Agency point pricing explained: theory, practice, benefits, risks

Last updated on 
January 19, 2021

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In the past few years, agency pricing has seen a bit of an overhaul. While for years input-based pricing was the norm, recently there’s been a shift away from hourly rates, daily rates and fixed fees as agencies switch to output-based pricing.

A huge driver for this lies with the unpopularity and difficulty of tracking agency hours. Aside from the inaccuracy of manual time tracking, many agencies struggle to explain to their clients how billable hours translate into value. Many see selling hours as a tight-fisted model, that discourages clients from querying work for fear of racking up additional fees.

So is point pricing the solution to these problems? How does it work and what risks does it contain? Crucially, does switching to point pricing – or any other output-based pricing model – eliminate the need for agencies to track how they spend their time?

What is agency point pricing?

While traditional input-based pricing models charge for the effort and time that goes into a piece of work, point pricing is about paying for the tangible results it delivers. You don’t pay for the hour or the day; you pay for the sum value of deliverables, which is quantified using a points-based system.

💵 The 5 main agency pricing models explained

 

How does point pricing work?

When an agency uses point pricing, they assign a cost to a point – e.g. one point = $50. For the services they offer, each task is then allocated a points value. So, a blog post could be three points, writing an in-depth guide or white paper could be 10, and delivering a complete marketing strategy could be 20.

Points are assigned based on the value and effort it takes to finish a job; the more effort a task requires, the more points it’ll be worth. Clients can buy a set number of points each month; then they can choose what to allocate their points based on their current objectives and goals. So, if in January they have a goal to generate new leads, for example, they could choose to spend their points on a targeted social media campaign.

The benefits of agency point pricing

A perk of point pricing is that it offers full transparency and gives clients insight into the precise value of different services. It also eliminates the unpredictability of hourly billing, since clients know exactly what they can expect to pay for a particular service.

Point pricing also offers an attractive degree of flexibility. Agencies are increasingly offering more holistic services, and pricing things like infographics and social campaigns isn’t always as straightforward as per-word-based articles or reports. Many agencies are also moving away from project-based work to retainer-based, and adopting point pricing affords clients far more flexibility; rather than having to decide in January which services they want in June, they can decide in May. They’re still paying for deliverables – but they don’t need to specify all of them upfront. As 2020 demonstrated, a business year can take a markedly different course to an agency’s annual plan, so this flexibility is become increasingly sought after.

The risks of point pricing

However, no pricing system is without drawbacks or risks – point pricing included. One potential problem with point pricing is that it requires a certain amount of imagination from clients to conceptualize value. While a metric like time spent is easy to attach to a monetary value, with points it becomes a little more abstract; clients would need to understand why a blog post is worth three points and a strategy is worth 20. This adds a level of complexity to the process, and for some clients – particularly those looking for quick wins – it might not seem worth it.

It could also be argued that point pricing encourages clients to swap in and out of services in the same way as they’d pick and choose from a menu – e.g. “Do we want four blog posts this month, or do we want a social campaign?”.  The problem with this is that being service-based can also distract from ultimate value; you work for a points system rather than focusing solely on trying to achieve a client goal. It can also lead to undesirable bargaining situations, where the client might ask the agency not to spend X amount of points on X task this month, and to move them onto a different project they’re working on instead. If a client is unwilling to buy more points for that month, you either need to compromise the quality of a certain piece of work or push back against what the client wants.

Should agencies still track their time?

As long as an agency is clear with clients about the way point pricing works, these issues can usually be avoided. Ultimately, this pricing solution ensures that clients get the whole value of every investment, irrespective of how much time it takes to complete. By using a points-based system, you’re also essentially removing time-based metrics from your pricing; focusing on providing the true value of a specific service, instead of the amount of time it takes to deliver it.

Yet switching to point pricing won’t mean tracking agency time becomes obsolete. Even if you don’t use time data to bill for your work, it holds tremendous value for gauging operational efficiency and workflow fluctuations, as well as preventing employee burnout, documenting overtime and ensuring labor law compliance. Practically speaking, it’s on one of the easiest ways to keep effort visible, aligned and focused across your agency, so people aren’t putting a disproportionate amount of work into a small task – all of which ensure agencies are able to deliver better work at the most profitable rate.

Of course, the amount of points you use to price different types of work themselves need to be informed by some core metric of effort. Time spent per resource involved offers a very easy and tangible means of quantifying this. If you find one three-point deliverable takes twice as long to produce than another three-point deliverable, you’ll naturally want to adjust your point allocation.  

Ultimately, no company operates in a vacuum outside of time – you will always need to compete on time in your project estimates to some degree, and it will be hard to run an efficient, profitable operation in its absence. It’s just the tracking part that causes friction and pain, but since automatic time tracking solutions are now available, there’s no reason for agencies to miss out on valuable time data.

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