There is so much time, effort, dedication, and money that goes into starting your own digital agency or growing your business. Your agency’s business model and pricing strategy are unquestionably among the most important decisions you will have to make.
This can be one of the most challenging questions faced by anyone starting a digital marketing agency or an agency looking to charge their clients more for their offerings. Choosing the right agency structure fee that works for you and keeps your clients happy is critical to ensuring that your agency sees high ROI and profits.
Choosing the right agency structure fee that works for you and keeps your clients happy is critical to ensuring that your agency sees high ROI and profits.
There is a fine line between being fair and being smart.
These are the 4 main types of agency structure fees. So, whether you are launching your digital agency or looking to restructure your pricing, keep on reading to see how different pricing methods could impact your business.
1. Time-Based Agency Fees
Charging by the hour is common in digital marketing because it is uncomplicated and very easy to explain. Time-based methods allow you to earn a profit by setting an hourly rate. For example, if you charge $150 an hour and you work 10 hours then you make $1500.
- Hourly rate pricing is simple for customers to understand.
- Clients like it because they know exactly how much they will be spending
- As long as you correctly estimate how many hours of work per week you need to complete a project you can predict your ROI.
- If you have limited incentive to finish the work quickly, your client will not be comfortable with that. The faster you complete the work, the less money you get.
- You will get paid the same for intense projects just as you would for simple ones.
2. Fixed-Fee Pricing
Fixed fee pricing is a favorite pricing method of an agency’s clients. The client can easily access the advertising agency rates to make an informed decision. It is also simple for the agency. The client can accept it or refuse it, but a decision can be made with little time wasted.
- Agencies are not under the watchful eye of their clients as much when using fixed-fee pricing.
- It is easier to compete for jobs when agencies can give a decent estimate of the total costs for the project.
- Fixed fee incentivizes speed and quality, the quicker an agency can finish the project, the more time it has to devote itself to another one.
- The deliverables, as well as the rates, are negotiated upfront, which can be a safeguard against scope creep and additional requests for work outside of the original contract.
- Fixed fee pricing allows agencies to ask for a part of the fee upfront.
- Making a profit using a fixed price is dependent on the agency’s ability to gauge fair pricing for its quality of work. Inexperienced agencies are in constant danger of losing clients because of overcharging or losing profits due to undercharging.
- There is no mechanism in place for charging for additional work, every addition needs to be negotiated.
- Agencies need to break up large projects into stages and negotiate payments per stage if they need a steady flow of funds.
- Any issues that happen need to be assessed for the impact on the workload to be readdressed in the renegotiation of the price.
Fixed fee pricing is an excellent pricing method for established agencies working on a contract with minimal fluctuations. In the event of an unexpected change or direction, the agency will need to negotiate fees again.
3. Retainer Fee
The retainer fee is what you charge for making yourself available to a client for set hours each month, whereas the contingent fee is what you charge for coming up with a customized plan for each client.
With this method, you can price plans according to their actual scope of work and have flexible rates so that you don't overcharge or undercharge clients. You will usually receive a deposit and payments throughout the project under a contingent fee schedule.
- You can be sure that you are not undervaluing your work or getting shorted if a project takes longer than expected.
- You can be flexible in your pricing for businesses of different sizes with different budgets.
- The client might see this as performance-based pay which could be appealing to them. They will feel you are motivated to do high-quality work.
- With custom pricing, it is almost impossible to standardize your pricing.
- You have to customize for all clients regardless of the budget amount.
- It can be difficult to correctly estimate the time or involvement of each project before you start actually working on it.
- The final cost could be more than the client was expecting unless you have a cap on overages.
4. Value Pricing
Value pricing is one of the difficult pricing methods. It requires more of an intricate agency pricing model. A project will get billed based on the value that the client gets instead of the amount of time it takes.
- Due to the potential to earn more money if the agency delivers more value, it highly incentivizes good quality work products.
- Clients may recognize this as a type of performance-based pricing, which may be more appealing to them.
- The agency has the freedom to set its pricing and expand its client base.
- It can take time to correctly estimate the value of the actual work.
- The agency takes on a lot of risks including the agency’s profits.
I think that your agency and its structure fee come down to the value you offer your clients. The biggest mistake you could make is underselling yourself. It will not give you the success you are aiming for because there will always be another agency that will undercut your low prices. Charging less for high-quality service cannot be your selling point.
It is important never to underestimate the psychological effect that pricing has on people because cheap prices are always associated with low quality. Do not shortchange yourself or your brand. Make sure you find your agency's unique selling point and don't be afraid to ask for a price that reflects its value.