You often hear the biggest challenge for an agency is setting a good pricing strategy. How much you charge for services affects everything: who you hire, the clients you pitch to, and how profitable you become as a business.
The reality is that pricing strategies are a natural part of business, and it’s important to choose the best one to take your agency to the next level. These six strategies can help you create a profitable model for your business.
1. Fixed-fee or project-based pricing model
A project-based pricing strategy has agencies offering a fixed-fee for a certain type of work. The strategy lets prospective clients know upfront how much they can expect to pay for an entire project. Project-based pricing is estimated from the value of deliverables or a fee based on the time it takes to complete the project.
For example, say you build a birthday bot for a client for $700. It’s a one and done project; they’d prefer to run Facebook ads themselves and handle the rest. Your only responsibility is to deliver the flow and its assets outlined in the project scope. If it goes outside the scope, you’ll have to modify the agreement based on new project requirements.
Say a client wants you to run Facebook ads, optimize flows, and have you consult for their business. You may want to move to an hourly or retainer fee.
Many consultants, freelancers, and new agency owners use a fixed pricing strategy. It can work in a competitive environment, but may not be enough to retain clients for long-term growth.
2. Hourly pricing model
Charging by the hour is a common pricing strategy for consultants, freelancers, and agencies who provide Chat Marketing services. As you’d expect, it’s trading your time for money. If you charge an hourly rate of $100 per hour and you work 15 hours on a project, your client would pay $1500.
If you choose to charge by the hour, there are two things to take into account when deciding your fee:
- Non-billable hours. These include tasks such as managing your team, admin work, training, marketing your own services, etc. When choosing your hourly rate, factor in non-billable hours so you don’t end up working against yourself.
- Blended rates. Sometimes you may need to outsource work to a contractor to free up your time availability. To not cut into your profits, you can charge a “blended rate”, which is your hourly rate + contractors hourly rate, and charge according to the sum of the two rates.
Hourly pricing models are easy and straightforward, but can make it challenging to scale your agency. New agencies can typically benefit from this pricing model if they don’t know how long a project will take. The downside to this model is, the quicker you finish a project, the less money your agency makes.
3. The “Working Backwards” pricing model
“Working backwards” is defined by starting at the end of a problem, and undoing it step by step. As a pricing strategy, it starts by focusing on a revenue goal. Then breaking it down into:
- How much revenue you’ll need to produce each month.
- How many clients you’ll need to reach that revenue.
- How much you need to charge each client to get there.
For example, say you want to make $95,000 this year, that’s $7,916 per month. If you want to charge $600 a month for your services, you’ll need to get 13 clients on board to reach your goal.
This pricing model example is taught by marketing agency trainer Matt Plapp to early-stage agency owners. It’s an effective way to kick off your business quick, but he advises, make sure you can deliver on the price point you choose. If you want to charge $1,500 a month, be certain you can get results for a client — otherwise, you may not have them for too long.
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4. Retainer pricing model
A retainer pricing model is when a client pays you an agreed fee for a set amount of time or deliverables. Retainers are best for clients with long-term goals and needs. They essentially buy your time and priority for a set amount of projects over a set timeframe.
There are two prime examples of agency retainers:
- Time-based. This is where a client agrees to buy a certain number of hours upfront per month. For example, if a client agrees to buy 20-hours per month at $100/hr, your retainer fee would be $2000. It can cover maintenance costs, tweaking flows, etc.
- Deliverable-based. Say your managing Chat Marketing for a client. You can set up a retainer that states for $2000 per month, you’ll plan and execute monthly email, SMS, and Messenger campaigns, write bot copy, manage analytics, and more.
Retainers are good for clients because it makes budgeting easy for them. They know what they’ll get in return for a certain price each month.
Typically, retainers are easier to transition into after you have a working relationship with a client. Not everyone will want to go on retainer right away, however, it’s a great way to get recurring revenue and build a scalable agency.
5. Performance-based pricing model
Performance-based pricing is also known as performance-related pay. This pricing strategy operates on the idea that a client only pays you for results — no monthly fees or percentages of ad spend. Instead, the business funds advertising costs and clients pay on an agreed cost per lead or sale.
Agencies who compete in a saturated market can use this strategy since a definite way to get leads is a key buying factor for clients. Your services are sold on the idea of working because you take on the upfront costs — but there’s little convincing needed to be done.
Viewability, an ads agency who runs on performance-based pricing, has a three-step process:
- Month one: The agency creates ads and runs the first 4-6 weeks.
- Month two: Analyze, tweak, and repeat campaigns.
- Month three: If the campaign is profitable, they “set it and forget it”, offering a greater profit margin than before.
To implement this type of pricing strategy, you want to put a great process in place for qualifying leads. Only work with companies you know have a good product and chance at you completing fulfillment.
6. Value-Based Pricing Strategy
A value-based pricing strategy focuses solely on the value your customers place on your services. For agencies, this can be extremely lucrative because clients don’t pay for your time, they pay for your expertise. The downside is, if you’re selling a service everyone else sells, it’s going to be hard to sell based on value.
However, you can use value-based pricing if:
- You are a top expert in your industry.
- Your agency has a lot of value.
- You’ve worked with top people in your industry.
- You have an incredible track record of getting clients results.
Value-based pricing is usually used by agencies who specialize in a particular niche. This strategy is a better fit for agencies backed by an industry expert as their experience offers far greater value than an hourly or retainer price. They are also in high demand and their experience has added value to their time spent with a client.
Choosing your pricing strategy
There are many variables to choosing your pricing strategy; what services you provide, how complex the campaign you have to build, the lifetime value of a customer. But when done well, you can build a sustainable agency model that’s both profitable and scalable.