Getting your pricing system right is one of the most important things you can do. Aside from profitability, your pricing impacts multiple aspects of your agency: from client satisfaction and staff happiness, to retention rates, who you hire and who you work with. So how do you decide which pricing structure is best for you? To help you make the right call, we’ve broken down the four most common pricing structures and isolated the factors you need to consider.
Agency pricing structures
Although more common among freelancers, hourly rates are still a popular agency choice, and often clients’ preferred way of paying. People tend to feel comfortable with hourly rates and understand the way they work. But, as with anything, there are pros and cons.
Hourly rate benefits- Ensure you get paid for all your work- Conventional and easy to secure, so popular with clients- Allow you to charge for overtime- Protect you from project scope creep
Hourly rate limitations- Difficult to gauge the total amount - Don’t reward or incentivize fast work (the quicker you work, the less you get)- Requires close monitoring and tracking of billable hours- Can limit profitably due to the finite number of working hours
Fixed rates or project rates are generally the most popular agency pricing structure, mainly because they are so straightforward – both for agency and client. It’s super easy to give and accept quotes in a quick and uncomplicated way. But it might not always be the best choice for certain types of work.
Fixed rate benefits- Simple to use; you don’t have to keep hyper-detailed time records- Prices confirmed at the start are easier to manage and prevent scope creep- Promotes efficiency: you’re paid for your work, not your time- Makes it easier to vie for jobs when you can state a price outright
Fixed rate limitations- Profitability depends on how accurate your estimate is- Less flexibility to adapt to modifications in project direction- Unexpected amends can eat away at your profits- Can be a dangerous choice for new, unchartered projects
There are two types of retainer: time-based and deliverables. Time-based retainers involve clients agreeing to buy a fixed number of hours each month (e.g. a 10 hour/month retainer at $100/hour means the monthly retainer would be $1,000). Deliverable-based retainers depend on work completed (e.g. if you agree to write 10 blog posts per month for $1,000, you’re obliged to do that – and the client is obliged to pay, no matter if it takes more or less time than anticipated).
Retainer benefits- It makes budgeting and accounting simple for clients - You get a guaranteed income every month- Reliable and predictable workstream- Reduces the requirement to find new clients
Retainer limitations- Can be expensive and opaque, so often hard to sell to new clients- Can limit profitability if projects take longer than planned - Requires careful scheduling to ensure there’s always capacity
Value pricing involves a more complex structure, and as such is one of the more problematic pricing methods an agency can use. Rather than basing the price on time, deliverables or a fixed rate, the client gets bills at the end of the project based on the worth they got from the work. Usually deemed as pretty risky, value pricing still has pros and cons.
Value pricing benefits- Promotes a high quality of work- Attractive to clients as it’s performance-based- Offers flexibility for the agency to set prices
Value pricing limitations- Can be tricky to accurately estimate the worth of work- Very risky for the agency – you have little insurance on return- Situations out of your control can reduce profitability
How to decide which pricing structure to use
It’s a minefield, but there is a simple two-pronged approach you can use to find the optimum structure for your agency's work.
First, you need to look at past project performance to benchmark costs and requirements: work out how much time you spend on similar projects, how many people you needed and what tasks they involved. If you’re not sure about this, use an automatic project time tracking tool, which captures and neatly displays all this project information for you.
Then, consider past findings against the situation-specific context of new work. Consider the complexity of the project, your own internal costs (e.g. project management and project communication), the anticipated amount of client involvement and creative direction, and the “newness” of the work.
A few agency pricing tips
Typically, hourly rates are suited if you work with indecisive clients; it’s one of the best ways of protecting yourself against expensive scope creep. They’re a good bet in any situation where you aren’t certain how long a project will take.
Fixed rates are better if you can accurately assess how long a project will take, or you’re working on a project with a distinct deliverable. They’re a good choice for building more solid relationships with clients, since they set clear cost expectations and help clients budget consistently on their side too.
Retainers work well with established clients where you’re able to do lots of work for them each month, and are often the agency pricing structure clients are most familiar with.
Don’t be put off by the idea of value pricing – it can work really well if you’re a specialist agency. While risky, it can be pretty lucrative.
Bear in mind that it can be tricky to estimate a good fixed rate for new territory – you might want to use hourly rates for completely new work, so you can build an inventory of what that project actually looks like. This will then help you to establish more honest and profitable fixed rates for similar future work.
You also don’t have to use a blanket pricing structure across all your work and clients. Many agencies like to pick and mix hourly fees with flat rates and retainers, depending on factors like the newness of a client relationship and the nature of the work itself. Just be sure to track and review all your projects to make the most appropriate choice for any given situation.
Just remember that the right pricing structure should benefit your clients as well as your agency. Pricing is central to reinforcing accountability and honest dealing – delighting clients and securing collaboration for the long-term, rather than just protecting your profitability now.
Accurate project time tracking doesn’t have to be a burden – try automating yours.