There are plenty of things you need to consider when you’re building an agency, like how you’re going to brand yourself, what kinds of clients you want to target and what your core services are going to be.
But one of the most important things to consider also happens to be one of that most challenging—and that’s your pricing model.
Your pricing model has an effect on every single aspect of your agency, from profitability to how you sell, who you hire to who you pitch—which is why it’s so important to choose a pricing model that aligns with your long-term goals and is the right fit for you, your team and your agency.
But choosing the right pricing model can be a real head-scratcher. What options are out there? What is the best model for the kind of work you do? And which models are your clients most likely to respond to?
Let’s take a look at the different agency pricing models, the pros and cons of each, and how to choose the right pricing model to help you hit your goals out of the park and take your agency to the next level:
Agency pricing models
Charging by the hour
The first agency pricing model is also the simplest—and that’s charging by the hour. With an hourly pricing model, you set an hourly rate and charge your client for every hour worked. So, if your hourly rate is $150 and you work 10 hours on a project, your client would pay you $1500.
If you’re going with an hourly pricing model, remember—not every hour you work is going to be billable to your clients. There’s plenty to do to keep an agency up and running outside of billable hours, like admin work, business development, and managing your team—so when choosing an hourly rate, make sure to charge more to compensate for those non-billable hours.
A lot of clients like an hourly pricing model because it’s simple, straightforward, and helps them understand exactly how much they’re paying for the work you’re doing (which can be a bit tougher with other pricing models). Where it gets tricky is if a project ends up taking longer than you originally thought—or, in a lot of cases, longer than they think the project should take. Before you start a project, set expectations with your client. Let them know how long you anticipate the project will take (giving yourself a few extra hours as padding), how many hours you have to devote to the project total, and come up with a gameplan if the project goes on longer than planned (which might include an increased hourly rate or extended deadlines).
The key to success with the hourly pricing model is making sure you’re tracking all your hours. If you work an extra hour here or there and don’t document it, that’s an hour you won’t get to bill—and an hour’s worth of cash your agency will lose.
- Simple and straightforward
- Easy sell to clients
- Can be lucrative if you’re working on a project that takes a lot of problem solving, like software development
- Extremely challenging to scale
- No incentive to work hard/fast (the faster you complete projects, the less you get paid)
- Agencies that work with clients who have a tendency to change their minds or require lots of edits/revisions (this model will protect you from scope creep)
- Agencies that are just starting out and aren’t sure how long project work will take
The hourly pricing model can work in certain situations—especially if you’re just starting out. Just keep in mind that if/when you want to scale, you’re going to have to hike up your rates or move to a different pricing model.
Pricing model: Project-based
A project-based pricing model is another simple pricing structure where (shockingly, I know) you charge your client by the project. So, for example, if you’re a digital marketing agency, you might charge a flat fee for developing a new Facebook ads campaign or an SEO site audit. Or, if you’re a graphic design agency, you might charge a flat fee for a logo and brand identity package.
The project-based pricing model works well for agencies because you can price based on your expertise, not your time. If you have an expert team of logo designers, they can probably whip up a logo pretty fast—and when you charge by the hour, that actually hurts you. But when you charge a flat fee per project, it doesn’t matter if it takes your team three hours or 30 hours—as long as the client loves the end result, you’re good to go.
When it comes to setting rates for a project, figure out how many hours you think the project will take to complete (including non-billable work like administrative tasks, answering client emails and research), add a few extra hours as padding (because, let’s be real—when does anything ever go exactly as expected?) and multiply that number by your ideal hourly rate.
Clients like project-based pricing because it lets them try you out before they make a longer-term commitment—kind of like test driving a car before buying it. However, some clients struggle with project-based pricing because they think it lacks transparency; since they don’t know how much you’re charging them per hour, they worry they’re getting overcharged.
- Simple and straightforward
- Easier to scale than hourly pricing model
- Easy to underestimate how long a project will take—and end up underpricing yourself in the process
- If your project price is too high, certain clients might get sticker shock
- Agencies who specialize in a specific kind of project (like web development) and can accurately estimate how long a project will take
- Agencies who work on projects with clear deliverables (like a logo)
Pricing model: Retainer
When you work with a client on retainer, they agree to a pre-negotiated and pre-paid fee for either a) a set amount of time, or b) a set number of deliverables.
Let’s start with time-based retainers. With a time-based retainer, your client agrees to purchase a set number of hours per month. So, for example, if your client agreed to purchase a 50-hour-per-month retainer at $150 per hour, your monthly retainer fee would be $7500. With a time-based retainer, you can either stipulate that a client must use all their hours each month (or lose the cash) or, if you’re feeling generous, you can allow them to roll a certain number of hours over to the next month.
The other retainer option is based on deliverables. So, let’s say you’re managing social media for one of your clients. You might have a retainer with that client that says for $7500 per month you’ll deliver three social media posts on each of their platforms each day, create 15 social media images, and respond to 100 social media comments. It doesn’t matter how long it takes you to get those tasks done—as long as you deliver, you’ve held up your end of the retainer.
Clients like working on retainers because it makes budgeting and accounting easy for them; they know exactly how much they need to pay you each month and when they need to pay it, so it makes the billing and payment portion of things easy-peasy. On the flip side, some clients struggle with retainers because they are definitely on the pricier side—so if someone is working with a shoestring budget, this probably isn’t the best model for them.
- Guaranteed income each month
- Retainer fee paid up front
- Allows you to easily scale
- Can be a tough sell for new clients
- With retainers based on deliverables, projects might take longer than anticipated, which would lower the profitability of the retainer
- Agencies with established relationships with their clients (long-term clients are easier to transition into a retainer model)
- Agencies who work with larger clients with bigger budgets
- Agencies who work quickly and can produce a large volume of work each month
Pricing model: Performance-based
If you can directly tie the work your agency does with a specific outcome, like increased sales—and you’re confident that your work will deliver on that outcome—you might want to consider a performance-based pricing model.
With a performance-based pricing model, you charge your clients based on the performance of your work. So, for example, if you run a copywriting agency and you create a sales page for a client, you might charge a percentage of all sales the company closes as a result of said sales page.
- Can be extremely lucrative
- Easy to scale
- If your work doesn’t perform, you don’t get paid
- Agencies whose work ties to a clear, measurable outcome (like sales or lead generation)
- Agencies who have the metrics to prove their work can deliver
Pricing model: Value-based
The last agency pricing model—and arguably the most lucrative—is value-based pricing.
With value-based pricing, your clients aren’t paying you for your time—in fact, they’re not even paying you for specific deliverables, like they would with a project-based pricing model. Instead, they’re paying you for the value you bring to their company in the form of your expertise and the solutions you can provide to their pressing problems.
Value-based pricing can be extremely lucrative—but only if the demand is there. Your agency needs to do something that not many other agencies do, has to do it better than any other agencies out there and has to do something that your ideal client actually needs.
So, if your agency specializes in logo design, you’re going to have a tough time with value-based pricing, since there’s so many agencies out there doing the same thing. On the flip side, if you own a digital marketing agency that specializes in promoting online courses for entrepreneurs through social media advertising—and you’ve been able to generate six-figure sales for 100+ courses—there’s going to be a lot of course creators out there who will be more than happy to shell out the big bucks in exchange for the value you can bring to their project.
- Most lucrative agency pricing model
- Easiest model to scale (as it’s typically the least time intensive)
- Can be a hard sell
- Only lucrative when there’s enough customer demand
- Agencies who are considered experts in a specific area
- Agencies who specialize in a niche area (but not so niche that there aren’t enough customers to create real demand)
The “money” part: How and when to charge your clients
Alright, so now that we covered the different types of pricing models, let’s talk about the logistics—in other words, how and when to charge your clients.
There are a few different ways you can charge your clients:
You can choose to charge your clients upfront and have them pay 100% of your fees before you start working on a project. This practice is the norm with retainers and value-based pricing models, but you’re likely to get some pushback with other pricing structures (like project-based).
On the flip side, you can choose to collect your fees once you’ve delivered your project to the client. While clients will be thrilled about this pricing structure, it can cause serious problems for your agency—there are some clients who might just disappear after you finish the work and send them an invoice or try to renegotiate. The one exception to this rule? Performance-based pricing—with that model, the only way to get paid is on completion.
50% up front, 50% on completion
The best pricing structure for both you and your client when using a project-based pricing model is 50% up front and 50% on completion. (Alternatively, some agencies split this into thirds or quarters with pay happening after certain milestones.) That way, you get the deposit so you can get to work but your client has the security of knowing they won’t have to pay in full until they’re satisfied with the project.
When you’re using an hourly pricing structure, you’re going to have to invoice your clients. How often you invoice your clients will depend on the nature of your relationship; if you’re working with them on a daily basis, invoicing weekly is appropriate. If you just work a few hours here or there, a monthly invoice would make more sense.
With invoicing, it’s also important to set the terms of payment. How long does your client have to pay the invoice? Is it upon receipt or NET 30? Setting clear payment terms from the start will help to avoid any confusion—and will ensure you get paid on time.
What to do when you need to charge outside your pricing model
Now, in an ideal world, your clients would adhere to whatever parameters you set for working together—and in that ideal world, you’d never have to deviate from your pricing model.
But let’s be real—we don’t live in an ideal world. And no matter what pricing model you choose, the time is going to come when you need to charge outside of your pricing model. So the only question becomes how do you do that—and still preserve the client relationship?
The easiest way to manage charging outside of your pricing model is setting the parameters from the start. Clearly outline what is included in your pricing model, and add a stipulation to your contract that says anything outside of what you’ve agreed upon—whether it’s phone calls, meetings, or extra deliverables—will be charged at your hourly rate. This sets the expectation that you’re only going to do the work you agreed to do—and your client should expect to pay for anything additional.
Not only will this protect you from scope creep, but it will also discourage your client from changing their mind a zillion times over the course of a project—which can be super frustrating for you and your team.
Other things to think about when choosing a pricing model
If you’re still on the fence about which pricing model is the right fit for your agency, here are a few other things to consider:
- What structures will you have to implement to make a pricing model work for you? In order for each pricing model to be successful, you’ll need to have certain structures in place; so, for example, if you decide to go with an hourly pricing model, you’ll need time tracking software and a tool to keep track of your invoices. If you go with a performance-based model, you’ll need analytics in place so you can measure performance for your clients. Before you decide to go with any pricing model, think about the structures you’ll need to have in place to support it—and whether or not those structures will realistically work with your agency.
- What kind of clients are you going after? The pricing model that’s going to be the most successful completely depends on the kind of client you’re going after. If you’re going after brand new clients, they might be hesitant to go with a retainer until after they’ve worked with you on a few projects. If your potential clients have never worked with an agency before, the high fees that typically come along with value-based pricing are going to be a hard sell. Before you settle on a pricing structure, think about what’s going to work for your clients.
- Remember—you can take a test drive before you buy the car. There’s no rule that says you need to choose a pricing model and stick with it forever. If you’re not sure which pricing model is best for you, try a few out and see what happens! For example, if you’re a design agency, work with two clients on their logo design—one on an hourly basis and one on a project basis—and see which is more lucrative. You can also continue to evolve your pricing model as your agency grows—for example, as you work with more clients and establish yourself as an expert in your space, you can transition to more retainer and value-based work.
Which pricing model is right for your digital agency?
Choosing a pricing model can be tough. But now that you know the ins-and-outs and pros-and-cons of the different agency pricing models (and when each model is the most appropriate), you have everything you need to effectively price your agency’s amazing work—and make a killing in the process.
Author: Deanna deBara