One of trickiest parts of choosing an agency pricing model is figuring out which one best suits you and your clients. Your pricing model has a significant impact on pretty much every aspect of your agency – not only profitability but positioning, productivity, sales, success and culture.
Every pricing model has its pros and cons, and it can take trial and error to find the model that suits you. Get it right, and you can get paid fairly, propel your agency forward and ensure your clients are happy; get it wrong, and you’ll create a stressful cycle of long hours, low returns, and endless back and forth with clients.
To help make sense of all the nuance, we’ve broken down the five main agency pricing models – explaining what they are, what situations they benefit and what to consider before using them.
Input- vs output-pricing
Before we dive into the intricacies of each agency pricing model, it’s worth clarifying the strategic context behind each. Agency pricing can broadly be understood as a fee attached to the things you put into a work process, and those you get out of it. This is mainly approached in one of four ways:
- Input-based pricing – charging for the resources your team puts into the work (e.g. total team hours committed)
- Output-based pricing – charging for specific deliverables (e.g. the package cost for a campaign)
- Outcome-based pricing – charges for the overall results or performance of your work (e.g. leads, conversion, traffic won)
- Value-based pricing – charging for the perceived value or impact of your work (e.g. reputation, brand appeal, unique expertise, niche software)
So which is the best? Sadly, there is no clear “correct” answer to that – it’s as much a cultural decision as a financial forecasting one, and your company will need to think carefully about the consequences of each pricing strategy. Either way, don’t feel you need to lock yourself into one way of thinking; many companies successfully use a combination of pricing approaches for the different services they provide.
5 popular agency pricing models
1. Hourly rates
Hourly pricing is a fixed-input rate that charges the client for your staff’s time, by the hour. You can charge a “blended” rate, which is one single hourly rate for the whole company, or you can use a specialist rate, where you use different hourly rates depending on an employee’s experience and seniority. Hours are usually sold with minimums or in monthly retainers.
You get paid for every hour you work for a client
Simple for clients to understand, so easy to sell
Can be easier to scope work when you’re estimating by the hour
Works well with project management, which often focuses on tracking hours
Disincentivizes agency efficiency: the longer the work takes, the more the agency gets paid
Can cause problems with clients if you exceed the total hours estimated
Limits how much you earn – as to earn more, you have to raise rates or hire more people
Can cause clients to become overly involved: e.g. start questioning every billable item, asking for detailed invoicing, requesting more junior employees do the work to lower costs, etc.
2. Fixed project rate
A fixed-fee pricing model is another input-based rate where an agency agrees to a fixed price for the completion of a project. It’s usually worked out by estimating the number of hours required to complete the project, the hourly rate of the agency, and then adding on a buffer fee or margin. Many agencies begin by using fixed-fee rates because they’re simple to quantify, and charging a flat amount for your services is preferred by many clients who are worried about hidden costs.
Good for new agencies who are just starting out
Good for clients and projects who have set budgets
Easy to explain to potential clients
Discourages an agency to identify new development opportunities for their client
Makes it trickier to grow larger engagements and scale your agency
Inaccurate estimates can lead to serious scope creep
3. Unit pricing rate
Unit pricing model is an output-based rate that’s based on delivering different elements of work (e.g. cost per campaign). It’s similar to fixed-fee pricing, but focuses on shorter term campaigns or deliverables – e.g. ten blog posts, two white papers, a tech audit – rather than an entire project. This pricing model works well if your services have very obvious deliverables. In order to set a unit pricing fee, agencies usually estimate the total hours needed to deliver the work and any associated costs.
Good for clients, as they can predict what they’ll pay and know when they’ll need to pay it
Works well with content, marketing, design and development clients, where there’s usually a finite end to a project
Your income isn’t tied to your time, so it works well when you work fast
If a client isn’t happy or doesn’t think the deliverable is finished, they can withhold payment
You need to be able to identify any unexpected variables that could delay the deliverables
Can lead to scope creep, which quickly reduces profitability
4. Performance pricing
Performance pricing is an outcome-based rate that’s paid according to the tangible value driven by your services (AKA the measurable results of your work). Common examples of performance pricing include cost per click, cost per view, cost per lead and cost per acquisition. For this to work, agencies need to establish conversion metrics will be with their clients, as well as the value of each conversion, how conversions will be tracked and shared, and the performance payout timeline.
Clear metrics can incentivize staff, making them more invested in success
It’s easy and honest to sell, as clients like to pay per result
It can be very profitable... if your work is successful
If you don’t succeed, you don't get a bonus and your client has the advantage
Since results can’t be guaranteed, all risk lies with the agency
Driving successful results can take a long time
5. Value pricing
Value-based pricing is judged according to the unique value of your work – which can be influenced by specific expertise within your team or your agency’s clout, as well as the unique software, equipment and processes you offer clients. Value pricing isn’t about the value driven by your services; it’s about the perceived value that a client places on different deliverables, and the price they’re willing to pay for your services. Agencies that use value pricing often have a unique selling point, as their client will have an expectation that they’re going to get more value from their work – e.g. maybe they’ve got an excellent reputation, or have had big success on similar projects before.
Aligns client incentives with agency incentives: the more they earn, they more you earn
Works well for agencies that already have a track record of producing high-value outcomes
Can produce big margins
Only works well for established companies who already have clout
Requires an agency to be confident about getting results
Value is subject and can be tricky to define
Doesn’t reduce the risk of scope creep