Your choice of pricing model will have a huge impact on your agency’s profitability and how it runs on a day-to-day basis. So it’s important that you choose the best-fit pricing model for your digital agency.
Today I’m looking at the differences between the three most common agency pricing models, and how to choose the best pricing model for your agency.
3 Agency Pricing Models
1) Hourly Pricing
The hourly pricing model is where you charge for the time your employees spend working on a client’s project. You will probably charge different rates for different employees; for example, a junior designer would have a lower hourly rate than a senior designer.
Pros of the Hourly Pricing Model
- You bill your client for every hour you work on their project, eliminating unpaid work that can eat into your agency’s profits.
- It’s easy to understand – both for your agency team, and your client.
Cons of the Hourly Pricing Model
- Your agency team isn’t incentivised to work efficiently: the longer a project takes, the more you get paid.
- You’re more likely to have customers question your billing: “Why did X take 5 hours this time, when last time you did something similar and it only took 3 hours?”
2) Fixed Bid Pricing
With fixed bid pricing you and your client agree on the scope of work that you’ll do, for a set price. You might charge on a per project basis, or use ongoing retainers where you complete a set amount of work each month.
Pros of the Fixed Bid Pricing Model
- Your clients know how much they’ll pay and when they’ll pay it.
- Your agency’s goals are better aligned with your customers, focusing on deliverables rather than time taken.
Cons of the Fixed Bid Pricing Model
- It requires your agency to commit more time scoping out the project before you start working on it, to agree milestones and the scope of work you’ll get paid for.
- It’s not aligned with an agile way of working: projects will inevitably change as they progress, so you may end up completing different work than previously agreed upon.
3) Value Based Pricing
In the value based pricing model, your agency’s fees are directly linked to the value you create for your client. As an extreme example, your agency might have no upfront fee for the project, and instead agree on receiving a percentage of your client’s revenue generated from the project.
Pros of the Value Based Pricing Model
- The value based pricing model is the best for aligning your agency’s work with your customer’s needs: you’re incentivised to do better work for them because it affects the payment you receive.
- If successful, value based pricing can let you earn much more than you’d charge for a fixed bid project.
Cons of the Value Based Pricing Model
- It’s unpredictable: if your work doesn’t generate as much measurable value for your customer as expected, your agency won’t get paid as much as anticipated.
- It can be difficult to directly link the value generated for your client to the work that you’ve done.
What Pricing Model is the Best Fit for Your Agency?
To choose the best-fit pricing model for your agency, you need to consider three main things:
- The type of work your agency does.
- The type of client you work with.
- Your agency’s growth goals.
Most agencies start off billing by the hour in their early stages, but this limits profits and growth: to bill more hours, you need to take on more staff, which increases costs. Therefore, when agencies start to grow, and they have a better understanding of their capabilities and capacity, they will often change to fixed bid or value based pricing. This will depend on the type of work you do, and whether it can be directly linked to value generated for your clients.
All agencies will have different goals and different motivations for their choice of pricing model. If you’re using the hourly pricing model and it works for your agency, that’s great, but it may be that your agency uses the hourly pricing model as a default because they haven’t considered the alternatives.