How To Use Agency Pricing Models To Maximize Revenue

How To Use Agency Pricing Models To Maximize Revenue

Running an agency is TOUGH.

As a digital agency, you face a host of challenges most B2C companies don’t have to deal with:

  • The “feast or famine” cycle of new business
  • A constantly shifting media landscape
  • Soaring ad rates
  • Unpredictable Google updates
  • RFPs, RFQs, and creative reviews
  • Unrealistic client expectations

There’s a lot to keep up with, and the industry is ever-changing. But one thing remains the same:

Time is money.

And for marketing agencies trying to increase their revenue, choosing the right agency pricing model has never been more important.

For agencies trying to maximize profitability, time-tracking has never been more important. Click To Tweet

How marketing agencies bill their services

Many marketing, advertising, and digital agencies start their business by establishing a standard pricing model. But unfortunately, most of them never revisit their pricing strategy again.

Believing they figured out how to charge their clients, they focus on improving their creativity and adding new businesses to their portfolio.

But your pricing model should evolve alongside your business strategy. Your agency should be testing and optimizing its pricing models to create a bigger impact on your profits, deliver more value to clients, and increase your revenue.

According to a 2018 study done by CMI, 47 percent of companies do not track their content marketing return on investment (ROI) at all. Read this post to see how we do it at Hubstaff.

And it’s easy to understand why. It’s difficult to attribute a sale to a social media post or a blog post article.

However, if you accurately track the time your team invests in each of your marketing campaigns, you can easily come up with a figure that sums up all your efforts. This should help you affix an ROI figure to your campaigns, which can help you sell your services to new clients.

Showcasing your ROI teaches your clients how to value a digital marketing agency. A client might be reluctant to invest $10,000 in a marketing campaign, but knowing that you can bring in $60,000 in new business should shatter their doubts.

There are a lot of different agency pricing models you can choose from that make more sense for advertising agencies than digital marketing companies and vice versa, for example.

If you want to determine the best model for your agency, you should start by examining the most popular ones and go from there.

Agency pricing models you should use to increase your revenue

1.    Project-based pricing model

Also known as a fixed-fee pricing model, this agency fee structure requires you to estimate the cost of a project by calculating the number of hours your agency needs to invest in the project and then adding a buffer fee or a margin.

It’s expected to charge the client part of the money up front and the rest after you complete the project.

Who should use the project-based model?

The project-based pricing model is suitable for clients who want to adhere to a budget and want to know how much a project would cost before they agree to it. Any agency can use it, for everything from digital to brand to SEO to consulting.

This model is also suitable for retainer-based work because you can estimate the number of hours you work on a project or within a month and adjust the billing model.

Potential downsides

One of the problems with the fixed-fee pricing model is that projects often change and evolve when you’re implementing them.

The changes can dramatically alter the project’s timeline or budget, making your initial estimate inaccurate. This might put you in a situation where you either have to send additional bills to the client or reduce your own profits. Both are less-than-ideal situations as your client might get frustrated or you might miss out on revenue.

Another potential issue with the fixed-fee pricing model is that it can be detrimental to your relationship with the client.

As an agency, you don’t want to suggest new ideas to the client midway through the project because that might cause your business to lose out on profits or it might confuse the client.

In addition, every request your client makes might be interpreted as asking for free work. Lastly, the client might feel that your agency only cares about completing the project, not so much about its outcome.

But despite its many disadvantages, the project-based pricing model is very popular because you can make it work to your benefit. Once you’re confident in your agency’s productivity and turnaround time, you should be able to accurately estimate how long it’s going to take to complete a project and make a tidy profit.

And, you can always issue a change order if a project deviates too far from the initial scope or estimate. Just make sure you outline this possibility with your clients from the beginning so they’re not surprised.

To implement a project-based pricing model, you and your team should be experienced at estimating a project’s costs and requirements and have the project management skills to see the project through while making a profit.

And the good news is, you can easily transition from a different price structure to being a contract-based agency.

2.    Hourly rate pricing model

The hourly rate pricing model means that your agency exchanges time for a set price.

Your agency can either charge an agency-wide hourly rate (commonly known as a blended rate), or you can charge the specific hourly rate of each individual working on a project, based on individual skills and experience.

Who should use the hourly rate model?

The hourly rate model is ideal for small to large businesses that work on multiple projects at once. If your team switches from one project to another in a workday, it can be difficult to determine a project’s total costs without using this model.

You might be wondering why determining a project’s goals is important.

As a digital agency, your ultimate goal with proper pricing should be to calculate a project’s cost and ROI so you can sell your services to other prospects. Knowing that your social media marketing expert spent 20 hours on a project out of a total of 40 he or she worked in a week can make a huge difference in your cost estimate.

Even if your team puts in a consistent number of hours each week, knowing exactly how much each team member contributed to the success of a project can help you with managing your employees’ pay rates and their roles within the company.

Potential downsides

One of the problems with the hourly rate pricing model is that it puts the agency’s wants in opposition to the client’s. Your agency gets paid more if it takes longer to complete the work. This can damage the client’s trust in your work, especially if the total costs exceed the estimate.

Another issue is that clients may limit the number of hours spent on a project to fit their budget.

A project that actually takes six hours might have to be completed in two, sacrificing quality or forcing the agency to absorb the cost to ensure the project is done well.

When implementing the hourly rate pricing model, it’s very important to track the time your employees put into each project and to manage the projects efficiently so that you make a profit and can show clients exactly how much time was spent on them.

Track hours and invoice automatically

Streamlined time tracking and billing for agencies

3. Value-based pricing model

Pricing your agency’s services on the value of your work puts your goals in line with those of your client’s. Since only the end result matters, you and the client share both the risks and the rewards.

Your client doesn’t have to be concerned about the agency’s costs, and you can focus on the end result rather than the agreed terms of the project.

Who should use the value-based pricing model?

This is the most advanced of the agency pricing models. The structure is very effective at increasing your agency’s revenue, but it’s also difficult to implement.

Value-based pricing is when agencies quantify the impact of their work by focusing on results instead of hours. This approach can help your client understand the importance of your work.

However, it also requires an agency to use data to track their advertising, branding or marketing work, which isn’t always available.

Most agencies can move to this model once trust has been established with a client, or if the agency is in high demand and is able to prove its value from the beginning.

Of course, with the right tools and processes in place, agencies specializing in anything from market research to media buying to digital advertising can use it from the very beginning.

Potential downsides

If you want to use this agency pricing structure, you need to have a track record of high ROI figures because some clients will be reluctant to pay for something different than a fixed fee or an hourly fee.

Being able to track ROI on any project should help your prospects realize they’re buying positive outcomes instead of projects or time.

When starting to implement, your agency should first determine what’s valuable for your client — leads, engagement, click-through rates, conversion rates, etc. Then, your agency should be able to track and measure your project’s performance and results.

The importance of time tracking

There’s nothing more valuable than time. And if you bill by the hour or project, accurately tracking time is critical to growing your agency.

The U.S. economy loses 50 million hours, or $7.4 billion a day, in untracked time. Click To Tweet

Inaccurate time tracking means inaccurate invoicing, which means one of two things:

  1. You’re not getting paid enough
  2. You’re scamming your clients

(It should go without saying, but neither is good.)

Time tracking isn’t just about getting paid, though. It’s also critical for increasing transparency, building trust, and cultivating long-term relationships with clients.

Before signing off on the latest invoice, clients want to see exactly how time is being spent. Time tracking tools help you do that in a simple, streamlined fashion.

Time tracking for agencies

Time tracking can be especially difficult for agencies. Consider what you’re up against:

Employees jump in and out of multiple projects, and time isn’t always tracked to the right project — or recorded at all.

Working with a mix of full-time employees and part-time freelancers means time is often tracked using multiple systems and processes, and making sense of it all can be a nightmare.

On top of all that, the folks you work with are super creative — they’re great at executing cutting-edge marketing campaigns, but often less enthusiastic and disciplined about filling out timesheets.

Start maximizing your profits today

Hubstaff offers a 14-day free trial

How to make timesheets work for your agency

To make timesheets work for your business, you need to ensure three things:

  • They’re easy
  • They’re accurate
  • They get done — and done well

Fortunately, technology makes accurate time tracking for agencies easier than ever before.

Time tracking software is easy-to-use, affordable, and accessible anywhere for employees and freelancers alike — in the office, at the coffee shop, on the plane, wherever…

It’s easy

Traditional timesheets are tedious, cumbersome, and prone to errors.

Time tracking software eliminates these issues. With user-friendly timesheet apps, tracking time is as simple as clicking a button on your desktop, smartphone, or tablet.

More advanced time tracking apps even integrate with project management tools like Asana, Trello, and Basecamp, so tracking time between projects and tasks is easier than ever.

When it comes time to run payroll, some time tracking software even integrates with popular payment, accounting, and invoicing tools like PayPal, QuickBooks, and Payoneer.

It’s accurate

The best time tracking software tracks time to specific projects and generates reports automatically, so you can understand at-a-glance whether or not time is being spent efficiently — no time-consuming data-crunching required.

Some automated time tracking apps even included built-in safeguards like idle timeout, which detect inactivity and ensure that time tracked is actually time worked.

For managers and clients alike, time tracking software offers real-time insight into employee activity levels, app usage, and even screenshots.

Teams working at multiple job sites can even utilize GPS time tracking to track time to specific locations.

It gets done — and done well

Of course, even the most accurate time tracking software is useless if people don’t actually use it.

Today’s best time tracking apps make adoption and compliance simple, with desktop apps available for Mac, Windows, and Linux, and mobile apps available for iOS and Android.

With automated time tracking, ensuring employees compliance is easy, and agency managers and clients alike can rest assured that time reports and invoices are accurate.

Why timesheets are crucial for an hourly-based pricing model

Some voices within the marketing industry say that using an hourly-based pricing model limits your profit margins. According to these sources, the billable hour pricing structure makes it difficult or even impossible to predict your monthly revenue because your agency’s number of billable hours differs from month-to-month.

For example, if your agency has to submit two projects for big accounts in a single month, your employees will put in a lot of hours to ensure that happens.

If the next month doesn’t include any major deadlines, your agency’s workload might look completely different. This makes it difficult to estimate what your agency’s six-month trajectory might look like.

The hourly-rate pricing model can also be affected by a variety of elements, including factors such as employee onboarding, time off, sales efforts, or personal productivity. Some of these elements are billable, but others are not, even though your employees still put in the time.

However, you should be able to break down every project into smaller stages that are easy to track.

Once you identify your billable and non-billable tasks, you can create an estimated cost for every project and add time for unexpected events.

Non-billable hours are part of every project. Whether it’s following up with payments, setting budget limits, or checking in on team members, these hours will increase your agency’s workload without increasing your revenue.

Unless, of course, you optimize these processes.

How to optimize your agency pricing models and improve your revenue with Hubstaff

Hubstaff helps optimize your agency pricing model and improve your revenue by cutting back on the most common small business expenses and automating your non-billable tasks.

Here’s how it works

1.    Smarter, simple time tracking

Agency leaders know how difficult it can be to get teams to fill out timesheets.

Hubstaff is available as a desktop app for Mac, Windows, and Linux, or as a mobile or web app. Team members can track work hours to specific clients and tasks no matter when or where they’re working.

The timer is easy to start and stop, so there’s no need to write down hours and record them later. When it’s this easy and streamlined, capturing work hours becomes a breeze.

And if you run an agency, you know how important this is. Drew McLellan actually calls timesheets the “key to agency profitability.” McLellan reminds agency managers:

“The data you collect through timesheets will make evident what you’re doing well, and it will also demonstrate where there’s room for improvement. Most importantly, it will reveal the profitability of each client by illustrating the time spent on every project.”

2. Automate payment process

The days of payroll outsourcing are gone. Payroll outsourcing could cost a 10-person company more than $3,000 per year. Hubstaff premium simplifies that process by automating your payroll. All you have to do is enter the pay rates for each of your employees, choose a payment integration service, and select a regular payment schedule.

This not only ensures that the member of your team benefit from a 100% accurate pay because you’re paying precisely for the time they worked, but it also means that you’ll never charge your clients more than you should.

3.    All-in-one team management platform

Using an all-in-one team management platform saves you both time and money.

Switching between apps to track vacation and time off, pay team members, and check how many hours your employees have worked can be time-consuming. Not to mention expensive. Time tracking software can cost up to $25 per month for every single user.

With Hubstaff, you can view hours by day or week, monitor your team’s workload, set budgets, and manage your employees’ time off and holiday requests.

This will reduce your team’s non-billable working hours and should improve your ROI calculations.

4.    Set weekly limits and idle time settings

Accidental overtime can put a dent in your profit margin. Without supervising your team, you risk paying more overtime than you would expect for a project. And keeping a close eye on your employees only increases your personal non-billable time.

Hubstaff helps you avoid paying overtime by placing weekly hour limits for each team member. Once you set the number of hours for your employees, each of them will receive a notification before reaching the limit.

In addition, when a team member doesn’t stop the timer and goes idle, Hubstaff automatically removes that time or gives the employee the possibility to decide whether to keep the time or remove it.

Hubstaff will also remind your team to submit their timesheet for approval, so you won’t have to personally notify each of them.

This will help you estimate your team’s productivity and turnaround time, so you can make more accurate estimates for how much a future project will cost.

Make your agency more profitable with agency pricing models

If you’re running an agency and billing clients by the hour or project, the success of your business depends on accurate time tracking.

Not only does tracking time tell you (and your clients) who did what when, but it also provides valuable insight into agency processes, so you can proactively identify bottlenecks and correct inefficiencies.

But traditional timesheets make ensuring compliance difficult, and they’re often riddled with inaccuracies.

Fortunately, today’s timesheet apps require only a small investment in automated time tracking that can increase efficiency and profitability with minimal effort and employee discomfort.

Finding the right pricing model and implementing it successfully will increase your agency’s revenue.

This post was published August 11, 2017, and updated July 2019. 

Agency Advantage 50: Rich Brooks On Growing Your Agency By Building A Brand

In this episode of Hubstaff’s Agency Advantage Podcast, I’m talking with Rich Brooks of the web design and internet marketing agency flyte new media. In addition to running his agency, Rich runs the annual Agents of Change conference in the great state of Maine, and also hosts the Agents of Change podcast. Today we talk about…

Agency Advantage 47: Casey Cobb on How to Avoid Accidental Evil

Casey Cobb [Twitter] is the founder of the 25-person design and development shop, Project Ricochet, but he is also an inventor, angel investor, writer, speaker, and has co-founded 2 other companies. In this interview, Casey shares with us a concept that describes why working with a team can be so miserable sometimes. That concept is…