Fee setting in marketing agencies: Top tips

A pricing strategy refers to the methods by which companies define the sales price of their products or services. It is a common misconception that profit is the main driving factor in pricing. While this is true to some extent, there are many other considerations and factors to take into account when setting prices.

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One of the biggest challenges in marketing agencies today is undoubtedly setting the right prices. Although the prices may vary in each agency, you have to make sure you receive consistent profit margins linked to the resources and time invested. In this article, we share with you the most implemented alternatives that the market provides for pricing in marketing agencies.

Before you start setting prices for your services, you should take into account the following factors that influence the setting of rates:

• Local economic conditions.
• Competition in the market.
• Production and distribution costs.

Importance of pricing

Pricing strategies are important for several reasons:

• They maximize profits. 

  A well-designed pricing strategy contributes directly to a company's bottom line. This doesn't just mean charging as much as possible, but pricing smartly to gain market share and retain customers.
  
  

• They reflect the brand.

  A company's price point reflects the value of its brand and market segments. For example, let's take Apple's iPhone. The relatively higher price of this product helps to represent Apple as an experiential, avant-garde, high-quality brand.
  
  

• They attract the right customers.

  Similarly, the price of a product or service represents its perceived value. A high-priced service could be considered expensive or high quality depending on the market segment. Whereas a low-priced product could be considered cheap and poorly made. In this sense, pricing in marketing agencies is almost a marketing strategy: attracting the right kind of customers and keeping the wrong ones away.
  
  

• They leverage growth.

  Many agencies focus on acquisitions as a growth tactic, but conducting price and change analysis can also help drive growth.

Different types of pricing strategies

There are many different types of pricing strategies, and the most effective one depends on your business goals. Next, let's take a look at the most common pricing strategies.

1. Hourly pricing strategy.

Hourly pricing is where marketers, often freelancers, set their prices based on time. They define an hourly rate and then calculate how long a project will take them according to the number of hours.

Hourly rate x estimated time for the project = price

A professional's hourly rate depends on a variety of factors, with geographic location and experience being the most important. Customers are much more likely to understand the cost of a project when they see how many hours will be invested. And for the agency, it ensures a fair rate. However, not all companies and agencies show the transparency they presume and at the same time, it can work against them if they budget for x amount of time and it takes more than necessary.

Consequently, the biggest challenge to hourly pricing is increased scope, rework, and inaccurate time estimates. For example, developers estimate that they can complete the project in 10 hours, but the customer requires a lot of work and meeting time. In the end, the project takes over 15 hours to complete. Developers can't charge the customer more, so they end up working for less.

2. Project-based pricing.

Project-based fee-setting is when agencies and freelancers charge a fixed fee per project, rather than charging by the hour. The fee is based on the perceived value of the deliverables or the estimated time for the project.

The advantage of project-based pricing is that it provides clarity to customers since they know exactly how much the project will cost them. Compare this to hourly pricing, where the customer won't know how much the job will cost until it's completed.

However, the increased scope is a real problem with project-based pricing, and marketing agencies need to be clear from the start how much rework is included in hours. Many agencies accept several small changes from customers, which soon add up and affect the overall profitability of the project.

3. Price based on value.

Value-based pricing is based on customers and what they are willing to pay. To adopt value-based pricing, marketing agencies must first define their market segments to create value and define the right price for their target market.

The advantage of value-based pricing helps build customer loyalty as the service is centered on the customer and therefore the customer's desired outcome. It also helps drive a higher profit margin, because it doesn't take into account competitor prices or discounts.

Still, value-based pricing requires a lot of research into market segments and time spent creating customer avatars and defining buyer personas. It can also be a case of trial and error until a business figures out what customers want and how much they are willing to pay. Value-based pricing is also prone to price-cutting by competitors.

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What are the challenges of using rate settings in marketing agencies?

While project, hourly and value-based pricing are the best strategies for marketing agencies, we have found that they are not without their challenges. Here are some of the most common problems for marketing agencies using these pricing strategies:

1. Scope slip.

This is where the workload creeps up on the project, creating additional tasks that were not included in the project price. Meetings with customers and reworks are common causes of increased scope.

Wanting to create value for their customers, many marketing agencies accommodate customer requests, even if they go beyond the scope of the project. This is a problem because it leads to longer completion times, which hurts profitability.

2. Time tracking.

As with increasing reach, when charging by the hour, many marketing agencies find that their projects take much longer than anticipated. This is because many companies do not track time accurately (or not at all) and therefore, lack the data to back up their time estimates.

Because they don't have an accurate idea of how long projects span, they miscalculate their time investment and often don't get paid for all billable time. This means lower hourly rates.

3. Transparency. 

With hourly rates or value-based pricing, marketing agencies often have a hard time justifying their prices to customers. This means that they cannot negotiate better rates and increase their profit margins. This is due to the lack of transparency around the project, which makes it clear that customers find it difficult to perceive the value, as they do not fully understand the work involved.

Lack of transparency often manifests in a lack of operational visibility within a marketing agency. If an agency doesn't have visibility into its workflows and resources, how can it share this information in its dealings with customers?

4. Efficiency. 

Marketing agencies need to make sure their project teams are working as efficiently as possible to protect their margins and fees. The problem is that many companies have not yet embraced digital transformation and automation, so creative teams waste time completing time-consuming and repetitive tasks like invoicing. And this means that team members spend less time on billable work, which directly impacts profitability.

5. Quality of deliverables.

With a lack of time tracking and automation, project completion time is often underestimated. This means creative teams have to spend more time than planned working on deliverables, for the same fee.

This devalues the hourly rate, which harms morale and, in turn, the quality of deliverables. It also demonstrates that creative team members can take on work beyond their capacity, which can lead to burnout and high staff turnover in agencies.

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In general, terms, setting rates in marketing agencies is still a sensitive issue that requires a thorough analysis and discussion with the members of the agency, since not all pricing strategies will be equally effective in all cases and for each customer.

Some marketing agencies may rely on the hourly model, it is profitable for them and customers have no problem paying for the number of hours worked on a project.

However, charging by a project could offer greater transparency for customers, as well as charging by value. The biggest challenge of these pricing strategies is the possible increase in the scope of a project, which is incompatible with the established budget. Implementing monitoring of the processes and stages of the project can significantly reduce speculation and future financial risks.