7 Agency Pricing Models Explained: Pros vs Cons

agency pricing methods broken down

Ryan Stewart

I've built and sold dozens of online businesses including WEBRIS, a 7 figure SEO agency. This blog is a collection of my thoughts on scaling digital agencies.

How do you price your agency or consulting services?

There’s really no right answer (well, depending who you ask).

This article will review every agency pricing method available to you and break down the pros and cons of each.

At the end, I’ll detail the system I recommend based on by 10+ years of building, scaling and selling agencies.

 

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1. Fixed fee pricing

What is it?

Flat fee pricing charges a flat amount for your service. I generally look at this as an ongoing scope / engagement (i.e. monthly fee), not a one-off engagement.

A lot of agencies start here because it’s simple to quantify, both from an agency management and client understanding perspective.

Examples:

  • $500 / month for SEO
  • $300 / per content published
  • $1,000 / month for ads management

How is it calculated?

I’ve seen a lot of young agencies calculate this based on what they believe their service is worth, market pricing or competitors.

It should be built based on projected number of hours to complete a given task.

$ = (Hours required x Hourly rate) x Desired margin

$ = (10 hours x $100/hr) x 40%

$ = $1,400

Pros
  • Good for small, young agencies
  • Easy to justify to a prospective client
  • Good for prospects with a set budget
Cons
  • Estimates can become inaccurate quickly, leading to massive scope creep
  • Disincentives an agency to find new growth opportunities for a client
  • Not a good method to grow larger engagements and scale your agency

 

What is scope creep?

Scope creep occurs when you consistently do work for a client that’s outside the agreed upon scope of work. Scope creep is a killer – it creates more work (that you’re not compensated for), headaches and staff discontent. Scope creep MUST be avoided at all costs!

 

2. Project based pricing

What is it?

Similar to flat fee pricing, but focused on short term campaigns or deliverables.

Examples:

  • $5,000 for a technical audit
  • $2,000 for a set of blog posts
  • $500 / page for web design

How is it calculated?

Similar to fixed free pricing, with the assumption that it will be a one time scope of work.

$ = (Hours required x Hourly rate) x Desired margin

$ = (1 hour x $100/hr) x 40%

$ = $140

Pros
  • Good opportunity get foot in the door (i.e. run an audit, then upsell full scope)
  • Works well for design and development where there’s a finite end to a project
  • Works well when you work fast (i.e. a logo) and produce high quality results
Cons
  • Can be major issues with scope creep that erodes your profitability on the deal
  • If you don’t have a sales person managing the relationship, it can be a lot of effort for not a lot of revenue. Upselling these projects is key!

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3. Value based pricing

What is it?

Where work is priced based on the “value” it delivers to the client as opposed to the agency’s time, costs, margins, etc.

It can be viewed as the price clients are willing to pay for your services based on the value brought.

To me, this means you need something unique about your service.

This is an unpopular point of view – mainly because people confuse Value Pricing with Performance Pricing.

Value Based pricing does NOT mean you get paid based on the “value driven by your services”, that would be Performance Pricing. Value pricing is based on the PERCEIVED VALUE that your services can add, not the ACTUAL RESULTS VALUE of your services.

Examples:

  • Additional value brought from having someone like Gary Vee (or relevant influencer) on staff. Having that level of intellect in house will command additional value in engaging with your agency.
  • Additional value brought from having proprietary software in house that the market can only get access to if they become an agency client. Having this software ONLY available to clients commands additional market value for that client.
value based pricing strategies

How is it calculated?

Pricing is calculated based on the customer’s perception of value AND the value you determine you can bring to a client campaign. They need to align to strike a deal.

There is no mathematical way to calculate perceived value. Instead, you should focus on your justification for the additional value you bring.

Pros
  • Works well if you have a lot of clout and demand, value can be derived
  • Can have huge margins if sold
Cons
  • Value is difficult to define and subjective
  • Slows down the process by having to constantly convince prospects of your “value”
  • Still doesn’t reduce scope creep
  • Need to have proprietary advantage in the market over competitors

 

4. Performance based pricing

What is it?

When your agency is compensated based on the output of your work. For example, if you’re working with an attorney running PPC ads. Every time you drive a phone call, you get paid.

Examples:

  • $500 each phone call driven
  • 15% of each sale made as a result of services
  • 5% equity stake in the business based on X milestones hit
  • Free until you rank for “boner pills KW”

How is it calculated?

You need to make sure you’re tracking the right things in Analytics / CRM closely, as you’ll be compensated based on the results you drive.

  • Set a fixed price ahead of time per lead, visit or sale
  • Charge for each as they are accrued in real time
Pros
  • Clients are always happy to pay per result
  • Can be highly profitable if you can dial in the arbitrage right
Cons
  • There’s a lot of work that goes into driving results (months)
  • Results are never guaranteed
  • Client has all the advantage here

 

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5. Retainer based pricing

What is it?

When a client agree to a pre-negotiated and pre-paid fee for either a set amount of time, or a set number of deliverables.

Examples:

  • $5k/month for 50 hours of SEO work
  • $5k/month for 4 posts a day on each social platform, create 20 images, respond to 100 comments, etc

How is it calculated?

You need to forecast the number of hours it will take to deliver work across the entire agreement. You can do this by building detailed hourly forecasts during the proposal phase and sum / amortize these into monthly retainers.

Service

Month 1 Month 2 Month 3
Technical SEO 10 10 5
Content audit 0 20 0
Keyword research 5 5 5
On page SEO 0 0 20
Total Hours 15 35 25
  • With hours projected, you can simply multiple that times your hourly rates to determine monthly cost
  • You can either amortize the total number of hours of bill actuals as they accrue
Pros
  • Clients like retainers because it helps them budget easier (no variable costs)
  • Easy to track and manage if you’re tracking hours internally
  • Easy to pitch and justify to a prospect
  • Paid up front
  • Easy to scale
Cons
  • Mismanaged hours will cause HUGE issues with profitability and scope creep

 

6. Points based pricing

What is it?

Each project within a campaign is assigned a fixed-point total based on value creation rather than hourly estimates.

Point allocations are defined at the start of every month, and are based on an agreed-upon scope. This allows for more efficient and accurate forecasting and planning.

Examples:

  • 20 points of work each month = 3 points for a blog post (4/month) and 4 points for email blast

How is it calculated?

Point allocations are defined at the start of every month, and are based on an agreed-upon scope.

Points are roughly based on hours to complete work x desired margin. You need to create an entire scale of this to pitch to clients.

points based pricing

Graphic source

  • Set a fixed price ahead of time per lead, visit or sale.
  • Charge for each as they are accrued in real time.
Pros
  • It’s easy for clients to pick the work they want
  • You’re able to easily meet expectations
Cons
  • Regardless of how much time is invested to complete each project, the point totals remain constant (scope creep)
  • Becomes a lot of ongoing work to manage points
  • Creates more work (comms) and you become an “on demand” vendor, almost outsourced
  • Convoluted and confusing, slows down sales process

 

7. Hourly pricing

What is it?

The client pays for your staff’s time, by the hour. Generally speaking, hours are sold with minimums or in monthly retainers.

Examples:

  • 10 hours of on page work month 1, 10 hours of keyword research month 1 and 2

How is it calculated?

Hourly (aka billable rates) are assigned to each employee.

hourly pricing table
  • Please read this guide on how to find your hourly pricing for your agency’s employees.

 

The BEST agency pricing model…

I’ve been working in agency’s for over 10 years – the best way to price your agency services is using hours.

Let me explain!

When I say “use hours” I don’t mean that you have to move to a straight hourly model. There’s a difference between hourly pricing and hourly billing. I’m advocate for hourly pricing, not billing.

Hours are the glue between sales, operations and HR. Here’s why…

  • Hours are easily justifiable to sales prospects. When you’re pitching, a prospect can clearly see what they’re paying for. When you go down the route of “value based” or “performance based” pricing, it gets convoluted (value and performance are both subjective). These models work better for advertising where you can better control results.
  • Hours are the easiest way to upsell more work, or increase deal size. One of the most common questions we all get as SEO professionals is “how can we get results faster?”. If you’re on the hours model, you can simply increase the scope of work by adding more hours. This is how I take a $2,500 a month client and turn them into a $4,000+ a month client.
  • Hours are the easiest way to increase your pricing. The argument FOR Value Based Pricing is the ability to charge more for your services. But hourly is even easier – just raise your rates…
  • Hours are the easiest way to manage your resources. When you’re running on hours, you can track your internal profitability and utilization rate which clearly feeds back into project planning and sales. It makes managing your team (knowing when to hire, who to hire, how much to pay them. when they can take vacation, etc) SO MUCH EASIER.
  • Hours ensure you get paid for EVERYTHING. How many times has a client requested extra stuff assuming it’s included? Moving to an hours system is the w scope creep.
  • Billing & tracking hours is industry standard…because it works. Let’s be real, we’re not building disruptive companies that are going to change the world, we’re building a business that’s been around for centuries. The hours model is the foundation of the biggest advertising agencies in the world, because it’s the best system to scale.

You can make educated business decisions about your agency because it’s cut and dry data. All the gray area is removed, you’re looking at mathematical justification for who to hire, margins, etc. I like to dig into 2 key metrics:

  1. Revenue per seat. How much revenue is each person generating (billing) for the agency?
  2. Utilization rate. Hours billed / Hours available. Do we need to hire another position? Do we need to sell more work? This is the key figure to optimize your agency against!!!
hourly models for agencies

These metrics are CRITICAL to scaling your agency to $10M+ in revenue.

If you want to learn more about these metrics and how to leverage them, I strongly recommend you check out our module on staffing and managing your agency’s resources.

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COMMENTS (2)

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  • Amol Tolbandesays

    This is really awesome – would love to see more of these!