Pricing is not something that is discussed so much, especially for small businesses, but adopting the right strategy for pricing your services is really essential in business growth.
If your price is not well structured, such that it appears to clients that they are paying too much for your service, they will leave & go to competitors… On the other hand, if you underprice your service to woo customers in, you’re likely to run out of business.
Look at it this way, your pricing is tied to your business’ profitability (I mean – sales, customer Retention & satisfaction, etc), So if you get it right, your profit is sure to move in the right direction.
But, the path to discovering a pricing model that fits your business can be quite steep.
Oftentimes, you’ll see yourself asking questions like – 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?
If you see yourself asking these questions or you’ve had to be confused about what pricing model to adopt for your business, then this article is for you.
Inside this article, I explained different pricing models that work for a digital agency business and the things you should consider when choosing a pricing model for your business.
… But before that, let’s quickly see how to charge clients as an agency.
Strategies On How To Charge Clients.
There are 3 methods that you can engage as an agency to charge clients for your service.
1. Upfront Payment;
This is where you charge your clients immediately & have them pay 100% of your fees before you commence on their project.
It’s a good method to employ when charging your clients but take note that this method works best in situations where your clients already have an existing working relationship with you.
2. On Completion;
In this method, you charge clients & get paid for your service after the project is completed. Many clients will be thrilled with this method since they don’t need to pay immediately.
Personally, I won’t advise you to use this method as it can lead to a lot of problems for you – some clients can disappear after the project is done or try renegotiating your fee.
If you’re ever going to use this method, it has to be with clients that you have a long, existing relationship… It should never be with new clients.
3. 50% Up Front, 50% On Completion;
This is my favourite method for charging clients & getting paid.
With this method, you charge your clients your fee & get them to pay you 50% of the agreed fee for the project. The remaining 50% will then be paid after the project is completed.
This works well for both your clients & yourself.
With the first deposit, you can start working on your client’s project, while your clients can relax & wait, knowing that they won’t make full payment until they are satisfied with your work.
Deciding The Perfect Pricing Model For Your Business
Now, I’ve selected 3 different pricing models that you can use in your agency – depending on the type of service you offer & the clients you work with and they are as follows:
1. Hourly Pricing Model:
This is quite a simple pricing approach, It entails charging for inputs. In other words, it is simply charging for the hours put into the work.
The agency sets the hourly rate for each service and charges the client for every hour spent on a project. For example, the agency set an hourly rate for service for $100, if it takes five(5) hours to carry out the project for a client, the service charge for that project is simply $500.
An hourly rate pricing model is good for digital marketing agencies that work with clients who have a tendency to change their minds or require lots of edits. By agreeing to an hourly rate, you can avoid things such as an uncontrolled expansion and adjustment to project scope.
The hourly model can also be useful when managing limited agency resources since it simplifies the tracking of overall profitability, team-hours management, and scheduling and planning individual projects.
Like any model, the hourly pricing approach has its advantages and also drawbacks.
We will be looking at the pros and cons of this pricing model in order to help you make an informed decision on the pricing model to use for your agency.
- The simplicity of hourly pricing is one of the obvious advantages of this model. Clients like hourly rates because it’s quite straightforward and easy for them to understand how much they’ll be paying for your services. It’s also great for attracting clients with a set budget.
- Hourly can be a good solution for new agencies, if you don’t know how long a project will take, hourly can protect you against running into deficits.
- Hourly pricing is great for ongoing client work. If you’re working on a long-term project that requires a lot of problem-solving and research, it can be quite a rewarding model.
- It is also very flexible.
- The emphasis is mostly based on Agency cost as against value delivered. You spend time and energy calculating hours instead of creating value.
- It discourages smart work, as the agency could actually lose money if the projects get completed in less than the forecasted hours.
- It encourages agencies to take longer to finish a project because the agency will then make more money.
2. Project/Performance-based Pricing Approach:
As the name suggests, this model entails charging clients a flat fee for the project. In this approach, agencies estimate the total number of hours required for a project (including non-billable hours) and multiply it by an hourly rate.
It’s simply when a client pays you based on a completed project or achieved goal. It does not necessarily mean payment comes “when the job is finished.” It can include the agreement of 50% payment upfront and 50% on completion.
- It’s an easy-to-understand model for both the agency and the client.
- With this model, Clients can predict the amount they will pay and even when they will pay it. This approach helps when working with clients that are highly budget-driven.
- A project-based plan is easy for clients to compare. They can choose an agency based on well-thought-out proposals.
- It allows for agencies to profit from their own efficiency, projects can be done speedily as time spent on the project does not determine the pay. The team is also motivated to learn to work faster and better.
- The nature of this model emphasizes expertise over hours spent on the project, and so rewards speedy turnaround time and value for the client.
- It’s a win-win approach for both Clients and the agency. Clients are able to predict the cost of the project and time of payment and the Agency on the other hand is able to predict revenue and when it will be received.
- Here, you are estimating. If you’re not good at scoping, you’re going to underestimate the work, which wipes out the potential efficiency savings.
- Under this model, Clients can easily expand and adjust the scope of the project, new information arises which might end up eating into the profits of the agency.
- This approach is not so favourable to beginners in that for project-based pricing to work in the agency’s favour, you need to clearly understand how long it will take you to work on a project, as well as the expected and unexpected costs. So it’s best to only use this model after you’ve finished a few projects and have a good idea of the costs associated with the milestones.
- Even if properly scope out a project, things always change. Clients often want to make updates to what it is they want to be delivered, and this can cause relationship issues if not handled properly.
3. Value-based Pricing Approach:
It is also referred to as a performance or milestone pricing approach. This model involves charging based on successfully performing the work your clients have assigned you. With a value-based pricing model, both the agency and the client become incentivized by the end result due to the shared risks and rewards.
Value-based pricing is a strategy of setting prices primarily based on a consumer’s perceived value of a product or service. Value pricing is customer-focused pricing, meaning companies base their pricing on how much the customer believes a product is worth.
Here’s how it works…
First, the agency has to determine what is specifically valuable to the client, it has to be able to track and measure the performance and results.
Companies that offer unique or highly valuable products and features are better positioned to take advantage of the value pricing model than companies that chiefly sell commoditized items.
This pricing model is the most advanced, but it has also shown to be highly effective at increasing an agency’s profits.
- This pricing approach helps the agency to develop higher quality products. Value-based pricing not only determines a more accurate price for the end product, but the process will also benefit your business. The heavy emphasis on value puts pressure on the agency to deliver products of high quality.
- Removes time from the conversation, allowing both client and agency the freedom to explore options and be creative inside the set scope.
- Eliminates confusion around how well an agency is performing.
- One good thing about using this model is that it indicates your confidence in your own services to clients. Since you’re sharing the risk with the client, it can be easier to convince them to work with you. It’s also quite scalable.
- It allows the Agency to provide quality/top-notch customer service. The attention to consumer opinions and wants will result in more personable and considerate services.
- This can be the difference between one time customers and loyal clients who develop a bond with the company and always come back because they trust you’re providing the value you continue to claim you are in your price.
- Everything that has advantages also has its fair share of disadvantages, Therefore the cons of the value-based pricing approach include:
- One major downside of this pricing approach is that if you don’t deliver, you don’t get paid. Plus, this is an extremely work-intensive model that requires a lot of effort in driving results.
- It’s quite time-consuming as a whole lot of research needs to be put in for value to be delivered.
- Most start-ups shy away from this approach because they tend to think that only large and extremely wealthy businesses can do things this way.
So, finally… what model should you go for?
I would like to say that there is no rule of thumb when it comes to adopting a pricing model for your agency. There Is no ‘’Right way’’, you have to decide on what works for you depending on the kind of service you offer and the clients you work with but you could consider the guidelines below:
- Pricing should be as simple to understand as possible.
- Your pricing should be what you feel comfortable and confident quoting.
- Whatever pricing strategy you adopt should support the profitability of your business.
It’s also important to note that you can adopt a mix of two pricing models to achieve your desired goals.