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Money Talks: What Goes into Ad Agency Pricing?

Few conversations between agency and client are more difficult or uncomfortable than pricing discussions. Let’s face it—money talk is fraught with booby traps and land mines for average agency people. And relatively few agency owners come from financial backgrounds, so as a group, we’re just not that comfortable talking about money. However, if you want to control your own destiny, you need to be able to conduct honest, rational conversations with your clients about agency pricing.

Sometimes, the mere ability to have an honest, open conversation about money is the most important part of talking money with the client. Your prices need to be set to allow your agency to make a fair profit. Clients who won’t accept fair pricing are not clients you should aim to acquire. That’s why the best pricing strategy is one that is coupled to a disciplined and consistent self-promotion and new business program. Attracting the best clients allows you to pick and choose whom you will work for—and being in demand means you have more freedom to control your own pricing.

Regardless of the type of client you are speaking with, there are some considerations you should keep in mind.

How important is price to your client? If a client decides who gets a project solely on price, your agency’s pricing needs to be as accurate as you can make it. Further, your scope of work must be very specific. But, if they consider other “intangibles,” such as depth of experience, industry knowledge, responsiveness, customer service, turnaround, customer knowledge or even geographic location, you may have more leeway on price. Try to gauge how each client perceives agency services as a guide for structuring a pricing discussion.

Be sensitive to chemistry.  Clients may be more amenable to giving the agency some pricing freedom if your agency excels at clear, concise communications; if you have a history of measurable success (i.e., you make them look good to the C-suite); or if your agency and the client just plain work well together. This is another area where a strong bond between agency and client can smooth your path. Work hard to achieve client-agency intimacy, and you’ll be rewarded with fewer arguments regarding pricing.

Know your pricing types. Every client requires a custom approach these days. How you set or negotiate price depends on your relationship status, level of project, and whether you work on retainer, by fee or more as a consultant. Typical pricing strategies include:

Project-based – This is common for new client relationships. After working with a client, you can make pricing adjustments based on how you work together, how scope of work changed, how successfully you worked together, etc.

Package-based – You create a level of project (low, standard, high), and use that as a basis for pitching the client. Each package level allows for X number of concepts, X number of pages, X number of revisions, etc. Anything over the designated “scope” is additional. Use this to add structure to an otherwise open-ended project.

Retainer-based – While retainers are designed to cover most costs incurred for clients, agreements should specify what isn’t covered. Also, agencies are responsible for tracking hours against retainer. If retainer hours are regularly exceeded per month, the retainer will need to be adjusted. Agencies should use project scope standards internally to keep projects within the range covered by the retainer.

Time-based – This applies to projects that take as long as they take, including website maintenance, data analytics, etc. Time-based billings require that agencies carefully set hourly rates (which should be adjusted regularly), and charge in hourly increments or at day rates, depending on the task being billed. A day rate can help shift you toward consultative status. Time must be posted daily to a tracking system, and ideally integrated with accounting.

Factors in Determining a Price

To accurately—and profitably—arrive at a project price, you must consider factors beyond mere hours and materials. Use the following outline as a guide for building a pricing template.

As agencies shift to new models of compensation and billing, how you determine—and justify—pricing will become more critical to controlling billings and agency profits. Begin now to master better pricing tactics. Your agency will be stronger for your efforts.

Download a sample Pricing Worksheet.

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