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Escaping the Hourly Pricing Model

Escaping the Hourly Pricing Model

Too many smaller ad agencies and marketing firms are caught in a trap of their own making. That trap is their pricing model. 

Many agencies began as the proverbial two guys/girls with a Mac, and defaulted to the old billing model of tracking hours and adding a markup for profit. But in today’s environment, clients are demanding greater accountability; abandoning agency of record relationships (AoR) in favor of project assignments; and putting immense downward pressure on agency fees. These combine to create a vendor mentality in clients, and agencies still using hours-based pricing feed right into that thinking. 

Time and Materials = Vendor

When you charge by the hour, the focus is on time and materials. Time-based pricing gives you very little control of profit management, and the better you are (faster, more efficient and more responsive), the less you make. You may also be tempted at times to under-estimate a project just because you need the work, further positioning your agency as a commodity vendor who can be pressured to cut prices on every job (as well as revealing your desperation).

You should focus client attention on the value you bring through elevating the brand, delivering on client objectives and identifying and exploiting opportunities, all with smart, strategic creative work. 

How do agencies escape hourly, vendor-style pricing trap?

Benefits of a Better Pricing Model

Having a well-conceived pricing system accomplishes a number of things: 

  • You stop offering desperation pricing to get a project;
  • You focus the agency as well as the client on the results delivered, not on cost; 
  • You greatly simplify your billings—there’s no need to compile hours and costs, since those are built in to your approved estimate and scope of work;
  • You worry less about lost billings, a.k.a., slippage, since your price is based on what a job is worth—you may even gain a bonus based on exceeding client objectives; and
  • Clients stop treating you as a vendor or expense, and treat you more like partners/consultants who deliver value and results.
     

Better Methods for Ad Agency Pricing

While some clients (government agencies and some corporations) may require hourly/time-based pricing, there are other, better ways to develop pricing.

Value-based Pricing – Set your price based on outcome or usage—the value you deliver. Your price is a percentage of total revenue or pre-agreed results (return on objective). Value-based pricing also charges a premium for your expertise.

Project-based – You develop a scope of work with key performance indicators, set the timeframe, discuss the value to client, calculate your desired profit margin, and estimate expenses. Use a pricing template to work the calculation.

Package-based – This model is good for standard projects that fit a “typical” pattern. E.g., website design may have several possible “packages,” depending on whether you are building a basic template-style site, custom-designing the entire site, including hosting and site post-management, etc. Packages may include a monthly retainer, based on a set of agreed upon services (scope!) paid for over time with regular or phased payments. More administration is involved; because it is a little more complicated, it is not advisable for new or first-time clients. Some negotiation may be needed. Try to avoid retainers based on hours, as that draws you back toward hourly pricing. If you must include hourly rates, use a blended agency rate. Closely manage project scope, detail what is not included in the package price, and include guarantees for over/under-use.

Look for opportunities to move from hourly to other pricing strategies with new clients, or clients expanding the agency’s workload.

Other Pricing Strategies

Beyond establishing a preferred pricing model, test these additional strategies.

Use pricing psychology. Present your pricing options, with “our most popular package” highlighted. Price in tiers and detail what you get with each tier. When clients press you to reduce fees, make sure they know lower fees means fewer services/inclusions.

Negotiate terms, not price. Adjusting payment schedules or the number of payments is superior to cutting your price, and often satisfies the client’s cash flow concerns. Another way to hold firm on price is to offer an additional service or benefit—increase the value, but never lower your price.

Split extra costs. Who pays for designers’ learning curves on new skills, knowledge or research? Do you consider these as outside the project scope, amortizable to future clients… or build it into the pricing model? Explain your “usual” practice, but be prepared to negotiate with some clients.

Consider hybrid pricing. When you control your pricing, you get to decide whether to customize a price per client. Consider a hybrid of value-based and project-based with scope management; build in an hourly or retainer fee for exceeding the agreed project scope.

Keep it simple. The simplest possible pricing strategy reduces billing confusion for your accounting department and the client.

Take time to determine which pricing model will best serve your agency, and free you from the vendor/hourly rates trap. It will be the best thing you’ll do for your agency this year.

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Milestone Billing: A Strategic Cash Flow Tactic

Closing Your Agency’s Realization Gap

Four Methods for Stronger Ad Agency Billing

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