- Communicate regularly – regular communication with clients is key for client retention, as it shows that your agency values the relationship. You can use email newsletters, client meetings, or video calls to discuss project progress.
Use Upsell Strategies
Upselling is an important sales process that can help agencies boost their profit. It involves convincing customers to increase the value of what they buy or purchase additional products or services.
For example, a customer may buy a basic website design package from an agency and be offered additional features such as eCommerce capabilities or analytics tracking.
Agencies can also use upselling to encourage customers to upgrade their contracts, such as increasing the time they engage with the agency or purchasing a higher-level service package.
When pricing services, agencies should consider how upsells can be used as part of their sales process and incorporated into their pricing models.
This can involve offering discounts or special packages to customers who purchase additional items or services or even bundling several services together and offering them at a reduced price.
In addition, agencies should consider offering flexible payment plans that can be adjusted to accommodate upselling strategies.
Think carefully about how you can incorporate upsells into your sales process and pricing models to ensure your services remain attractive and competitive.
Change up the Pricing Models
Agencies can increase their profits by leveraging different pricing models depending on the project type and situation. By understanding the value of their services, agencies can set prices to better reflect that value and generate higher revenue.
Each agency pricing models have their advantages and disadvantages, so it is important to understand which pricing model works best for the project and client.
For example, the hourly-pricing model is perfect for smaller projects or services requiring a certain number of hours to complete. While retainer fees works well for ongoing projects, such as monthly website maintenance.
It is important to regularly review your pricing models and adjust them based on project workloads, industry trends, and the value of your services. Doing so will ensure you can maximize profits while providing quality service to clients.
Offer Different Services
As you grow your agency and hire more people to join your team, you’ll have more chances to offer more services to your clients. This is a great way to improve your agency’s reach and increase profitability.
For example, web development agencies can increase the value they provide for their clients by taking on projects that go beyond web design and development. They can include services like digital marketing, user experience (UX) design““, and content creation.
By collaborating with digital marketing professionals, they can create content such as blog posts, infographics, and videos, which can help drive more traffic to websites and keep customers engaged.
They can also provide valuable insights into customer behavior and preferences that can be used to improve website performance and user experience. This includes support services like website maintenance, hosting, and security consultations to help their clients get the most out of their web design projects
By offering a wide range of services, web development agencies can add more value to their clients and increase their profits in the process. This helps them stay competitive in an ever-changing marketplace and build relationships with customers that last for years.
Alternatively, a web development agency can expand its services by hiring professionals who have learned other programming languages.
Optimizing costs is an important part of running a successful agency. It can help you boost your profit and keep your business running efficiently. Here are some tips to help you optimize costs:
- Analyze your current costs – take time to review your current operating expenses, including rent, labor, supplies, and other associated costs. Identify areas where you can cut back or find more affordable options to reduce spending.
- Track your expenditures – monitor your expenses regularly to ensure that you’re not overspending in any area. This will help you ensure that the company spends its resources wisely and that nothing is slipping through the cracks.
- Look for opportunities to save – research different vendors and find ways to negotiate better prices or discounts on certain products or services your agency needs. You may also be able to save money by consolidating certain services, such as combining shipping costs for multiple orders.
- Make strategic investments – investing in the right areas can help you save money over time. Consider investing in equipment or technology that will increase your efficiency and reduce labor costs, or invest in training to help your employees become more productive.
Understanding the agency pricing models is integral to growing and maintaining your business. It allows you to determine the most profitable and appropriate model based on your projects and clients.
There are six most common types of agency pricing models:
- Hourly-rate – based on the number of hours worked by your staff to complete a project or provide services.
- Project-based – charges a flat rate based on the project’s type.
- Performance-based – rewards success by offering bonuses based on a project’s performance metrics.
- Value-based – charges a percentage of the total value created by the project, such as increased sales or decreased costs.
- Retainer-based – clients pay a regular monthly fee for ongoing services, such as management consulting or marketing campaigns.
- Mixed rates – combines both variable and fixed fee pricing.
Regardless of your chosen pricing model, it’s important to review and evaluate your agency’s performance regularly. Doing this will let you know when you can increase your prices to improve your agency’s profitability and ensure its long-term success.
Agency Pricing FAQ
In this section, we will answer the three most frequently asked questions regarding agency pricing.
What’s the Difference Between Input And Output-Pricing?
Input pricing is the model based on the cost and resources used to finish a project or deliver a service. On the other hand, output pricing refers to what clients pay for after completing the project.
What Is an Average Agency Markup?
The average agency markup typically ranges between 45-75% though it can vary based on the project and services provided. This covers overhead such as administrative costs, staff salaries, and other costs associated with running an agency.
What Is a Good Agency Margin?
Typically, agency profit margins range between 11-20%. However, this can differ heavily depending on your agency’s experience and brand recognition in the industry.