I have a team of amazing podcast producers at One Stone Creative. One of the founders, Megan Dougherty, often sends me topic ideas for this very podcast. Because she also runs an agency, she has many of the same questions we all have and she provides me great fodder for thought.
One of the ideas she sent me was a discussion about how to provide different types of services—at different price points—for many different clients.
But, it’s not as easy as it sounds. Like many entrepreneurs, I started my business thinking I could scale by offering communications services to small businesses because they’re underserved.
Well, there is a reason for that: it’s incredibly challenging to scale a business on $500-$1,500 per month retainers. You can only hire junior-level employees and they’d each have to service 20 clients at one time. If you had one weekly meeting with each of them, you’re at 20 hours a week, just in meeting time, not to mention all the work you have to do.
Not to say it’s not possible, but it’s extremely challenging.
That’s why, rather than try to be all things to all organizations, it’s important to figure out the right pricing model for your business (or, in this case, agency) and then how you might be able to package things for the clients that can’t afford your done for you services.
Chip Griffin and I had a similar conversation to this last July on the Agency Leadership podcast. We decided there are eight types of pricing models to consider:
- Billable hours
- Buckets of hours
- Fixed-fee retainers
- Productized services
- Points based
As I go through each of them, think about how you might apply each of these to the work you do and the clients you work with—internal or external.
Meaning, you may work for an agency and have external clients, or you work for an organization and have internal clients. Think about which ones make the most sense for different sized organizations that have different sized budgets.
Here we go!
Billable hours. Blech. I’m not a fan of billable hours because you’re getting paid for the time you spend and not the expertise you have, but this also comes at the tail end of my serving as an interim chief content officer for a client and they paid me by the hour, which ended up being very lucrative.
So it’s not always bad—and the billable hour often gets a bad rap. For instance, many attorneys bill by the hour, and it’s usually a very high hourly rate. That’s because you’re paying for their expertise and efficiencies. If you want to service different-sized organizations, perhaps this is the way to go. You can offer a different hourly rate, depending on their revenue numbers. You could have a non-profit rate, a small business rate, and mid-sized business rate, and a Fortune 500 rate.
That could get a little messy for the accountants, but it’s feasible.
The next option you have is project-based, which many of us shifted to in 2019 and certainly last year. This is the most common pricing model because it keeps the client’s risk low—they know how much it’ll cost and what they get for the money—and it allows you to stay within the scope of work. If they want more than what’s outlined in the scope, they pay for it.
The trick with a project-based pricing model is that you have to get your time estimates right and there needs to be a buffer for scope creep. The only thing I don’t like about this pricing model is it’s impossible to project cash flow and revenues beyond a month or two. But this is a great option for smaller organizations that need your services, but don’t have an annual budget.
Buckets of Hours
Selling buckets of hours allows you to blend hourly and fixed-fee projects into one. With this pricing model, a client would buy a block of hours for a defined cost. There are many coaches who work this way—you buy a bucket of hours and use them as you like, but once you run out, you either have to ante up again or end the partnership.
This usually works well if a client knows exactly what needs to be done—and about how long it will take. They lead the strategy and provide you with a plan to get things accomplished. We have a client who likes to work this way for things such as database development, email marketing funnels, and social media templates.
Fixed Fee Retainers
The Holy Grail for many agencies is the monthly retainer—it’s how I’ve grown my agency and I love it because I know exactly how much money is coming in each month, and for how long. I love the certainty of it.
The challenge, of course, is that with a retainer, a client thinks you are there to do their bidding, no matter what it is. And that goes for the $500/month retainer to the several thousand dollar per month retainers.
You have to be crazy clear about what it includes, but more importantly, what it does not include. For instance, in my early entrepreneurial days, we had a client that thought his $2,500/month retainer meant he could call me at all hours of the day and night (and weekend) and would often call me to attend a meeting that lasted four or five hours, which back then, was easily half the monthly budget. For one meeting.
We overserviced it to death, trying to meet his demands, but also get the work done. Imagine my shock, then, when they fired us for not achieving the results they were expecting. That was a hard lesson to learn.
Even with fixed-fee retainers, you have to be crystal clear about what’s included—and what’s not.
The all-you-can-eat option is just like the buffets we’ve all been to..well, at least before The Corona. I’m pretty sure you’ll never again see me at a salad bar, Chinese buffet, or Las Vegas breakfast buffet.
This option gives clients lots of options and they wander around, slopping options onto their credit card. We’ve tried this method before and, just like it sounds, it’s a mess. Not only is there no strategy attached, you’ve pretty much become an order taker who just does tactics.
If your agency deals in high-volume repeatable tasks for clients, a pricing model like this can work, but pricing needs to be spot-on to ensure that neither party gets a bad case of indigestion (ba da dum!).
I am very much a fan of productized services—and LOVE this option for the clients who can’t afford you.
At my agency, we have online courses, the PESO Model certification, one-on-one coaching, workshops and training, and we do the PESO Model work for clients. This allows us to work with anyone who wants to implement a PESO Model, even if they can’t afford to hire us to do the work.
It has taken A LONG time to get to this point—and there is still much to do, but this pricing model works best for us.
That said, I don’t think it would work quite as well if we didn’t have a defined process that everyone is trying to get their hands on.
You can certainly productize your intellectual property; just make sure it’s done in a way that prospects need your special sauce to do it themselves.
During the past decade or so, a new approach to pricing has gained a foothold among some agencies, particularly in the digital marketing space. Instead of selling buckets of hours on a one-time or ongoing basis, agencies give clients a set number of points for a fixed price.
These points can then be “redeemed” for specific items on a menu. Writing a blog post might be 100 points while posting to Twitter could be five. A landing page might cost 250 points while an About Us page just 50.
Points enable you to move away from discussing billable hours, but it really is just a veneer for the same type of relationship. For clients with wildly varying needs from month to month—either in terms of the specific services required or the volume needed—points can be a viable solution.
Using a points-based approach to pricing has many of the same downsides of selling buckets of hours, but it also adds the need to educate prospects on the pricing model since most clients haven’t experienced it before.
Nevertheless, it could be a good solution for some agency-client relationships. Just be careful here because, like the all-you-can-eat approach, it can also end up being that you’re just an order taker, not a strategic partner.
Groooooan. I HATE pay-for-performance. It doesn’t take into account all of the work we have to do to get a new campaign up and running. For instance, a prospect called me the other day. He’s looking for someone to help him market to a new audience. He said he would happily pay us a percentage of all the leads we generated for him, but he didn’t have the budget to hire us outright.
At the beginning of my entrepreneurial journey, this would have been appealing. I KNOW we can generate quality leads for him so taking a percentage sounds appealing. But I also know how much work goes into getting things up and running for a program like that—and I have to pay my team, which I can’t do in the interim if we’re not being paid.
Likewise, there are plenty of publicity firms that will set up pay-for-performance with new clients. The way they make money is they’ll post news release after news release to the wire and then send the reports to the unsuspecting client as a “show” of how many hits they’ve gotten.
That definitely straddles the unethical line, especially because I know many of those hits are bunk. Not my cup of tea.
(This is a topic that Chip and I covered in a podcast episode, so give it a listen if you want to consider it; I’m not always right.)
Choosing the Right Pricing Model
There is a lot here to chew on here, and we’ve really only scratched the surface. The first thing you want to do is figure out if you really do want to be all things to all people and offer different pricing models based on pre-set criteria. If you do, many of these models would work, as long as you have a great accountant and are diligent about estimating accurately.
As Chip says:
You also need to remember that you are not Netflix or Amazon or The New York Times. Nobody is going to report about changes you make to your prices or pricing model.
This means you can be flexible and make changes over time. Test things, see what fits, and keep improving.
If you want to chat about all the pricing models, what might work for you, or how to service different-sized businesses while still making a profit and not working yourself into a hole, join us in the (free) Spin Sucks Community.