If you’re setting up a new creative agency (or undertaking a widespread review of an existing one) you might be wondering about how you should set your prices. As you’ll see from a close inspection of your competition, there isn’t a set pricing model you should follow. We’ve found five creative agencies pricing models in regular use, alongside a few less common methods.
You might wonder whether it matters what type of pricing model an agency uses. You need to find the model that works best for your clients. In How to Start a Social Media Marketing Agency, we saw the importance of determining your ideal customer type – this is just as relevant to all types of creative agencies, not just social media marketing agencies. We saw there the importance of finding pricing models used by other agencies targeting your preferred customer type.
As we’ll see in this article, each of the pricing models comes with pros and cons. You need to find the method most favored by your target customers, that will also be most profitable for your creative agency and has the least cons.
Your agency will change over time. So, don’t look at your creative agency pricing model as being fixed. You can easily reevaluate the model you choose later if you feel you need to change to something more suitable at that time. This could become particularly relevant if you alter your target customer over time. If your new preferred customer is used to a different model from what you are currently using it could be advisable to adapt your pricing structure to match their expectations.
Five Common Creative Agencies Pricing Models Your Agency Could Follow:
What are the Most Common Agency Pricing Models Used?
1. Hourly Rate Pricing
Hourly rate pricing is arguably the best-known method of charging by an agency. It is exactly what the name says – you charge your clients a particular amount for every hour you work for them.
You may have multiple staff members working on a project (each charging out at a different rate, depending on their experience and seniority), but you can charge your client an average rate to simplify your charging.
Another possibility is that you use one of the other methods for most of your account, but add on an additional amount for specialist work, based on an hourly rate. For example, you might charge a set price to manage your client’s accounts but charge them an hourly rate for any writing work done.
You must set a realistic hourly rate that covers all your anticipated costs which includes an extra amount for contingencies.
Pros
Hourly pricing is straightforward, and everybody will understand exactly how it works. It simplifies your pricing and makes for easy accounting. It is also flexible. You can easily add additional hours if needed without renegotiating the contract. It also gives a fair proxy to the amount of effort required for a project – if it takes more hours, you charge more money, even if the work takes longer than expected. Conversely, the client benefits if you find you can finish the work quickly.
Cons
Hourly pricing generally has little connection with the actual work done. It uses cost-plus pricing, focusing on your agency’s costs, rather than the value you deliver to your clients. It can be challenging for budgeting, as the actual hours you spend on a client’s work can be unpredictable. Hourly pricing also doesn’t reward efficient work. Any savings your employees make go straight to the client, rather than your agency. Of course, the reverse also applies – a client may feel “cheated” if you take longer to complete a task than they anticipated. They may simply look at the bottom line, and not understand why the bill is higher than they thought it would be.
Some tasks can be challenging to keep records for. For example, if you’re tasked with social media moderation, you might have to do it at odd times, in a hurry, and could easily forget to record the time involved.
2. Project-Based Pricing
As its name suggests, project-based pricing assumes you can split your creative work into distinct projects for each client. You analyze the needs for a project and quote the resulting figure as your price for the project.
In practice, project-based pricing considers hourly rates but does it behind the scenes in advance of a job. You need to estimate the time that a project will take, and determine your costs based on your employees’ hourly rates (and other costs). You should include a buffer amount to allow for any variation between your estimates and actual expenses.
Depending on the size of your project, you may demand payment in installments, with 25-50% up-front, and the remainder on completion (or throughout the project if it’s very large).
Pros
Project-based pricing simplifies budgeting for your clients – they know precisely how much they need to set aside to pay your account. It makes things very predictable. This makes project-based pricing best for tasks with clear outcomes, for example, designing and developing a website.
The certainty of it can also be advantageous for you if you don’t encounter any unexpected expenses.
Project-based pricing also gives you an incentive to operate efficiently. The quicker you complete a task, the more profitable it is to your bottom line.
Cons
As with projects in many other sectors, there is a danger of scope creep, where clients continually ask for additional features and changes to the plan, each of which may appear relatively minor, but which can have a major effect in total. If that happens, you need to be prepared to recognize that the project has changed and be prepared to remit additional invoices to cater to this.
A fixed price tends to limit creative options. You might come up with an idea partway through but be unwilling to implement it because you won’t be able to cover it within the existing quote.
Project-based pricing can be high risk if you encounter problems and have to shoulder any extra expense.
3. Value-Based / Performance-Based Pricing
With value-based and performance-based pricing you charge based on the perceived value that your client receives from your services. To achieve this, you need to determine the most important factors that will be of interest to your clients.
The two types are very similar, but with performance-based pricing, you charge around a specific metric and show that your services have positively changed that metric by an agreed amount. For example, an influencer marketing agency may quote a certain amount to run an influencer campaign that results in a set number of creator partnerships that deliver a minimum number of pieces. A social media marketing agency may charge based on an agreed number of new Facebook followers, X (Twitter) impressions, and new organic engagements per month. Value-based pricing is less tied to metrics and focuses more on the perceived value that a customer receives from a service.
Pros
Value-based and performance-based pricing align your goals with your clients’. They also separate your pricing from your costs, meaning clients feel they are receiving value for their money, rather than merely being a cog in cost-plus pricing.
This means your team can focus on producing quality content and delivery, rather than keeping a close eye on the hours they spend on a client’s work. It also means that you aren’t limited by pre-set budget limits set by your clients.
It is much easier with performance-based pricing, in particular, to demonstrate the ROI of an activity, compared to most other pricing models we have examined.
Agencies often use value-based pricing if they have built a reputation for expertise and specialized skill in a particular field. They can increase their prices for a service once happy clients feel that they are getting value for their expenditure.
Cons
These pricing models assume that you can deliver on your promises, particularly performance-based pricing which can be very specific in defining required results for payment. Your clients are paying a premium for this certainty and won’t pay at all if you fail to achieve the agreed goals.
You need to have complete faith in your team and be particularly wary when making new hires.
It can be challenging to design a model where you can fairly attribute improved results to your creative agency’s activities. You need to ensure that you have robust tracking measures in place.
Value-based pricing can backfire if clients don’t believe they are receiving value-for-money. If you tried to price this way in the early days of your agency, you probably wouldn’t be able to charge at a high enough rate to make it profitable. You need to build up your (good) reputation first.
4. Retainer-Based Pricing
With retainer-based pricing, you charge your clients a set fee for ongoing services. You often see this on agency websites, where the agency offers tiers of services for a particular monthly fee. For example, Ninja Promo offers three pricing tiers, which it ties back to particular tasks (and they indicate what the hourly rate works out to be).
Source: ninjapromo.io
Retainer-based pricing is only relevant for activities that continue over time. For example, a web designer wouldn’t charge using retainer-based pricing to create a website for a client, but they may use it for maintaining the website each month.
Social media management agencies often use this method when they manage clients’ social accounts. As we can see in the above screenshot, the important factor is that you undertake “regular tasks” for your client.
Pros
Retainer fees provide a steady income for a creative agency. They also make predictable payments for clients. This is an excellent charging method when you have a long-term relationship between client and agency if the work each period is relatively even.
Cons
You can’t use retainer-based pricing for one-off activities. By its nature, retainer-based pricing is inflexible and doesn’t cater well to frequent changes in the scope of services required. Sometimes a client will feel locked into a long-term contract, even though they don’t need all those services. They may feel reluctant to approach you to make changes, even though they may make for a better relationship.
5. Unit-Based Pricing
Agencies often use this method of pricing when they contract to deliver a mix of different kinds of work. For example, they may contract to deliver twelve blog posts, 20 social posts, and five TikTok short videos. They may charge a total fee but clearly separate the components.
Pros
This provides clarity for your clients, making it clear what they are paying for. It isn’t time-based, however, so it rewards you for fast and efficient work.
Cons
You will generally have to wait until the client is happy with every component before they will pay you. This can make cash flow challenging for large campaigns. As with project-based pricing, you may suffer from scope creep, where you end up doing extra work without recompense.
Less Common Creative Agencies Pricing Models
Input-Based Pricing
This is similar to Hourly Rate pricing but uses a wider range of inputs in its calculations. Here, in addition to accounting for labor hours (and the related costs), you also consider your other costs of doing business. This means you base your charges on costs such as software subscriptions, travel expenses, marketing costs, and a myriad of other expenses, in addition to labor. Changes to any of these costs will have a direct impact on what you charge your client.
Output-Based Pricing
This has similarities with Project-Based pricing, in that you charge a set amount for a particular activity. For example, you might quote a particular sum to develop a single-page website, with other rates to develop websites depending on the number of pages required. Another situation where creative agencies use this method of pricing is when they give a single price to implement an all-inclusive marketing campaign. Unit Pricing is an example of Output-Based pricing.
Wrapping Things Up
You must pick the most suitable pricing model for your creative agency. It can make all the difference between businesses taking a risk on you and becoming your client, and not having suitable customers at all. It can have a significant impact on your relationship with your clients and whether they feel they are receiving value for money.
Some agencies use a variety of methods depending on the requirements of the client. In this case, you are unlikely to advertise your fees upfront, preferring to negotiate a custom deal.
