Choosing a pricing model for a local marketing agency that works best for you and your clients can be one of the most difficult decisions you could make.
The pricing model you choose can have an impact on your profitability, how you sell, who you recruit and the types of clients you serve.
As such, it’s important that you get it right. There are many factors that can determine the pricing model for a local marketing agency which will be addressed in this article.
We’ll explain everything here: what is the best pricing model for local businesses, why it matters and how to use it effectively!
Why is it important to have the right pricing model?
The right pricing model for your marketing agency will help you boost profitability, attract the right type of clients and run the operations sustainably.
Let’s look at each in turn!
A profitable pricing plan immediately affects a company’s bottom line. This doesn’t just imply charging as much as you can, as we’ve already mentioned; rather, it means pricing strategically to gain market share and keep clients.
Attract the right clients
Choosing the right pricing model for your agency will help you target the type of clients that you would want to eventually be working with.
For instance, if you want to focus on serving clients that require custom design solutions, you would have to charge premium prices compared to those requiring templated designs.
In essence, the right pricing will move away from you attracting the wrong type of clients.
Scale the agency sustainably
To ensure that you don’t burn out, it’s important that you have steady cash coming into the agency in the form of revenue. This is especially important if you have a team reporting to you since you will need to pay the bills regardless of how well the company performs.
To ensure you scale and run the agency sustainably, you need to have the right pricing model in place.
One that works best for your clients and one that can help you easily sustain the operations in the long run.
Types of marketing agency pricing models
The pricing model that you choose should correspond with your agency’s business model and the types of local marketing services that you offer. This will ensure the revenue and costs are aligned.
Broadly, there are 6 types of pricing models that agencies can choose from:
- Time based pricing
- Project based pricing
- Performance based pricing
- Package pricing
- Value based pricing
Let’s explore each of these agency pricing models in more depth in the context of working with local businesses.
The hour-based approach is the most straightforward and well-liked among most agencies. In fact, when an agency initially starts out, this is the model they look at first. Simply put, this is where you bill your clients for the time you spend managing their accounts.
One of the biggest advantages of this type of pricing model is that it is very easy for clients to understand and allows them to pay for services only when required, which is attractive for them.
Although there is nothing inherently wrong with time-based pricing structures, restricting your income to your time will prevent you from scaling your agency.
You can only work for a certain number of hours each day. High hourly fees can be a major turnoff for prospects as well, depending on your market or niche (at least if you’re selling on time).
In essence, the hourly fee model puts the value provided to the client below the time spent on a job.
Another straightforward price structure is a project-based pricing approach, in which you bill your client by clearly set deliverables.
For instance, if you run a local marketing firm, you might charge a set rate for website development, optimizing for search engines, creating and maintaining a Google Map listing, managing reputation online etc.
Agencies benefit from the project-based pricing model since you may set prices based on your competence rather than your availability (like in the time-based pricing model)
Because it allows customers to test you out before making a longer-term commitment, project-based pricing is popular with clients. It’s similar to test-driving a car before making a purchase. However, some clients find project-based pricing difficult because they feel it lacks transparency; because they are unsure of your hourly rate, they fear being overcharged.
A more profitable pricing mechanism yet equally liked by clients is the performance-based model. This is ideal if you can explicitly link the work your agency provides with a certain outcome, like greater sales—and you’re convinced that your work will deliver on that outcome.
This works well for local businesses as they usually tend to have clearly defined metrics such as revenue, conversion rates, cost per acquisition, average order value etc.
To make this work, agencies must decide on conversion criteria, the value of each conversion, the tracking and sharing procedures, and the performance payout schedule with their clients.
Package pricing can help a firm get off the ground, but it also runs the risk of making your services appear to be a commodity. Setting your charges in advance without first analyzing the client’s issue puts your requirements (money) ahead of theirs (effective solutions).
It’s more suited for a productized service business model whereby a local marketing agency (SEO) firm might sell a productized service that provides its clients with a certain number of links or pieces of high-quality content each month rather than acquiring high-end retainer clients one after the other.
Alternatively, you could charge clients based on the number of locations local businesses want to optimize just like how the team at WebFX does it.
When a customer hires you on retainer, they consent to a pre-arranged and upfront charge for either a predetermined period of time or a predetermined number of deliverables.
The closest thing to a regular salary is a retainer, which is a pre-determined and pre-billed charge for a specific amount of time or amount of labor.
This can be time-based; for instance, the client might agree to pay $10,000 for 100 hours per month at a rate of $100 per hour.
The other option is to base it on value. In this scenario, the client may outline the features or deliverables they require and agree to pay $10,000 each month for the work, no matter how long it takes.
In most cases, retainer-based agencies are more profitable than those that employ the prior models. This is so that their pay is unrelated to their time commitment. With this method, it makes no difference how long it takes you to finish the task at hand—you still get paid.
Clients prefer retainers because they find budgeting and accounting to be simple. They also know exactly how much and when they must pay you each month, which simplifies the billing and payment process.
Value based pricing
The value-based pricing strategy for agencies is the most profitable. Value-based pricing is incredibly scalable and completely independent of the number of hours you put into the project.
Value pricing takes into account the perceived value that a client places on various deliverables as well as the price they are ready to pay for your services. It does not focus on the value that is generated by your services.
As a result of their client’s anticipation that they would receive more value from their work—for example, because they have a stellar reputation or have had great success on similar projects in the past—agencies that use value pricing frequently have a competitive advantage.
How to charge local businesses for marketing services
As mentioned above, one of the main goals of pricing is the ability to manage the business sustainably – which also translates to managing the cash flow efficiently.
Let’s look at 3 different ways you can charge your clients (which depends on the pricing model that you choose)
It can seem counterintuitive to take candy from a baby when trying to persuade customers to part with their hard-earned money up front.
Only retainers or project-based pricing models can effectively use this method of payment collecting because it is incompatible with the hourly pricing model.
On the other hand, you have the option of collecting your payments when the client receives your project.
While customers will be delighted with this pricing structure, it could seriously harm your business because some customers may simply stop doing business with you when you finish the job, give them an invoice, or attempt to renegotiate.
However, it can undoubtedly aid start-up agencies in obtaining consumers. It is suitable for businesses that charge hourly and project-based prices.
The performance-based pricing approach is typically used by agencies, who bill after completion.
When employing a project-based pricing model, a 50% advance payment and a 50% payment upon completion pricing structure works best for both you and your client. (Alternatively, some organizations divide this into thirds or quarters, with payment occurring after achieving specific goals.)
You can pay for your upfront expenses by charging a proportion up front. The security of knowing they won’t pay until they’re satisfied gives your client peace of mind.
The project, retainer, and value-based pricing models all benefit from this method of payment collecting. The performance fee is frequently added on top of an upfront payment by agencies who use the performance-based approach.
Factors to consider when determining the pricing
Choosing the right pricing model is never an easy decision, so here are some things you could consider when weighing the pros and cons of each:
- Systems/structures you need to have in place: Whether you’re going with an hourly, performance-based or time-based pricing model, there are certain things you’ll need to have in place to support it. These include time tracking software, analytics and a tool to keep track of your invoices.
- Types of services you offer (ongoing vs one-off): If the types of services that you offer as a marketing agency are one-off (like website development), then you are likely to charge a project-based or hourly-based pricing. On the other hand, if you are offering continuous support to local businesses, you could get them on a fixed retainer.
- Kind of clients are you going after: If your potential clients have never worked with an agency before, the high fees typically come along with value-based pricing are going to be a hard sell. If you’re going after brand new clients, they might be hesitant to go with a retainer until after they’ve worked with you on a few projects.
- Importance of client retention: The lifetime value that local businesses have on agencies are generally high and therefore you would want to adopt strategies that improve the client retention. One way to do this is to get clients on fixed retainers that are attractive enough for them to stick with you.
- Ability to upsell to clients: If your intention is to make more money off of your current customers, your pricing strategy should reflect the same. For instance, if you offer WordPress development services, you can persuade a customer to buy a premium service package that is more valuable to them.
What is the best pricing model for a local marketing agency?
Picking a price strategy might be challenging. But now that you are aware of the advantages and disadvantages of the various agency pricing models (as well as the circumstances in which each model is most appropriate), you are equipped with the knowledge you need to accurately set the price for your agency’s outstanding work and make a killing in the process.