When choosing a digital marketing agency, it is important to understand how the agency charges for its services. There are several pricing models which are used by digital marketing agencies to set up their prices. Let’s talk about each of these pricing models and their pros and cons so you can understand the true costs involved with the different pricing models.
Hourly-based
This pricing model is the simplest one. The agency charges their clients a fixed hourly price and their profit is built into this price. There are two options on when the agency will charge the clients when using hourly-based prices. They can either charge after the project is done based on how many hours it took the agency to finish it, or the agency can quote and a certain number of hours, and the clients pay them in advance with overages invoiced after the project is completed.
Pros:
- This model is simple and straightforward
- The client has a good idea of how much a project is going to cost
- This model is profitable for the agency
Cons:
- This model does not reward efficiency
- It (sometimes) undervalues work
Project-based model (fixed pricing)
The project-based model is another simpler way that is used by digital marketing agencies to charge their clients. The agency charges a flat fee for any project based on their expertise. When setting up the price for projects the agency estimates the amount of effort, time, and other costs necessary to finish the project.
Pros:
- This model is transparent for a client
- This model is predictable for the agency (it is easy to predict the revenue)
- This model also allows clients to test the results of small tasks
Cons:
- This model is a high risk for an agency (it is sometimes hard to predict how long a project can take)
Retainer model
This model means that the client pays the agency a fixed amount every month, quarter, or year. It is common to use this model once the agency has established a relationship with their clients and it can be part of a hybrid model in combination with another pricing model.
Pros:
- It is easy to predict the payments using this model (for the agency and for the clients)
- Assures a steady income for the agency
- Makes the budgeting and accounting easier for the clients
- The money is paid upfront
Cons:
- It can be expensive for the clients
- Expectations for the agency can be high
Percantage of ad spend model
In this model the agency receives a fixed percentage of the money the client spends on the media as a fee. Agencies usually charge anything between 5% to 25% of total ad spend. The bigger the budget the smaller the percentage. Let’s say a client’s budget is 1000$ and the agency charges 20% of ad spend, this means the agency will receive 200$. However, if the client’s budget is 100 000$ the agency will charge 5% of ad spend, which means the agency will receive 5 000$.
Pros:
- This model is easily predictable
Cons:
- It is not suitable for small projects
Value-based model
The value-based model is essentially based on the value the agency brings to its client. The price is calculated by the potential success of the project and the benefits to the client.
There are two ways how to create a value-based pricing model. The first one is called the performance-based or the results-based model, in which the client is paying the agency only for predetermined results. For example, the agency can agree upon a percentage of all sales the company closes.
The second option on how to determine the value is to take the Customer Lifetime Value (CLV) or the client’s Customer Acquisition Cost (CAC) into account. Keeping either of these two in mind, the agency and advertiser negotiate how much is the client willing to invest to acquire a certain number of clients and that is the fee for the advertising campaign.
Pros:
- The client pays for results
- This model is beneficial for both parties
Cons:
- It can be difficult to provide consistent value
- Specific goals might not be met
- This model can also be a high risk for agencies
Hybrid model
This model combines two or more of the previously mentioned models. Using two or more pricing methods makes it easier to achieve a balanced agreement which is beneficial for both, the agency, and the client.
Pros:
- This model is extremely flexible
- It is also mutually beneficial
Cons:
- This model can be complicated (both partied must understand the terms of the agreement)
The digital marketing industry is highly competitive, especially now that the internet has taken over the world. However, every city, country or even continent has a different demand for digital marketing services. Therefore, the prices and fees digital marketing companies charge their clients can vary. There are a few factors that can affect digital agency fee structures.
Experience
This is probably no surprise but the more experienced and established the digital agency is the more they are going to charge for their services. This makes sense because their employees probably have a fair deal of training and expertise under their belt, they can deliver better and quicker results therefore the agency can charge more.
Scope of work
The more services (social media marketing, SEO management, PPC) the client is in a need of the higher is the fee. The more time, effort and resources the agency spends on a project the higher is the price.
Industry-specific factors
Some industries are more competitive than others. The more competitive the industry the more original, complex and bigger the campaign should be to stand out. This usually requires a bigger budget than a less competitive industry.
Conclusion
Every agency, company and industry is different. It is difficult to determine which one of the pricing models is the best or the most beneficial, all of them have their pros and cons. The best way to choose a pricing model is to find what works for you and your agency because what works for one does not necessarily work for the other. Finding the middle ground is the key component of a long-term relationship.
