Understanding pricing models for your agency’s services

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Hello and welcome to today’s SAGA webinar. I’m Chip Griffin, the founder of the Small Agency Growth Alliance. And today we’re going to be talking about pricing, specifically the pricing models that you can use in your agency and how they may fit together, which one you might want to choose for what kind of work.

So let’s go ahead and dive into the topic at hand. And before we do that, though, let’s, I guess we’ll touch on a couple of the housekeeping items. There will be a replay of this webinar available and all of the previous webinars that I’ve done through SAGA are available at sagaimpact.com.

Just go to the resources tab and there’s a whole list of previous webinars that you can access. If you have any questions, feel free to use the Q and A function at the bottom of your screen. for your time. If you’d like to tweet about this, use the hashtag agency leadership. If you have questions or feedback, I’d love to hear from you.

And that’s chip@sagaimpact.com. We’ve got a few other upcoming webinars that you might be interested in. And both of these build on the discussion. That will be having today. The first is on productizing your agency services. That will be a week from today on April 7th and productizing your service offerings is something we’ll talk about briefly as part of pricing models, but we’ll get into it much more in depth.

Next week. And then the following week, we will talk about using paid discovery to get better clients. And this goes to getting your pricing, right? Figuring out the right pricing models and also really onboarding the clients properly and getting the scope, correct. So lots of things will be rolled into that conversation.

So hope you’ll be able to join me. And these are of course, free, just go again, small agency growth. com and on the webinars page, you can sign up. For any of these. All right. So let’s go ahead and jump to what we’re going to be talking about today. And so we’re going to be talking about the differences between what pricing is and what pricing models are, because that’s going to be an important distinction and it will help define what the scope of the conversation today is.

We’ll also talk about nine different pricing models and what they look like. where they can work well, what are the pros and cons, all that sort of thing. And finally, I’ll spend a little bit of time talking about how you choose the right one for your agency and your clients. And it may not be the same for every client engagement.

So let’s go ahead and jump in. And I’m going to actually, I’m going to pull out here and go full screen and we’ll just, let’s see if I can do this correctly. There we go. I’ve put up the subject area up here on my shoulder. And so hopefully that will be a good way to do today’s webinar. We’re giving it a shot.

I’ve been trying different things with each of these each week, and I’m always curious to hear what your feedback is and what’s the most compelling way to present the information to you. So, with that said, pricing versus pricing models, what’s the difference? So pricing, of course, is what you’re actually charging your client.

And there are all sorts of different ways that you can get there. There, you can do what’s called cost plus. You can do the very popular and well talked about, but often misunderstood value pricing. You can come up with all sorts of different ways that you come up with the numbers. We’re not going to talk about the numbers today.

I want to talk instead about how you package things up and what are the units that you’re selling because you really have to nail that first and then you can figure out how to set the actual price for those components later on. And I can tell you that most small agencies that I know most that I work with charge too little.

So the key thing that I always tell folks from a pricing perspective is that you really need to make sure that you understand what your actual costs are. And I’m a broken record on this and I encourage all of my clients and anyone else who will listen to put together project budgets. There are free resources available on the SAGA website that will walk you through it.

Templates. Excel spreadsheets that are pre designed with formulas. So you can just plug in some basics and it will help you understand what your real costs are. And if you know what your costs are, then you know what your price floor is. And if you know your price floor, it’s very difficult to get into trouble because you know the price, you cannot go below in order to turn a healthy profit.

Now, of course, that doesn’t mean that you. Charge that floor that just that is the floor and you want to try to find a way to get above that and one of the ways that you can do it is by coming up with the right pricing model and pricing models are something that get fiercely debated. There’s been some innovation over the years in how they’re done.

And we’ll talk about some of the trendy approaches that folks are taking to pricing models. But fundamentally it comes down to figuring out how you can come up with something that aligns your interests as an agency with the interests of your clients. You want to help them see the value of what they’re contracting with you for, and you want to make sure that you are seeing the profits that you deserve for the work that you’re doing.

And some of this will come down to understanding what your costs are. Some of it will come down to understanding what your service delivery approach is. Some of it comes down to how well you can know the scope in advance and how fluid it may be. And the pricing model really goes to address a lot of that certainty or uncertainty and risk.

Because when it comes down to it, any negotiation, any pricing strategy is all about risk. The more risk that one side or the other has, the more that the financial arrangement will tend to skew towards them. So if the client is taking on a tremendous amount of risk, they’re going to want more of a discount on the services that they’re offering.

Whereas if you can guarantee them certain results, if I can say, if you give me 10, I can guarantee you, I can give you a thousand dollars back. Well, then 10 looks super cheap. Heck, I’d probably pay a hundred. Maybe even 500. If I knew for certain that I could double my money, right? So if you look at it from that perspective and you’re understanding those risks that’s key to it and it’s not just about the actual numbers It’s about the models that you choose.

So let’s go ahead and start diving into the nine models That we’re going to talk about today and the nine models are not This is not necessarily exhaustive. Other people will come up with other ideas. There’s hybrids of some of these approaches, but I think these nine are, they’ve really stood the test of time.

And they are the kinds of things that most of you have probably seen or experimented with in your own business. So first up is billable hours. And I have to tell you that I think that billable hours get a really bad rap. And most of my fellow agency advisors and consultants will tell you never charge by the hour.

It’s horrible. You can’t get your value. It’s, it’s terrible. I mean, blah, blah, blah. I mean, it’s on and on. And yes, I get it. And I’m, I think there are reasons not to do billable hours and we’ll talk about those in a minute, but there are also reasons to do billable hours. But before we do, let’s get to the root cause of why most people have objections to using billable hours as a pricing model in the agency world.

And fundamentally, it’s because they don’t set their hourly rates correctly. Because here’s the argument that you will typically hear from someone who is preaching against charging clients by the hour. They’ll say, look, I can get this work done really quickly because I am experienced. I know how to do it.

I can design a logo in just an hour or two and it will be better than something that someone just starting out will spend 10 or 20 hours on. And so I’m getting robbed if I charge by the hour. People will give you the example of the repair man who goes into the factory and some machine is some expensive machine, million dollar machine isn’t working.

And he goes in and he kind of takes a look at it. And then he makes one slight adjustment to a screw and all of a sudden it’s fixed and working. And he presents a bill for thousands of dollars. And someone says, well, how, how can you charge me thousands of dollars? It only took you 10 seconds to fix that.

And he says, you’re not buying that 10 seconds of my time. You’re buying all of the experience that went into it. And that story is absolutely correct, except that, that means that that individual should be charging a much higher hourly rate. If I work with my law firm that I’ve used for many, many years, the lawyer that I have started out as a junior associate and he’s moved his way up over the last 20 years.

And so his rate has gone up. Why has his rate gone up? In part because he’s more skilled, but in part because he’s also more efficient. It doesn’t take him as long to produce a contract or to edit a document because he’s been there, he’s done that, he’s seen that. We’re the same way in the agency space.

And so what we need to do is, if we’re charging by the hour, We need to charge fairly and we need to make sure that that rate encapsulates all of the experience and value that we’re bringing to the table. So billable hours as a pricing model is not inherently bad. You can still get your value out of it.

You can still embrace the whole concept of value pricing, in fact, through billable hours. It’s a little more tricky, but you can do it. The idea is that you just need to get these numbers right. And so if you’re a small agency, one of the things that you should be already thinking about is what is your effective hourly rate?

Because even if you’re not billing clients explicitly by the hour, You should know what you’re generating in revenue per hour of your time your employees time and if you know that that will give you a really good idea of what your effective hourly rate is and Therefore what you’re really charging clients because even though we may come up with some other method We may come up with a fixed project fee or a monthly retainer or those kinds of things It all gets down to time in the agency space You We are selling time.

It’s the way we package it. It’s the value we deliver that allows us to generate profits, but our fundamental, our core resource in almost every agency is time. So internally we need to have these metrics. So when should you use billable hours? Well, billable hours are the perfect solution. If you’re in a situation where it’s very difficult for both sides to agree on a scope.

And that may be because Let’s say it’s crisis communications. It’s very difficult to do crisis communications with a fixed fee. Because the whole nature of a crisis is you’re not certain how it’s going to unfold. And so, when you’re estimating what a cost will be for a fixed fee approach, the chances that one party or the other is aggrieved at the end is much higher.

Because both sides are taking on a tremendous amount of risk. So the way you can mitigate that risk is by going to a billable hours format for that kind of work. Now, there are times when the scope may be noble, but you don’t know it. You know, maybe it’s the first time you’ve started working with a client.

Maybe they’ve got a challenge that you haven’t seen before. They haven’t seen before. And so nobody’s really quite sure what it’s going to take to put together the plan, the solution. Whatever it is, maybe you’re a digital firm and you’re trying to figure out how to solve some issue that some other developer created that can be very difficult to scope out if you don’t know exactly what the diagnosis is.

So maybe during the diagnosis phase, you’re billing by the hour. Okay. There’s a lot of different times and places that billable hours might work. Now, as I said, I’m not advocating for billable hours as your primary approach as an agency. Most of you probably shouldn’t be using billable hours as your primary pricing model.

And the reason why you shouldn’t is because it does create a tension with the client and it creates an internal tension as well. Because as the agency owner, the agency leader, you want to be billing as many hours as you can. That’s how you generate your revenue, your profit. So your incentive is to put more hours in.

Your client’s incentive is to keep costs down and therefore have you work as little as possible. So they may decide they don’t want to go forward with certain things that they know are a good idea, that you’ve told them is a good idea because they know it’s going to incur some extra hourly cost. And it leads to some bad decision making.

In particular, it can lead to some bad decision making where clients may be reluctant to provide you with appropriate feedback or guidance because they hear the clock ticking in their head as everything’s going on. And so maybe they don’t have as many calls with you. They may not send emails as much because they’re afraid of what it will cost.

I know that this happens all the time with lawyers and accountants, and it can happen with agencies too, if you’re billing by the hour as your exclusive or primary billing method. It also can create a tension because particularly if you’ve got someone that you’re working with on the client side who perhaps has worked in an agency before or has done the kind of work that you’re doing, they may be a little bit more nitpicky about bills.

And they may sit there and say, you know, I don’t know why it took you so long to write this press release or why it took you so long to build that landing page. And you don’t want to have that kind of conflict manufactured for no good reason. So there are lots of reasons why you wouldn’t want to do billable hours.

But there are certainly some for why you would, and you just need to figure out if it’s the right approach for a particular engagement. So don’t throw the billable hours out altogether. Don’t rely on them exclusively. All right. So let’s go ahead and take a look at another model. And this is project based and projects are another thing that sort of get a little bit of a bad rap in the agency space, depending upon which kind of agency you are, but so often, and we’ll talk later about retainers.

So often I hear from clients who will tell me, you know, I really want to get as much monthly recurring revenue as I can from clients. I really want to have people on fixed retainers. So I have predictable income. And that’s all well and good, but one of the things that we’ve learned repeatedly over the years in the agency space is that retainers aren’t the be all, end all, and they aren’t guaranteed income.

How many agencies had retainers guaranteed income that just evaporated last March, last April? A lot. So, project based is something where you’re giving a very defined scope. Usually in terms of what the deliverable or deliverables are. And what the time is. And so this is very common, obviously, if you are in spaces where you are an agency producing certain kinds of things, if you’re creating videos, building websites, providing graphics, but it’s also not uncommon in PR firms or those kinds of things where your, your agency may be putting together a communications plan, or maybe helping with the launch of a particular product.

And so you’re charging a set fixed fee for that project. Now, the beauty of project based pricing models is that the client knows within a reasonable degree of certainty exactly what they’re going to get and you as the agency know exactly how much money you’re going to get. Now, there are some risks.

There are some unknowns. The client has to assume the risk that the quality of that deliverable is going to be there. And that the scope has been correct so that they’re going to get exactly what they wanted. On the agency side, you’re accepting the risk that your estimate of how long it’s going to take to do something is right.

Because if I’ve guaranteed a price to my client, I’m not getting more unless the scope is changed. And so if it takes me five hours to do work that I thought was going to take me an hour, and that adds up over time, over the course of that project, I may be in a place where my profit margin is much lower than I had anticipated.

So project based pricing models really require you as an agency to get really good at estimating. One of the best ways to get good at estimating is by making sure that you’re tracking your existing projects correctly. And so that again brings me back to the idea of the project budget. If you have a project budget and not just one that you create at the beginning of the project, but one that you’re tracking against as you’re delivering for clients, it allows you to review the work at the end and figure out how close were you to your estimate?

How did your profits turn out on that particular project? And the idea is to learn from each previous engagement. So ideally you should be getting better and better at your estimating, which means that you’re more likely. As you go along to set an accurate scope, an accurate estimate, and therefore an accurate price for the project work that you’re doing.

Now, of course, sometimes projects can come out to your advantage as the agency owner. Sometimes it takes you less time to do the work, and that’s great. That allows you to have some additional profit margin and maybe it offsets a project where you guessed wrong. And when you’re doing project, you also have to anticipate the contingencies.

So don’t assume when you’re quoting a project based fixed fee that everything goes perfectly. Assume some hiccups along the way, assume some, some difficulty from the client where you have to accept some feedback and do a little bit more in revising words or images or whatever it is that you’re producing for them.

If you do that, you’ll have that kind of a cushion in there so that you’re in a position that you can absorb some of those hits along the way. Continue to keep the client happy and not have to go back and continue to make them feel like they’re being nickeled and dimed for change orders and those sorts of things.

So project based really requires that. That knowledge, it becomes easier as you go on with a client because you know what their style is. You know what they tend to do with regard to feedback. Do they nitpick? Do they provide lots of feedback? Do they always want to throw revision one out and start all over again?

There’s all sorts of different things you will learn about the client as you go along. Now projects can also be a good way to get started. With a client, and we’re going to talk a little bit later about a specific kind of project, and that’s a productized service, right? And so if you’re, if you have that, if you have a productized project based approach, that can be a fantastic way to get started with clients, provide them with an initial deliverable, learn a lot about them, help you to scope future projects correctly and estimate time correctly. So project based, I would say is becoming the predominant way that most agencies are engaging with clients these days, particularly over the last year or so, clients have become even more risk averse. They want to really know what they’re getting for their money. They don’t want to commit to long term

ongoing retainer agreements with agencies. They want to say, okay, we’re doing this. We know it’s going to cost us this. We know we’re going to have this at the end. And if you run projects correctly, it can be really good for your agency. So as much as we may have always embraced the idea of retainers as the lifeblood of an agency, I think projects are really headed in that direction.

They give you flexibility as an agency owner. You can make more adjustments to the kind of work you’re doing, the kind of clients you’re working for. You’re much less likely to over service on a project. And if you do over service, you can hopefully contain it to that one project and then course correct for future projects and clients.

So there’s all sorts of benefits to be had from project based pricing models. The next one here, buckets of hours. So buckets of hours, these are particularly popular for agencies that do a lot of tactical work. So if you’re doing digital marketing and you are producing lots of little projects for a client, for example, this can be a good pricing model because under this model, it’s sort of a hybrid of a traditional fixed fee retainer.

And the, the more, and, the billable hour, right? Because what you’re doing is you’re saying, okay, you’re gonna buy. 10, 20, 30, 50 hours of my time in a month. And for that, you’re going to pay me X number of dollars. So let’s use some real world numbers here just to make it easier. So let’s say that I’m going to give you 10 hours at a hundred dollars an hour.

So you, you as the client have a thousand dollars a month that you’re paying, you get 10 hours and we can allocate it differently from month to month. So it may be that one month is creating a lot of content for Instagram. Maybe the next it’s for Twitter. Maybe you’re, you’re making a big push on something and they need help setting up an ad account.

It’s really useful in those scenarios where the kind of work is going to vary. So it’s hard to write a uniform scope of work that encapsulates what you’re going to be doing. You’re able to provide some sort of a discount on that hourly rate to the clients over what you would charge if it was an a la carte, right?

So you would typically say, you know, if you’re selling buckets of hours, you would say, okay, I will sell you 10 hours at 100 an hour. If it’s a la carte, it’s 125 an hour, right? Because they’re essentially pre buying your time, which allows you to do the resource planning that you need to do so that you can make those hours available to them.

It gives the client a discount off of that a la carte pricing. So it’s more appealing to them for that reason. And so there are real benefits to taking this approach if you’re in that scenario where there’s a lot of different kinds of activity, but you can roughly estimate. the amount of time that you’re planning to spend.

These are very common to use with lower dollar clients because it’s a way that they can flexibly allocate their spend with your agency based on what their particular needs are. And they can really control the budget at the same time. So think about buckets of hours as a way to address those situations where you’re being a little bit more of the arms and legs where the nature of the work may vary a bit from month to month, but where you want to have a situation where you’re able to provide a better price to the client because they’ve reserved not just your time, but also have guaranteed revenue for you.

So that’s bucket of hours. Fixed fee retainers. Okay. Holy grail. This is, this is what everybody in the agency space, as I said before, has typically aspired to. This is where our, you know, we have the idea that, you know, we’re going to have these clients who pay us 5, a month, and we’re just, we’re their agency of record.

We’re out there doing all sorts of stuff for them. It’s, it’s a true partnership. We’re, you know, all that. And all of that is real. All of that exists. So it’s not pie in the sky. This is not a unicorn. It really exists. However, to do fixed fee retainers, you really have to make sure that there is a clear understanding on both sides about what’s included and what isn’t.

Or it has to be at such a premium price that the agency can absorb pretty much whatever comes along. The problem with fixed fee retainers is while it sounds good to have all of this money coming in on a guaranteed basis every month. And there’s that predictable revenue stream. The problem is that first of all, most of those contracts aren’t truly worth the paper that they’re printed on or the bites that are on the screen.

If a client wants out, they’re going to get out. I can count on one hand the number of agencies that I know that have sued clients over breaking contracts. Yes. Because most of the time it’s simply not worth it. The amount of money and time that you would spend on legal fees and going through the court process or the arbitration process is far in excess of what you’re likely to collect.

So the reality is. that you don’t have as much security and guarantee. Yes, you have the leverage of the contract, but the reality is it’s not as solid as you think it is. The other problem with fixed fee retainers that you have to be aware of is that most of the time agencies will tend to over service Retainer based clients, the longer the relationship lasts.

And the reason for this is twofold. The first is that when you’re first starting to work with a client, you will often say yes to almost anything they ask for. And you say yes at that point because you’re trying to have a great onboarding experience. And it’s very easy for you to convince yourself, well, I’ll just make one little exception.

Yes, I’ll do that. Yes, I’ll send that extra report. Yes, I’ll do those extra emails. Yes, I’ll do an extra round of revisions for things, whatever it is. So you start making those exceptions early on. The problem is those one off exceptions early on become policy, whether you intend it to or not. The other challenge that you have is that you’ve got team members who may be working on the retainer work, and they’re making their own exceptions, some of which you don’t even know about as the agency owner or leader.

And so they all begin to, to mushroom. That’s snowballs rolling downhill and continuing to get larger and larger. And so maybe you finally get that under control. And so, so now while we took that, that hit in the profit early on, now we’re, now we’re coasting along, we’ve got the routines down, we’ve become more efficient in delivering things for clients.

So, you know, if you look at that, if you were to look at a percentage based chart of your profit margins for retainer based clients, typically the margin is going to be relatively low in the first few months because you’re getting up to speed, you’re You’re investing a lot of time getting to know the client.

You’re really trying to make that good first impression. So you’re bending over backwards. Then, then that profit margin chart will go up and you will have a much healthier profit margin for a period of time, but then eventually, and it can be different for any particular agency, six, 12, 18, 24 months, it’ll start to go down.

Hopefully it goes down gradually. But the reason why it will start to go down later on in the engagement is because that’s where you start to over service. That’s where you start to get nervous about losing that retainer revenue. The relationship is, is becoming maybe a little bit stale. Maybe you’re worried that they’re looking around and they’re seeing other agencies doing cool things and maybe they’re interested in that.

You know, maybe they’re in a position where, or maybe you’re in a position where it’s such a good chunk of your agency’s revenue that you’re afraid to lose it. So you’ve made clear to your team, we need to do. Anything it takes to hold on to this business and so the anything, anything it takes mentality.

manifests itself in much lower profit margins because of over servicing. And these can be very difficult scenarios to break out of. It’s one of the reasons why project based work can be much easier to make those kinds of course corrections because you have a defined endpoint for most projects. With retainers, they’re typically open ended, or at least we see them as open ended.

If you’re doing retainer based pricing models, I would encourage you to look at doing them on an annualized basis where you actually review the strategic plan every year and come up with a new budget based on that. So instead of keeping it truly open ended, you have that opportunity to course correct somewhere along the way.

So that’s sort of a hybrid between a retainer and a project model. It’s not quite as tightly focused as a project. But it’s got more definition than an evergreen retainer. If you’re going to do evergreen retainers, and I’ve certainly done a lot of those over my time, and they can be successful, you need to understand what the risks are and take active measures to guard against them.

Make sure that your team knows not to over service. Make sure that you’re keeping an eye on it, having the conversations, the one on ones that you need to be having with your employees so that you can spot over servicing right out of the gate. Make sure that you’re spending time to invest in the relationship with the client.

And so that means as an agency leader, even if you’re not involved in the day to day with the client, you need to make time to have the relationship building exercises. And these days that may be on Zoom instead of in person. Hopefully in the not too distant future, those will be able to be much more commonly held in person again, because that’s a great way to build relationships.

But you need to be thinking about all these things and making sure that your pricing model is addressing it. So if you’re going to use fixed fee retainers, make sure that you’re scoping accurately, that you’re trying to remain within scope, that you’re having candid conversations with your team, with the client to, to keep those boundaries in place and find ways.

to proactively review the scope over time with the client so that they’re getting what they need and you’re generating the profits that you deserve. All right, next pricing model, all you can eat. So the all you can eat pricing model is one, well, first of all, a lot of retainers become all you can eat, right, for the reasons that I talked about earlier.

If you’re, if you’re over servicing it, it effectively becomes an all you can eat pricing model. All you can eat is an explicit, Pricing model is something that’s, I think, a relatively new innovation, and it’s being used by a lot of firms that you may not even initially think of his agencies, but effectively, they are so design pickle.

For example, this is an example that I often use because design pickle. Is out there and they say, okay, for a fixed fee of several hundred dollars a month, or it varies depending upon what you’re asking for. But for this fixed fee, we will create as many graphics as you want. And it can be YouTube thumbnails, social media images, whatever it is.

And so they’ll say you can have an unlimited number, all you can eat. Now, obviously that’s something where you have to come up with something to put a governor in place so that it is not truly. Unlimited, truly all you can eat. Just as when you go to a buffet at a restaurant and it’s all you can eat, there are limits because you have to put everything on a plate and typically you’ll only have one plate at a time.

And so that will slow you down somewhat. At least most of us, it will slow us down a little bit. So you have those kinds of things in place. In the case of design pickle, what they say is depending upon the plan, we’ll work on either one or maybe two projects simultaneously. And so if you’re only working on one thing at a time, then we, we design that graphic, we finish it, we go to the next one.

And so that way you’re effectively. Putting a limit, some control over how much of that buffet the client can have. But the all you can eat approach is obviously a very appealing pricing model on the client side. Because from their perspective, at least the perception is, they get as much as they need.

Even with those restrictions on flow in place, they’re still going to generally view it that way. Now, obviously in these kinds of cases, resource planning can be a challenge because the reality is that most clients aren’t going to be giving you a steady flow. Most clients will have a few things for you, then there’ll be a gap.

And so you’ll work sequentially through those. If you, if you’ve used that one project at a time limiter or whatever, there are different ways that these are going to be used. So your resource planning has to be. A little bit more meticulous in these cases to figure out what kind of capacity you need and a lot of agencies that are looking at this or agency like businesses like design pickle.

I don’t think design pickle calls himself an agency, but they are. I mean, that’s they’re selling time, right? They don’t have computers doing the design. So they’re effectively an agency. And so, You know, they are in a position where they use a lot of contractors. And so if you’re doing that, then that puts you in a position where it allows you to modulate the amount of labor that you’re investing in based on the amount of work that’s coming in.

And anytime you have an all you can eat arrangement with clients, you typically, most of these agencies work in volume, right? And most of them are very tactically oriented, creating graphics. Some writing agencies use this all you can eat model. You know, we’ll create as many blog posts as you want in the course of a month.

We’re only going to write one at a time, but we’ll write as many as you want. And so in those scenarios, you have to think about if I don’t do volume, then I have to get it, my pricing absolutely correct, right? I need to make a profit on every single project. So most agencies that use this kind of a model are really looking at volume because they know that there will be certain clients that they lose money on under all you can eat.

And it’s very much like restaurants that have buffets. There will be some people who will go through the buffet four or five times. They’re, you know, in Las Vegas, they’re just larding up with lobster and all that kind of stuff. And so the restaurant, the casino is going to lose money on those clients.

Individual customers, but on the whole, plenty of people will go in, pay the price for the buffet and not eat that amount of food costs. So it balances out. And so if you’re going to be using an all you can eat approach within your agency for clients, you generally need to have enough volume that you can absorb those hits, that you can absorb the clients who are overusing the service by having others that don’t.

So all you can eat is, is definitely a higher risk strategy. But if you are in a, in a business where you’re doing a lot of volume, again, typically Writing and design work would be ones where clients have substantial ongoing needs, and you can do it at a volume that makes sense. Those may be places where you want to think about the all you can eat model, but it’s the kind of thing where you really do have to get it right, or you could run into a lot of issues from a profitability standpoint.

Next pricing model productized services and productized services, you can actually kind of use this for some of the other pricing models too. So again, this is, you know, when we’re talking about pricing models, there aren’t these bright lines and silos and a clear menu that you choose from. You can, you can bring them together.

So for example, you can productize the all you can eat model. That’s what design pickle again has done. They say, okay, these are our two or three packages and you choose from these productized service packages and you get all you can eat within each one. So it can overlap. Productized services can also be project based pricing, right?

So I mentioned that earlier. So you can do a, what I would call a paid discovery project as your first engagement with clients. So this is typically done. SEO firms do audits. A lot of digital marketing firms do either social media. Or add audits or those kinds of things. It might be a communications audit if you’re a PR agency.

It doesn’t necessarily have to be called an audit. It could be that you’re putting together a strategic plan. It could be, for example, I have a paid discovery process that I use with some agencies called the agency business checkup. And so what it is, is over the course of six or eight weeks, I do a deep dive with that agency to understand what their strengths and weaknesses are and what the opportunities are for them to work on things.

At the end of any kind of a paid discovery project, you want to make sure that the client has a defined deliverable in hand. Right? So it is, it is both productized and project oriented. They know what they’re getting, they know what they’re paying. It should be something they can act on on their own, or ideally work with you to continue the process forward.

So that’s a common way that you might productize services. But productized services as a pricing model goes beyond that. And so, generally speaking, when I sit down with an agency for the first time, I ask, what do typical engagements look like? What do they cost? What do you do? And a surprising number of agencies will tell me that every engagement is custom.

They don’t have, you know, a preset list of things they do or, or those kinds of things. They, you know, they can speak generally to the services that they’re offering and the kinds of clients that they’re working for, but they would never describe what they’re doing as sort of specific packages. But then we start digging in and I start looking at their active clients and the work that they’re doing for them and the prices that they’re charging.

And the reality is that many of you in the agency space, and I know I certainly was in this category when I ran my agencies, we had sort of our go tos. And so, you know, maybe that’s, you know, I typically have a 5, 000 monthly fee, and it typically includes these kinds of things. Now, I may call it completely custom, but the reality is that if I’m doing that on a regular basis, I’ve essentially productized my service offering.

So if you’re going to productize it internally, think about productizing it externally. In other words, use it as a selling tool with prospects. And so describe to them. The set of services that you’re offering, you can give them a product name or not. You could do it as bronze, silver, gold. You could do it as, you know, different levels, right?

So, you know, maybe it’s a light and intensive or, you know, whatever, there’s different ways to do it. Typically, if you’re going to be offering tiers or choices, you want to have three. There’s a lot of research behind that to suggest that if you give people three options that generally gravitate towards the middle one, you know, use the higher end one to anchor them high so that that middle one looks more affordable.

Most people don’t want to go for the cheapest. Same thing. If you’re buying wine in a restaurant, most people will not buy the cheapest bottle. They go one up from that. And so, you know, there’s a lot of pricing psychology that goes into it. We’re not really talking about pricing psychology per se today, but the, with productized services, it gives you that option to paint the picture and allow the client to express their feelings regarding budget and value and those kinds of things by giving them very clear defined options.

The other nice thing about productized services from an agency perspective is it really puts you in a position to become more efficient at the work that you’re doing. Because one of the reasons why some agencies have trouble hitting the profit margins that they want to hit is because everything they’re doing really is bespoke.

They’re continuously working with clients in different industries, providing different services or different kinds of services. And so the team is always having to spend time to get up to speed and learn. And ideally you want to get to a point where you’re not providing cookie cutter services for clients, but you are doing similar enough work That it becomes easier and easier.

You become more effective each time. So your clients are happier because you’re doing better work. You’re doing it more quickly. And because you’re being more efficient, you’re able to generate better profit margins because the value that you’re delivering remains the same. And so going back to the conversation that I was having with you regarding hourly billing and hourly rates, right?

Your additional expertise. doesn’t mean that you have to, even though you’re spending less time that you have to start charging the client less because they’re still seeing the same value. So you’re effectively hourly rate now goes up if you’re being more efficient. And so that’s one of the things that can happen through productized services.

The other thing that can happen with productized services is it can shorten sales cycles because of an, instead of going into every conversation with a prospect with just a blank sheet of paper and saying, Hey, let’s figure this out. You’re saying, okay, here are the different kinds of things that I offer.

Okay. And you can help them focus their thinking and you can have specific discussions around those solutions. Now you may choose to be in a productized service model where they truly are fixed and those are what you offer. And there are plenty of agencies who have success with that kind of model where they say, look, this is what the package is.

Small, medium, and large. You take your pick, but those are your choices. There are other agencies who may use these productized offerings as launching off points, jumping off points to create customized proposals. But you’ve now anchored the thinking around something that’s mutually agreeable to both parties.

Obviously, you’re offering it, so you’re agreeable to it. And they’ve pointed to it and said, you know, that one seems like the right one. And so think of this as sort of like, you know, when you go into a car dealership and you’re buying a car. You have the option to add additional options to that vehicle.

You can be really particular and have something created at the factory. It may take longer, cost you more, but you’ll get exactly what you want. Maybe it’s just, you know, some aftermarket add on that they can put in. Maybe you just say, look, I like the car as is I’m going to drive it off a lot today. When you use productized services, you allow yourself to have those kinds of conversations with clients.

And if you’re shortening the sales cycle, becoming more efficient, setting expectations better. You can be in a place where this can be a really great pricing model for your business. All right, let’s go to the next one. Points based. So points based pricing is something that I first heard about probably, a decade or so ago.

Paul, , Roetzer, R O E T Z E R, I think, PR 2020, was, I think, he wrote a book, and that was the first place that I had seen the idea of points based pricing. Now, there are a number of agencies that use points based pricing. So, what is that? So, points based pricing is really, this is sort of like the bucket of hours model, but instead of talking about hours specifically, You shift the conversation and talk about points.

So, for example, you might sell a package with 100 points for 1, 000 a month. And then what you do is you have a price list that says, okay, a blog post is 5 points, a press release is 10 points, a landing page is 30 points, whatever it is. And so you’ve got these options available and it just like the bucket of hours conversation from before, it allows you to adjust for clients where the nature of the work may vary from month to month.

It empowers the clients to make priority choices in a way that can be logical. To them, , as opposed to the bucket of hours, though, it takes out that conversation about how long does it take you to do something so it gives a little bit more certainty. So instead of saying, you know, we’ll write a blog post, we’re not sure it might take an hour, might take two, might take three.

You’re giving a fixed price, a project price effectively in points to those deliverables, right? So that’s you’re now giving more certainty. to the client that they may like, but you’ve also put it in a place where you are working to prioritize things and you have put some cap on the scope. So it’s not the same as just an open ended retainer or an ill defined statement of work for a retainer.

So those are reasons why points based might be a good idea. Points based does have challenges though. First of all, you may have to explain it to clients. Most clients are not going to be familiar with this model unless they’ve worked with an agency that does this already. And so you may be in a position where you have to explain how points work.

The second challenge with a points based system is you really have to come up with a menu of all the different things that you can provide, and you have to be able to do it in such a way that it’s logical to the client, but also covers your basis as an agency. So, for example. If you’re going to say, okay, I’m going to assign five points to write a blog post, you need to be pretty sure that with your effective hourly rates internally, your costs, that you can hit that pretty reliably.

Now you already have to do this if you’re selling on a dollar basis or whatever currency you’re using in your agency. But there’s a little bit more of a challenge from a point space because you also have to think through How that works with your team. And so you need to make sure that you’re communicating effectively with them, how everything works behind the scenes so that you get what you need.

You also really do have to anticipate just about everything. Cause you don’t want to be in a position where someone, you have to basically quote in points a new estimate every time your client asks for something new. Now, inevitably you will have to do some of this at the beginning when you first implement a points based system, because there are going to be things you haven’t thought of.

And maybe you put down blog posts at five and you realize, okay, that’s not going to work. I’m going to have to make some adjustments to that. Maybe you’re going to have to have different tiers. So long blog posts, short blog posts, detailed blog, whatever. There’s all sorts of different things you may have to anticipate and adjust as you go along to get points based pricing correct.

So it is something worth considering. It’s something where particularly if you’re very highly deliverable based, it can work. It’s the kind of thing where I’ve seen it more typically with digital marketing agencies, so folks who are developing landing pages, doing email campaigns, those sorts of things. I don’t think I’ve seen it really in more traditional PR agencies for the most part, although I’ve heard of a few that are using points based systems, but it’s something to think about, but understand what the complexities are before you go into it so that you understand if it’s really the right fit for you pay for performance. Okay. So pay for performance is something where there are different ways that you can get paid for your performance.

So, this could be that, You’re going to be taking a management fee, but then you also get a percentage of sales that you generate, right? If you’re doing digital marketing campaigns, you know, maybe what you’re doing is, you know, if it’s an e commerce client, they’re able to track, you know, the, the business that, that your efforts have generated.

And so you get a percentage of that. It might be that you get a percentage for every lead that you’re generating. If you’re an agency that’s doing business development, for example, it’s not uncommon for you to be paid for every appointment that you set. So if you’re out there helping generate business for clients by doing LinkedIn messaging or phone calls or emails or those kinds of things, you may be getting a set fee.

price per appointment that you set up. It could be that you’re getting a pay for performance based on some other metric, maybe something that you’re not directly tied to, but you know, maybe you’ve negotiated that you get a percentage of overall revenue growth. This is common if you’re or not common, but it’s, it’s mostly used when I’ve seen it in smaller companies, you’re the sole agency doing work for them.

They probably don’t have in house marketing, and so they can attribute a lot of their overall revenue growth to the work that you’re doing. So they might pay you in whole or in part based on some percentage of that. Now you have to keep in mind that pay for pay for performance. You as the agency are taking on considerable risk.

If you’re doing that, then you need to make sure that you’re being rewarded amply when you are successful. Obviously this can be very appealing to clients in a pay for performance model because you know, all or most of what they’re paying you compensating you as an agency is based on them doing well to begin with.

So it looks good from that perspective. Pay for performance, though, requires some real clear definitions around what formulas you’re using for the performance pay. There needs to be clear understanding of any audit mechanisms, right? So if you challenge the payment that you’re getting as the agency, you need to have a way to be able to audit and say, Okay, are these numbers correct?

And all of that goes to the idea that you need to have a lot of trust between yourself And the client. So typically pay for performance would not be something that you would go in for a first engagement with a client on. Typically, it’s the kind of thing where you might evolve the relationship to that.

And one of the things that Gini Dietrich and I have talked about on the Agency Leadership Podcast before is trading equity for your agency’s services. And oftentimes that comes in that pay for performance model. Now, equity compensation is not for the faint of heart, and it’s not to be done without lawyers and accountants reviewing and vetting everything for both sides, but it can be effective, and it’s something that Gini and I have both used over the years in our agencies as a tool for compensation.

So there’s a lot of different ways that you can do it. Now, you do have to be aware that some industry organizations look askance at pay for performance, particularly in the PR space. So success fees based on getting an article in the Wall Street Journal, for example, may be frowned upon, may not be condoned.

You may not even be comfortable with ethically. Those are things that you need to think about if you’re going to go down that path. And for pay for performance, you also need to really understand the value that you’re potentially able to provide, right? Particularly if you’re going to do an explicit pay for performance.

So think those things through. Maybe it’s the right solution for you. But understand that there are a lot of complexities there. All right. And going on a little bit longer than I planned to. So we’ve got to pick up pace here a little bit. I have one more model to talk about, and then I’m going to sum it up.

If you have questions, do feel free to use the Q& A function at the bottom of the screen. And I’ll try to get to as much as I can in the small amount of time I’ll probably have available by the time I’m done talking. So. For those of you who have advertising agencies, digital marketing shops, even frankly, some PR agencies now are dabbling in advertising in part because of the PESO model again created by my podcast co host Gini Dietrich.

But the P is paid. And so a lot of agencies are involved to one degree or another. In advertising purchases, whether those are Facebook ads, Twitter ads, LinkedIn ads, print, broadcast, radio, all these different kinds of things. There are a lot of agencies who are in the advertising space. And of course, then there are the pure advertising agencies, which of course are in that space.

And it is very common for agencies that do advertising. To be compensated in whole or in part based on a percentage of the ad spend. And that number is different for different industries. I was in the political advertising world, for a period of time in the course of my career, I’ve been involved in digital marketing and, in various industries.

and so I’ve had the opportunity to see on both sides of the fence, both as a client and as an agency, the fees that you may be charged for a percentage of advertising. And they really do fluctuate substantially. In some fields, it’s fairly opaque and there’s been a move in recent years to be much more transparent with clients about what percentages are being paid.

And so what do I mean by that? Well, in some cases, particularly in political advertising, it has not been uncommon for the client simply to be told, you know, that you’re going to, you know, Your ads will appear in this many places. Typically we talk about it in terms of advertising points. If it’s TV and things like that, you know, you’ll be buying a certain number of points and this is where it’s going to cost total.

You may not be clear with the client about what percentage of that you’re keeping. There’s been a movement away from that over the years. So typically it’s now more clear to the client what percentage of the total spend that you are going to be taking as the agency in the form of a management fee. And so percentage of ad spend can be a viable pricing model for you.

It’s one way that you can have an escalator. In the work that you do for a client without having to actually go back and ask them for more money, because if you’re successful in the work that you’re doing, it’s typically going to cause them to want to invest more in advertising, right? If I’m spending 1, 000 a month in online advertising and it’s generating 10, 000 a month in sales, well, what am I going to do?

I’m going to look to increase that 1, 000 a month spend if I’m getting compensated in part by a percentage of the ad spend as, as an agency. Well, that’s great because if they’re going to, if I’m successful. And they’re able to spend more on advertising because it is successful. I will also get paid more, right?

So it’s a way that you can have those escalators built into your agreement in a way that’s mutually beneficial because the typically the only way a client’s going to invest more in advertising is if they are indeed successful. And presumably that’s because of the great work that you as an agency are doing.

So it can be a good way to do that. It can be a way to generate some supplemental revenue so that you’re, you know, you may mix this with management or creative fees or those kinds of things, and then supplement it with a percentage of ad spend. And of course, we’re talking percentage of ad spend, but you can do percentage of other things too.

If there are certain expenses that the client engages in, it might be, for example, that you have partnerships with HubSpot, Salesforce, other people like that. And so you’re able to mark up their services. So there, this is something that you can use across the board in a number of different areas, but advertising is certainly where this is most common, most.

prevalent. You do have to think about, if you’re doing this, , you know, how that works, if they decrease ad spend. So that’s more important if this is only part of the work that you’re doing. So you would never want to count on this as part of the bread and butter. One of the challenges, of course, particularly with digital ad spending is that a lot of times your work as an agency doesn’t change that much based on what the ad spend is, right?

So servicing a thousand dollar a month. Digital ad account is not that much different than a 10, 000 a month account, but your compensation would be substantially different if you were getting a percentage. So those are all things to think through if you’re using a percentage of ad spend model for all or part of your revenue.

All right. I see this clock ticking away here. So how do you choose the right Pricing model. Well, the first thing I would say is it’s probably not any one of these nine. I think it’s probably some combination. You may use certain of these models for certain kinds of engagements. You may use them at certain stages of the relationship.

So a productized service. Project based offering at the start, for example, might be a good way to go. And then maybe you look to move into a retainer based relationship. Maybe you supplement it with billable hours for handling crisis work or ad hoc projects or things that are just outside of scope, but still need to be done.

There’s a lot of different ways that you can mix and match these. And, and you should be thinking about how you can use them most effectively so that ultimately at the end of the day, you want a situation where. Your, your prospects understand what you’re selling, how you’re selling it. They understand the value that you’re creating.

You want to make sure that your existing clients are satisfied and they feel like they’re getting that value. And so whenever they pay your invoice, they feel good about it. And of course, you want to make sure that on your side you’re generating the healthy profit margins that you need to have in order to thrive as an agency.

And so that’s how, that’s why there are different pricing models because there’s not a one size fits all approach for every agency and every client. And so you have to be the matchmaker and figure out based on the kinds of clients you’re serving, the solutions you’re providing, and how you’re set up and how you’re operating as an agency, what is the best fit?

What is the best combination of these pricing models? What other pricing models might be out there that, You may have seen or may have heard about or could be creative about, right? There’s, there’s no magic to these nine, but I think these nine encapsulate just about everything that you’ll likely see.

The other thing to keep in mind in choosing things is you don’t have to lock yourself in. You don’t have to put yourself in a position where you feel like I have no other choice, that I have to stick with what I’ve been taught. put out there. You can make adjustments. As I always say, we’re not Amazon.

We’re not Apple. Nobody’s writing about what our agency pricing model is. And if we make an adjustment to our pricing or to our pricing delivery model or any of those kinds of things, nobody’s saying, Oh my God, chip changed. Let’s write about it. Right. It just doesn’t happen. So you have flexibility. Take advantage of that flexibility.

Find the right solution for you, your prospects and your clients. So, that will wrap up the, that will wrap up the presentation portion of today. Let me try to go over here. We’ve got about two minutes here. Let me see if I can. Find the Q& A thing. See if we’ve got any questions that are in here.

Okay. So there’s a couple of questions. I’m, I’m really, probably only going to get a chance to get to one of these, but, so the, the, the question is, do I have any samples of all you can eat pricing other than design pickle? So I, off the top of my head, I, I don’t have another specific example.

There are a bunch of services that are like design pickle though. I just saw one the other day. Okay. It’s a video one. It’s vid, vid parts. I can’t remember exactly what it is, but they do effectively the same thing with video editing. There’s a couple of writing agencies that I’ve talked to over the course of the last year or so that do it.

But again, their, their names are escaping me. I, I’m lucky. I remember my own name on any given day. But there are a number of different ones again, usually in that deliverable space where they’re doing, graphic design, writing, video editing, those kinds of things where it’s, it’s something where you have that ongoing need, you’re doing things at volume.

They often work with other agencies. And actually, at some point, we probably should do a webinar about agencies that work for agencies and how to do that effectively. Cause I know a lot of my clients. Do agency for the agency type work. And there are a lot of you out there who are doing that. But I think that there are lots of opportunities for that.

And certainly these kinds of agency or quasi agency businesses are a good place to start and look and see how they’re doing it. So, with that, that does bring us to the top of the hour here. I’m sorry. I didn’t have more time to get to the questions. I will try to email some responses to the folks.

here who have asked questions afterwards. But if, if I didn’t get to your question, or if you have one now and you’d like to ask it, feel free to just email me chip@sagaimpact.com. Let me bring that up here so that you can see it. There we go. Actually I guess maybe I already had it over my shoulder.

In any case, uh,ank you for joining me. I hope to see you again at a future SAGA webinar. Again, the replay for this will be at sagaimpact.com, and you can check out the replays for all of the other webinars that I’ve done there as well. Thanks for joining me and have a great week.