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Should we all switch to output-based agency pricing?

Last updated on
September 4, 2021

Choosing the right pricing model for your agency is one of the most important things you can do. Getting it right doesn’t only determine profitability, but it also has an effect on employee morale and engagement, how you hire staff, the ways you work, client satisfaction, and your overall financial stability. That’s why it’s vital to choose the pricing model that aligns with your culture and goals. Increasingly, for many agencies that means switching to output-based pricing – focusing on the end-value created by a process instead of the effort that goes into it. But why has output-based pricing become so popular? What advantages does it offer over traditional input-based pricing? And what’s stopping every agency from switching to it?  

What is output-based agency pricing?

With output-based pricing, you’re not being paid in hourly rates, daily rates or fixed fees. You’re not being paid for your time. You’re not factoring in project margins, activities or overheads. Instead, you’re being paid for the value you provide your client with – for your overall output.

Your fees are determined by the value a client places on the different deliverables, and how well these deliverables ultimately do. Sometimes this is defined by results (a branch of output-based pricing called “performance pricing”) or campaign units delivered. But increasingly it’s defined by the overall perceived value of your work. Aside from the quality of what you produce, this can be informed by things like your agency’s reputation, special talent within your team and ownership of unique equipment or software.

Why is output-based pricing so popular?

The increasing popularity of output-based pricing is a direct response to some of the perennial issues with input-based pricing. For example, when you’re being paid for your time, there’s no incentive to work hard or fast – as the faster you finish a project, the less you get paid. It becomes easy for people to lose sight of the fact that the ultimate aim is to deliver something tangible, as opposed to delivering merely "time spent".

When you’re being paid for an overall project, it’s also easy to underestimate how long it will take – and so, to avoid pricing out clients, you might end up underpricing yourself. Retainers can be problematic too – they’re often a tricky sell for new clients, and if your retainer is based on deliverables you might find that it takes longer than anticipated to complete, which would slash profitability. Fixed fees also have issues, scope creep being one of the most common (and harmful).

With output-based pricing, focus and motivation is instead channeled towards the ultimate purpose of your efforts – the quality, impact and significance of the final product. It’s struck a chord with agencies looking for pricing models that are less about the mechanics of labour, and more aligned with a consumer landscape that is increasingly built around ideas of meaning, connection and value.

The pros and cons of output-based pricing

Output based pricing is the most advanced pricing model out there, and can be very effective at increasing an agency’s profits when used well. Once you’ve figured your pricing out, it’s simple to administer, fair, flexible, transparent and accountable. It helps to align the goals of both the client and your agency, and both parties are more invested: clients don’t need to be so fixated on your costs, and your team can focus their efforts on the fun part (creating quality products), instead of stressing over work hours, effectiveness and quantifying productivity.

However, that shared reward does admittedly come with shared risk – the main one being that it can be extremely tricky to figure out what and how to charge. Why? Because you need to define and agree the value of what you’re producing. Some values are fairly easy to measure (and therefore  monetize) than others. Performance-based pricing for advertizing and marketing campaigns, for example, is pretty clear cut – you can tie your pricing to the leads, click-through rates, traffic, conversion rates and backlinks links you secure for a set period. But some outcomes – like artistic campaigns or those tied to raising brand awareness – are more abstract and harder to quantify, particularly when they’re run offline.

Essentially, when the value of your work is subjectively assessed, it can be very difficult to price. A controversial recent UK government advertizing campaign encouraging people in the arts sector to retrain in cyber security illustrates this perfectly. While the government was happy to publish the ad, it sparked a national social media backlash and had to be removed. Using value-based pricing, that should make the ad campaign a complete failure – it didn’t land with its target audience, it didn’t satisfy its founding objective. So should the client still have to pay for that work? Cases like this one raise important questions around who decides what output value looks like – and that, ultimately, has huge consequences for an agency’s bottom line.

Of course, this is before you factor in potential fuzzy creative briefs, client indecision and lack of creative buy-in to your vision – all of which can quickly ruin the quality, impact and value of your final work.

Should agencies still track their hours?

The growing popularity of output-based pricing stems largely from the overwhelming unpopularity of tracking agency hours. Aside from the fact that input-based pricing based on manual timers is extremely inaccurate, agencies resent the overhead, inefficiency and rigidity that logging timesheets incurs. But while we all hate the process, the product is still tremendously important.

Whatever pricing model you choose, it’s always useful to understand how much time your team spends on each project, because:

No company lives in a vacuum: in spite of how strange our working worlds might look right now, deadlines still count. Clients still expect certain turnarounds, internal efficiency still matters, and companies will always need to compete on time to some degree. Having an overview of where project time goes helps to keep teams efficient and focused.
You need to be able to cover unreasonable client delays or extensions: the drawn out review and iteration processes that come with a lack of client commitment quickly makes projects unprofitable. Since output-based pricing puts this risk on the expert instead of the client, it’s good to get an idea of just how much resource you’ll need for different clients.
Time insights inform almost every business function: time data can help teams well beyond keeping projects accountable and profitable. With accurate time data agencies can balance and plan team resources, keep work visible, document overtime, monitor team capacity – all of which help to keep employee engagement and wellbeing front and center.

Ultimately, every agency should have a clear idea about how they spend time – both internally and on clients. Thankfully, agencies can now automate time tracking too, so it doesn’t have to be cumbersome, unnatural or unproductive. Smart AI-powered apps like Timely let you skip right past the annoying input part and get right to the return. It’s a win-win, both for agency and client.

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