Figuring out how to charge your customers is tricky at the best of times. But it’s even more complicated when you run an agency.
Pricing too high can put clients off, while asking for too little can actually create too much demand and lead to burnout and stretching resources too thin.
Worse still, the wrong pricing model can hurt your brand. You may settle on a strategy that doesn’t reflect your clients’ needs.
The solution is to understand the various pricing models available and choose the one that suits you.
But how do you do that?
Fortunately, this post is here to help. I’ll explore the various pricing strategies I’ve encountered and which you should use based on your clients and the type of agency you run.
Understanding Scalability: Creating A Stage For Growth
Before considering a specific pricing model, you need to set the stage for growth.
First, understand your current situation and what agency problems may currently hamper your growth before you move to expand your services, team, or pricing.
Understanding your company’s current financial situation helps determine the best fee structure for your enterprise and how you should charge clients, not just what you should charge them.
First, you’ll want to calculate your overheads: how much it costs to keep your business ticking over.
Start with variable costs. How should you price your services, accounting for labor and other consumables?
Then, estimate the number of services you need to sell to cover your fixed costs, like rent, bills, and marketing. Combining fixed and variable overheads should give you a ballpark price to charge. You can then adjust the exact amount over time to reflect supply, demand, and costs.
Next, you’ll need to consider efficiency: how much your team can get done in a given day, week, or month.
Efficiency matters to pricing because it reflects the real cost of producing a service. The more you can get done with a given set of inputs, the lower your prices and higher your profit margins can be.
Agencies can calculate efficiency by timing how long services take to produce. Knowing the length of time needed for each lets you calculate your team’s potential output.
Moreover, this granular information also shows you your time sinks: operations or services that take longer than you would like. You can use this data to improve pricing, with more demanding tasks requiring a higher fee.
Next, you’ll want to look at your current turnover. This figure reveals how much your total sales are worth, showing you the absolute size of your enterprise.
Knowing current turnover is handy because it helps you calculate profit margins and other metrics. It’s also helpful for simply telling you how big your enterprise is and whether you have room to expand.
Knowing your projections is also handy. Seeing what your sales and profits will be in the future can help you make better investment decisions today. It also lets you test various pricing strategies to see the one with the most favorable outcomes.
Profit Margins For Each Service
Finally, calculate the profit margins for each service. You can do this by subtracting costs from revenues for each item.
Knowing how much money you make per service lets you focus on the highest-value activities and invest in those. It also tells you how much money you could make by scaling your business.
Types Of Pricing Models: The Pros And Cons
Once you understand your agency’s financial situation, the next step is to choose the most appropriate pricing model. Various options are available, so it’s worth considering each and deciding which is best for you.
Some agencies, consultants, and freelancers charge an hourly or daily rate. Clients pay them for their time and receive services in exchange.
Easier billing accuracy. You only charge clients for time spent working for them, which can be reassuring.
Transparent. Daily rates break down client charges, improving transparency.
Cost uncertainty. Clients don’t know how much it will cost to complete a project.
Perceived inefficiency. Clients sometimes question why a specific piece of work took so long and may believe you are inflating the numbers.
Putting clients on a monthly retainer is another option. Here, they pay you a fixed fee, and you provide the services they request on demand in exchange.
Steady income. Getting clients on retainers and subscriptions makes it easier to calculate your projected revenue and plan your finances.
Long-term relationships. Clients often passively pay retainers for years to maintain access to your services, fostering loyalty.
Inefficiency. The scope of work clients ask you to carry out from month to month can vary significantly, lowering your real pay rate.
Inflexibility. Retainers are challenging to change once set, and clients can’t easily adjust services according to their real-time needs.
Finally, you can experiment with productized services. Here, you charge customers a fixed sum for each service you offer.
Simplified pricing. Clients know what they are getting in a specific order.
Efficiency improvements. Communicating the value each service offers is straightforward.
Limited customization. Customers can’t easily order one-off, bespoke work.
Difficulty differentiating from competitors. Productization can lead to commoditization and low-value service offerings with small margins.
As you can see, each pricing model has pros and cons. As such, it is up to your agency to balance the positives and negatives and choose the best option for your brand and business model.
Don’t be afraid to mix and match pricing strategies. Experimenting can help you find hybrid solutions that apply to your services.
How Types Of Agency Services Affect Pricing Models
The specific pricing model you choose depends on the type of agency you run.
Full-service agencies often have a different approach from specialized outfits.
Many full-service agencies set prices deliberately low and charge an hourly rate.
When working for a full-service agency, these low charges and hourly rates were both a blessing and a curse.
The pros were that the low rates attracted a lot of clients, and without charging as much as bespoke agencies, the clients didn’t expect a fully tailored approach. This obviously meant a more cookie-cutter approach was viable.
The downside was that the sheer volume of client demand often meant that the overall standard of work was lower than at a boutique agency. It meant the priorities were too broad as we looked to cover everything ourselves, and fast.
This often led to burnout, even with a relatively basic level of service overall.
Pricing strategies are often different at more specialized agencies, such as SEO agencies for example.
Many charge hefty monthly retainers, giving them time to specialize and budget for outsourcing.
In my time at a specialized SEO agency, I actually found problems with both under-servicing and overservicing clients.
Some clients get more attention than they pay for, and others less, which undermines efficiency.
Lack of clarity is also an issue for specialized agencies.
Many clients simply don’t know what they’re getting, making the value proposition unclear.
A retainer is great for you as an agency as you know you have dependable bankable income, but clients might be a little wary of paying an ongoing fee if they feel you’re simply stringing them along, or if they aren’t sure what you’re actually providing.
Agencies That Outsource
Lastly, agencies that outsource to other agencies can leverage productized pricing models that make it easy for clients to see what they are buying.
Agencies that use other agencies can easily scale with this model and don’t have to worry about pricing services themselves. Adding a markup to white-label services is simple and highly scalable.
But it’s not all good news. Strategy and consultancy can take a backseat, though, which is problematic.
Businesses that outsource to productized services can’t always support their clients in bespoke ways.
At FATJOE I’ve found that agencies that outsource to us thrive as they directly sell on the same products and packages that we do, making the transition super smooth.
There can, however, be issues when an agency wants to outsource to help them scale, but also try to retain an element of bespoke service for their clients.
The clients may request something that is beyond the scope of the product the agency is reselling, which means they then have to try to get the product changed (not likely as the base agency won’t want to disrupt their products), or implement the bespoke changes themselves which can be tricky and time-consuming.
How Types Of Clients Affect Pricing Models
The type of client you attract also affects the pricing models you should choose. That’s because customers from different backgrounds have varying expectations of how they pay.
For instance, local businesses tend to be budget-conscious and want targeted solutions. Spending money on items that generate substantial, measurable returns is the priority.
If you serve these firms, consider crafting tiered pricing plans that facilitate flexible entry points. Small businesses should feel there is an option that suits their circumstances, such as a 20-hour package or a set of 15 blog posts.
The value proposition should focus on how agency services can help brands improve local market presence, even on a small budget. Price pages should show the average ROI for local clients, backed up by social proof and testimonials.
Small and medium-sized businesses (SMEs) prefer more comprehensive services but still must balance their desires against budgetary considerations. Firms in this category can’t afford to throw money at marketing problems and hope for a solution.
Given this reality, suggest a retainer pricing model. Charging a fixed fee avoids the need for large one-off payments, spreading the cost over several months or years. SMEs get consistent, comprehensive coverage without taking a big hit on their balance sheet.
It’s not always the case, but often SMEs (particularly the ones closer to being large businesses) can be the easiest to get money out of.
They understand the value of the service you provide, and a £500 fee isn’t the massive blow to their budget that it is for a solo entrepreneur, but they’re not yet mired in bureaucracy like an enterprise is.
(This take might be a little reductive, but it’s hardly an unpopular take - just look at those Likes and Retweets!)
At the high end is enterprise. These firms are willing to invest heavily in exchange for unparalleled support and dedicated account managers. Decision-makers want solutions that meet their corporate objectives.
As such, you should develop customized packages that reflect enterprises’ complex needs. Retainers combined with productized services and hourly rates for bespoke consultations can convince large firms they are getting good value for money.
Give enterprises a menu of options, letting them create a unique package that meets their perceived needs (they can always change it later, in collaboration with you).
Highlight your track record of working with other large firms, reassuring them you can provide sufficient scale to meet their needs.
Just bear in mind that enterprise-level clients often have a lot of red tape and hoops you need to jump through before you can actually get started with a contract.
Compliance checks and finance departments can conspire to slow the process down, so be sure to bear this in mind when developing your acquisition pipeline.
Remember that no two clients are alike. Expectations will differ according to industry, size, and specific objectives.
Take this into account by tailoring pricing arrangements to meet clients’ needs. Let client goals drive your strategy, not vice versa.
Also, take time to educate clients. Share success stories from clients in comparable industries, showing them what you can achieve. Set expectations at a sensible level, only promising what you can deliver.
How To Build Packages And Craft A Compelling Offer
So, how do you go about building packages for your clients?
Start by offering choice. Make clients feel in control and able to pick a package that suits their budget and requirements.
Layer your packages according to the types of businesses you serve. Find service offerings that appeal to different segments to increase the chance of winning their business.
If you already have customers, look at who buys your services. Do you sell to big businesses, SMEs, smaller local firms, or a combination of all three?
Use Price Anchoring
Next, explore using price anchoring to influence how clients perceive the value of your services. Present higher-priced packages alongside more affordable options and compare them. Set expectations and show prospects what they could get if they upgraded to the next tier.
Finally, emphasize value. Discuss how using your services will help clients push through pain points. Highlight the solutions you offer that they can’t get elsewhere, including in-house.
How To Decide What To Do In-house And What To Outsource
Finally, when pursuing scalability, you must decide which tasks to handle in-house and which to outsource. To come to a sensible conclusion, you’ll need to consider your core competencies and existing resources.
Evaluate Your Core Competencies
When considering outsourcing, think about what you are good at. Perform an agency-wide assessment to discover where you hold a competitive advantage.
Ensure you retain control over areas where you can add unique value, including client relationships, creative processes, and consulting services. Don’t allow your most effective operations to wither or lose your most talented people.
Use Outsourcing To Complement And Expand Services
Outsourcing is a great way to build on those core competencies mentioned above by expanding your services without fundamentally altering your core team.
For example, a standard digital marketing agency could look to order outsourced SEO solutions to expand its offerings.
As you don’t need to make new hires to accommodate this, you likely won’t have to change your prices or your overall pricing model.
Consider Resource Allocation
Next, look at your existing resource allocation. Ask whether your team can scale and grow, based on your current pricing model.
Agencies benefit most from outsourcing areas requiring specialized expertise or significant resources. This approach frees in-house talent to concentrate on activities delivering maximum client value.
Balance Short- And Long-Term Goals
Finally, consider how you will balance short- and long-term goals. Outsourcing can provide immediate relief by reducing operational costs and labor requirements.
However, it can also cause in-house nurturing and development to stall. Why invest in your team if someone else is doing the work?
Developing long-term in-house capabilities can have a tremendous impact on customer perceptions.
Better quality control and adaptability to their needs help retain their business long-term while outsourcing to the right providers keeps services flowing and growing.
Now You Know How To Choose An Agency Pricing Model To Scale Your Services
Having read this, you should better understand how to choose a pricing model to scale your services. Getting the choice right improves client loyalty, boosts revenue, and ultimately helps you become more profitable.
Don’t be afraid to experiment with different approaches. It often takes several attempts to settle on the optimal strategy for both customer and your agency.