4 Marketing Agency Pricing Models and Which You Should Choose

Deciding how much to charge—and how to structure your marketing agency pricing—is a choice that can make or break your company’s long-term success. Here are your options, plus how to know which model to use.

Hourly Pricing Model for Marketing Agencies 

When marketing professionals quit the traditional 9-to-5 and launch their own solo consulting business, they often start out trading their time for cash. The most enduring—and often agonizing—question is, “How much should I charge?”

Wise leaders know that the answer to this question is crucial to the business. Price your services too high, and you’ll scare off good clients. But charge too little, and you won’t make enough to cover your expenses, attract quality talent, or pay yourself a healthy salary.

The perfect medium entices well-paying clients that value your service. And when that happens, your well-funded operations hum like an engine. You can afford to deliver quality work (that performs) and generate new business based on referrals from happy customers.

Credo’s 2019 digital marketing industry pricing survey revealed that, on average, U.S.-based digital marketing firms charge $167.28/hr.

That said, every marketing agency is different.

To calculate an appropriate hourly rate for your agency, simply add up all your monthly operating expenses (minus payroll) and divide that total by the number of hours your firm works each month. This, plus the hourly rate of everyone working on the project, is your hourly cost. The final step is to decide how much profit you’d like to earn on each hour of work performed for customers and tag it on.

Hourly Rate = {[(Operating Expenses - Payroll)/Working Hours] + Employee Compensation} + Profit

Experts at Promethean Research found that, on average, marketing agencies make 10–25% net profit.

CSI Market data shows even higher margins, specifically for advertising agencies. Depending on your profit goals, add your percentage to the total for an hourly agency rate.

Pros and Cons of Hourly Pricing

Charging by the hour has some benefits.

PROS

First, it’s easy to calculate. The formula above is as complicated as it gets. It’s simple for you, the agency, to explain. There’s no nuance involved. The clock needs no explanation.

This makes it easy for clients to compare agencies and choose one based on what they receive in exchange for the hourly rate.

It’s also flexible. When hiccups arise, you can handle them, knowing you’ll be paid for the extra work by billing hourly.

CONS

This model isn’t perfect, however.

“I discovered early on that the billable-hour model was a flawed, archaic, agency-centric system that wrongly tied agency performance to outputs, not outcomes,” writes PR 20|20 agency owner Paul Roetzer. And that makes sense. This marketing agency pricing structure doesn’t compensate you for value added or reward you for your product’s performance. You spend time and energy on calculating hours instead of creating value. And, like it or not, the structure demotivates creatives to work quickly.

“In the traditional agency pricing model, you have to navigate the frequent disconnect between the work delivered and the number of hours billed for with the customer,” says Haley Bryant, COO of content marketing agency Animalz.

“Time tracking also creates avoidable overhead for the team. Any available work time should be devoted to helping the customer achieve their goals, not figuring out how much to charge the customer or stressing about either not hitting or exceeding the designated hours per month.”

Finally, if you’re not careful, this model lends itself to after-the-fact sticker shock. Let’s say a client calls you to add a service to an existing scope of work. Under the hourly billing model, you execute, assuming they’ll be fine with a higher end-of-month bill. That assumption may sour the relationship, or worse, your client could even refuse to pay.

Project-based and Performance-based Pricing Models for Marketing Agencies

This model, which has also been called deliverable- and milestone-based pricing, are when a client pays you based on a completed project or achieved goal. It does not necessarily mean payment comes “when the job is finished.” It can include the agreement of 50% payment upfront and 50% on completion or another milestone-based schedule.

Mike Skeehan, owner of the global growth marketing agency Salted Stone, explains the best way to calculate a marketing project rate.

How Marketing Agencies Calculate Project-based Pricing:

• •    Tally up the total hourly value of individual production-oriented people involved in the project, and multiply this total by three. This is that person’s “rate.”
• •    Predict the number of hours the project will take—per employee. Multiply this total by each person’s “rate” (calculated above).
• •    Add 25% to the total. This cushion will cover any expensive, mid-production surprises.

The sum is your project rate.

Pros and Cons of Project-based pricing

While the formula is slightly more complicated to calculate, this marketing agency pricing structure has its advantages.

PROS

• •    Like the hourly agreement, this plan is also easy to understand. You know when you’ve completed the project, produced the deliverable, or achieved the goal.

• •    Also similar to the hourly plan, a project-based plan is easy for clients to compare. They can choose an agency based on well-thought-out proposals.
• •    It’s great for showcasing previous examples. Project-based work produces a portfolio of similar use cases to promote.
• •    Your team is motivated to be more efficient. Project-based marketing agency pricing incentivizes teams to learn to work better and faster.
• •    It’s potentially more profitable. Customers love paying for results. Ponying up feels natural and even congratulatory.
  
  

CONS

That said, this model isn’t hazard-free. There are definite drawbacks worth taking into account.

• •    You’re still estimating. It always hurts to accidentally over- or underestimate the time and resources it’ll take to deliver your product or service.
• •    This model is famous for scope creep. In the project management world, scope creep is the common tendency for a project’s dimensions to expand as it’s underway. New information arises, someone “higher up” has a great idea they want to incorporate, or a problem develops that must be addressed, eating into your profits.
• •    You can never guarantee performance results. Clients should know not to hold you accountable for how your work performs “in the wild.” However, project-based pricing lends itself to this expectation.
• •    It creates an unbalanced power dynamic. In the hourly pricing model, the agency holds all the cards. By contrast, in a project-based agreement, the client has more leverage. Ideally, you want to strike an equal balance.
• •    Staffing is dicey. Irregular work can turn off top talent. But top talent is key to delivering quality work. With this model, you’re constantly trying to balance both.
• •    Project-based relationships tend to be short-lived. When you operate by the project, fewer team members get to grow long-lasting client relationships.
• •    It makes managing cash flow tricky. Project-based work quickly complicates cash flow: Agency owners must make payroll before all client bills are paid but can’t make payroll if clients haven’t paid for past work. The feast-or-famine nature of this rhythm requires meticulous planning.

Thankfully, hourly and project-based marketing agency pricing structures are not your only options.

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Fee-based Pricing Model for Marketing Agencies 

The fee-based model has also been called a “retainer” agreement, “value-based” or “points-based.” In this scenario, a client pays you for a regular output, and when something extra comes up, you do it, but everyone understands that the spontaneous work eats up the resources your client has already paid for.

Pros and Cons of a Value-based Pricing 

Animalz, the agency mentioned earlier, is structured this way. “In our pricing model, expectations are aligned around the number of deliverables the customer will receive each month, and the team is able to work backwards from the goal of the number of articles they deliver each month to autonomously manage their time,” explains Bryant.

PROS

“For our customers, this pricing transparency allows our POCs [points-of-contact] to clearly set and manage expectations with their internal stakeholders and plan content calendars without fear of running out of budget.” And this equates to a more efficient operation. “For our team, it means less micromanaging and encourages everyone to work smarter,” she says.

The pre-approved work means you and clients both know that any “extras” are pre-paid by consuming credits, not by charging more.

This model also makes it easier to manage cash flow. Retainer agreements make you more aware of what’s coming in next month, so you can better plan spending.

Further, there’s no need to be in constant “sell mode” if you’re delivering value in exchange for pre-payment. In fact, customer retention becomes your growth lever. Many marketing agencies maintain a 60% customer retention rate, but the possibilities are endless: a 95% to 98% retention rate is not out of reach, according to experts at Proposify. Most PR agencies maintain rates even higher than that.

Source: Statista

For more about customer retention as a growth strategy, Adweek has a great article to help prevent churn.

CONS

In truth, this marketing agency pricing model doesn’t have many drawbacks.

Some clients may be averse to paying upfront for work, but your strong reputation can ease that concern. For particularly skittish clients, draw them in with an experimental “trial period” to gain trust.

Another potential drawback may be that you, the agency, must prove benefits. Defang this concern by offering to report on your work regularly. It’s a labor cost a smart agency will pay in exchange for a mutual understanding and appreciation from a client.

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Hybrid Pricing Model for Marketing Agencies 

Need something different? Well, you could piece together a custom pricing model for each individual customer.

Pros and Cons of Custom Pricing 

With this option, customers can see how much you value them. They see you spending time to tailor your offerings and compensation to their needs. In turn, they get a closer look and deeper understanding of how your agency can and will help them. Best of all, you can use the mutual lessons learned in future work.

PRO

This pricing model creates a balance. Each party holds equal relational “power.” It’s easier than project-based to plan income and cash flow, but it’s not as easy as the retainer or value-based option.

CON

Sadly, though, custom pricing for each customer is more complicated. That means it’ll require time to juggle your multiple plans. As you look to scale, you’ll find your pricing model holding you back.

A smart database can help with this cost, but no system can automate away such personalized service.

Get a custom answer from an outsourced accounting expert

What if you could maximize the pros and neutralize the cons of the main marketing agency pricing models? You can — simply choose the best structure for you.

A 2021 survey showed that 62% of businesses outsource some or all of their marketing activities.

Source: Sagefrog Marketing Group’s 2021 B2B Marketing Mix Report

Choosing the right marketing agency pricing amount (and structure) can help you steal from the remaining 38% of the available market share. But where do you start? You’re already on the right track by learning about the options discussed here. Now, call an Ignite Spot outsourced accountant to assess your finances and help you calculate what—and how—to charge.