As detailed in The Marketing Agency Blueprint, billable hours are contingent on the producer’s efficiency, creating what we believe to be a flawed pricing model.
A project that may take one person three hours to complete could take another at the same level five hours. The underlying cause will vary—distractions, lack of training, misunderstanding of the project, etc.—but the end result is the same. In the latter scenario, the client pays more, but receives no additional value.
But it doesn’t stop there. Agency professionals are typically evaluated based on the number of billable hours they track. There are no incentives to be efficient, but rather motivators to be inefficient.
Despite these inherent setbacks, one third of agencies rely on billable hours as their primary pricing model, according to the recently released RSW/US 2013 Agency New Business Thought Leader Survey.
What Pricing Model Do You Use for the Majority of Your Services?
A Broken Model Ripe for Disruption
As explained above, in many cases, the billable hours model leads to questions on the client side about how time is being used, as it lacks transparency into results and value.
In the words of one survey respondent: “We need to modify our pricing. Clients want to know what they’re getting for their money so I think more of a ‘project based’ (and value-based) model may be better.”
Another puts it this way: “We believe that all projects have a value. Some are higher and some are lower, and those values are not necessarily related to how long it takes to complete a project but more to how important the project is to the client’s business […] Using a fixed project fee model, everyone agrees on the value for the project up front. The clients like this approach because they know their cost in advance, and the agency likes it because we can manage our resources against that cost. Plus, we are incentivized to get it right the first time. The sooner we get it right, the more money we make.”
We agree with the above respondents, and believe there is an opportunity for agencies to move toward more results-driven, value-based pricing models.
The Pricing Evolution: Tips to Get Started
So, how do you make pricing more transparent and fair to the clients? We don’t have all the answers and are continuously looking for new, innovative approaches. That said, we believe a standardized services and set-pricing model is key.
If you choose to go this route, here are some tips to get you started:
- Scope your services: Make a list of the main services or campaign packages you offer and what activities are included within them. Give them a scope.
- Understand time spent on activities. Use time tracking software, like TimeFox, to better understand the resources that go into each service. Draw on historical data to find the average amount of time put into each type of project. This will ensure that you are not undercharging your services based on time expected.
- Consider perceived and actual value: Time put in aside; clients value certain types of projects over others. High-demand, high-value services should cost more even if they take less time than other services.
- Agree on scope and price: Agree upfront with the client on the scope of the project and the associated price. This eliminates last-minute surprises and reduces client-agency friction.
- Revisit pricing if scope changes: If the client changes the scope, refer them back to your original agreement and offer updated pricing options if needed.
How Do You Price Your Services?
Share your pricing challenges, wins and ideas in the comments below. For more on agency pricing, check out the resources below:
- How to Price Your Digital Marketing Services
- Adios Billable Hours
- Chapter 1 of The Marketing Agency Blueprint
- Integrated Services and Value-Based Pricing [Exclusive Webinar Access]
