Agency Pricing Models: Two Models to Choose From
In the creative world, value is the name of the game. How much of it does your agency bring to your clients, and does it roughly align with the dollar figure you charge?
The life of an agency is one that walks the tightrope between overcharging their clients and undervaluing themselves. If you overcharge your clients, though that might result in short-term profits, you may end up in a situation where clients are consistently underwhelmed by the end product you deliver. Not an ideal situation for a long-term working relationship, or for getting a strong reference for future clients.
On the opposite end of the spectrum, where you consistently undercharge for your services, you’ll have creative teams that are stressed, overworked, and lacking financial incentive to do their best. Though your clients may be consistently impressed by the quality of work you deliver, your creative teams will be on the fast track to burnout city.
There are many ways in which your project billing can go haywire, from poor rate management, improper estimates, and inaccurate time tracking. But one angle that is less often discussed is how your agency pricing model affects your billing.
In this blog, we’ll explain the two major agency pricing models and how to determine which one is right for your agency!
The Two Major Agency Pricing Models
Hourly billing is great when you have clients who want to know where their money went. For agency owners and project managers, they know that translates to income for their business. Scope creep becomes less of an issue for project managers and creative teams, as they know that they will be compensated for their extra work. (The scope creeps at a slower rate too, since clients know they have to pay for the extra work!) Ultimately, billing clients at an hourly rate can be a big benefit to an agency’s profitability.
There are some downsides to this method, however. First, if you’re only billing the hours you spent on the project, you need to make sure that your team is tracking every hour (easier said than done). Your creative teams also need to complete their work in a timely manner if you expect repeat business. Blogs can’t take 10 hours to write and images can’t take 5 hours to design. Most of the time this isn’t a problem, but it can discourage creatives from trying new tools and methods of working. The last potential problem is that estimating can be difficult. Some clients have a fixed budget that they can spend on their creative assets and prefer being given a fixed fee rather than a potential range. Hourly billing can leave you open to being outbid by agencies willing to create an estimate with a fixed fee attached.
Hourly billing is a viable option if you:
– Work with the client on a repeat basis or retainer (aren’t bidding on work often)
– Struggle to keep your fixed fee projects under budget
– Have a creative team capable of producing high quality of work within a defined time period
A Flat or Fixed Fee Structure
A flat or fixed fee structure can be liberating. The stress of tracking every minute of the project is removed and creative teams feel free to experiment with new tools and ways of working without worrying about how much time they’re taking (though they still have to deliver on schedule). From a project management perspective, they don’t have to worry about arguing with clients about the final cost, and if your team completes the work quickly, you can make a larger than expected profit from fixed fee structures.
Again, there is no perfect solution for digital marketing services pricing (or any creative agency pricing for that matter). For fixed-fee pricing to benefit your agency, you need to create accurate estimates. That means you need to have a strong handle on your team’s capacity and how they manage their time. Sorry creatives, but time tracking is still on the menu.
For project managers, they may find themselves defending against waves of scope creep. When a project has a fixed fee, clients may try to slip in an extra change here or there. At first glance, it may not seem like too much trouble—after all, what’s a bit of extra work to maintain a good relationship?—but as we have seen time and time again, it can be a major profitability choker for agencies.
The good news is that scope creep can be defended against by creating a detailed and accurate project roadmap that clients sign off on before starting the project. This document will be the map that guides you through requisitions about the number of revisions, deadlines for feedback, and whether certain items were listed as deliverables.
A flat or fixed fee structure may work for your agency if:
– You can accurately estimate project costs.
– Have project managers capable of preventing scope creep.
– Can manage the workload of your creatives.
Now we’ve looked at the two main models of marketing agency pricing, digital marketing agency pricing, and how agencies in other industries price their services. To know which one is best for you depends on both the industry you work in and the internal structure of your agency. With the pros and cons of each model explained, hopefully, you now have the information you need to make a decision that suits your agency.
It goes without saying that having a product on your side that enables you to estimate accurately, make time tracking easy, and enable you to readily analyze your profitability is important. Do contact us if you would like to see how Function Point could provide these and other benefits to your agency or organization.