Pricing Options and billing models for Digital Marketing Agencies
Making the right choice of pricing options and billing models becomes more and more important for agencies. In addition, the Cookie-BGH-Judgement, passed in May 2020, forced some agencies, which had linked their pricing model to the percentage of performance, to restructure their pricing model. The difficulties occurred because of the new “opt-in” regulation, that made it more difficult to measure their online performance.
In this post, we share our insight to make your services more profitable.
Which pricing options are used by agencies?
We found through many consulting and coaching projects with various agencies, that agencies generate their revenue through the following three pricing mechanisms (percentage of agencies using this mechanism):
1. Retainer (63%): Customers pay a flat fee for the services (subscription model).
2. Project-based (34%): The customer pays an individual hourly rate for a defined project.
3. Rate-Card (3%): The customer chooses the scope and the corresponding rate each month.
The mentioned pricing mechanisms are associated with both advantages and disadvantages. You can find the summary in the following presentation: Presentation Pricing Options
Why do clients use the services of a marketing agency?
In advance, it is important to understand the reason why customers use the services of a marketing agency.
We identified the following reasons:
- Consulting: Acquisition of skills: Your client does not have the internal skills to develop new concepts for digital marketing. Therefore he/she buys your skills.
- Managed: Acquisition of additional resources: Your client can’t invest in the development of additional resources and uses you as a contractor.
- Outsourcing: Saving operating costs: Your client has/had the digital in-house skills, but wants to use them freely and buys them from you for a lower price.
In order to ensure the profitability of each service, each service brand has to find a way to calculate the hours worked and the material used.
Which billing models are used by agencies?
Agencies have the following billing models, with each agency having different models (percentage of agencies using the billing model) at the moment:
- Time & Material (4%): The hours worked are recorded and billed. This method requires a proactive agreement with the client and an annual renegotiation of the price. In 2019, the average hourly rate in existing contracts was €89. In new contracts the hourly rate increased up to €127, illustrating the relevance of annual renegotiation.
- Package price (67%): Services are offered in packages (S.M.I.). However, packages can only be offered with limited scope and customer accounts can only develop to a limited extent.
- Percentage of Media Budget (52%): This billing model is widely used among media agencies. In this model, the agencies performance will be questioned by clients after 12 months. As an example, a media budget rate of 10% is currently common for a monthly customer budget of up to 10tsd. € / month.
- Percentage of performance (43%): This model only works for performance services. In addition, due to the BGH ruling issued in May 2020, this model will no longer be used. As an example, the agencies receive a sales commission of 4.5% for a monthly performance of up to 100tsd. € / month
- Value-based pricing (2%): Compensation is based on a percentage of the estimated value added for the customer.
The above-mentioned pricing models are associated with both advantages and disadvantages. We listed them for you in the following presentation: Pricing Options presentation
DIY: How can you improve the profitability of your services through price negotiations?
According to our research, the billing models of the agencies were 4.6 years old and have not been updated since. As an example, the inflation rate from 2017 to 2020 was about 4.78%. If an agency would revise the compensation from 2017 to 2020, it would correspond to an increase in turnover of 2.75%, and thus an average value of approx. 77 616€.
The following steps should be followed by an agency to effectively communicate the price increase of its services:
1. Identification of customers: Identify customers with whom no price increase has been agreed for a long time and transfer them to a project list.
2. Customer value vs. fee analysis: Compare the generated customer value with your monthly fee.
3. Sort your customers: Sort your customers according to the probability of granting a premium on the value you generated.
4. Discussion with the customers: Discuss the value proposition for 2020 with your customers and talk about inflation in 2020.
5. Progress Tracking: Track your progress in the price increase with your team.
6. For new customers: Always start by evaluating the value proposition during the pitch/offer process.
You can watch the video from our Community Call here: Video of the call . Furthermore we have provided the slides of the call: Slides of the call