Many UK marketing agencies are experiencing continued growth and success and furthermore, according to The Wow Company, 51 percent of agencies plan on increasing their prices this year.
But despite this, deciding how to price your digital marketing services can be a tricky balancing act between meeting your costs, out-bidding your competitors, offering value-for-money to your clients and, of course, making a profit.
Luke Brynley-Jones has suggested that some agencies and consultants have adopted a harsh procedure of pricing based on the budget that individual client has available in that particular time frame. He describes this way of thinking as ‘charging whatever your prospective client can afford’, and, while he is quick to point out that it is not a mentality he exercises, in our webinar he posed the question:
“Don’t we all do that, to some extent? Or do we really set out prices that are based on how much time it takes and how much cost there is to our business?”
A poll taken during our ‘Growing your digital marketing agency: what services should you offer?’ webinar outlined a result that perhaps we might not have been expecting — we discovered that marketing consultants and agencies take a stern attitude towards pricing. 90 percent of participants in our poll said that, when quoting for a project, ‘how much the client can afford to pay’ plays a significant role in their pricing. This puts the client’s perceived largesse (or otherwise) as a more significant factor than both the cost of delivering the project and the required profit margin.
Tamsin Fox-Davies pointed out that targeting prices at the budget range of the client is both necessary to ensure it’s realistic, and likely (in many cases) to result in prices being reduced, rather than inflated.
“I think costing against a client’s ability to pay is very reasonable. I’m not looking at it from a point of view of how much you can get out of them, but how much — especially if you’re working with a small business – their budget is”.
Lilach Bullock believes pricing is largely down to the value perception of the client. Despite the current popularity of social media and content marketing, these activities are known to be allocated smaller budgets than more established digital marketing activities, such as web design and advertising. Lilach thinks:
“It’s about the value they see. I think that’s where the lines get blurred over what a client can pay. If they knew that they were going to get results, if they knew they were going to grow their business by ten times over then, surely, their budget for these activities would be bigger?”
What factors should influence your pricing decisions?
Agencies obviously need to pitch reasonably competitive rates, but to what extent should this guide your pricing?
For our webinar audience the prices quoted by competitors had the smallest impact on their pricing decisions. This may be a reflection on the size of companies involved. Our participants were mainly individual consultants it became apparent that factors such as location and personal recommendations are likely to have a bigger impact on client purchasing decisions than price.
Pricing gets harder when competition isn’t restricted to local or even domestic markets. Lilach Bullock, who often pitches for projects in the US, says dealing with overseas competitors can complicate things:
“It’s really interesting. You really don’t know what they are going to be pitching. Obviously, they price in dollars and then you’ve got the exchange rate. But then we have our prices, know our base and how far we can stretch.”
The baseline for any pricing decision obviously begins with understanding the cost to your business of delivering that particular project. Yet, according to the blog, Marketing Donut, there are two pricing models that most agencies will work from to shape a basic price structure around their services, ‘cost-plus pricing, which involves adding a mark-up to your break-even costs; and value-based pricing, which takes into account the value of your service to your customers.’
Cost-plus pricing is usually calculated as an hourly rate or fixed cost based on the time and resources needed to deliver the services, with a profit margin added.
Like many small agencies, Vee Smith of My Super VA has found a cost-plus pricing model that works for her:
“If there’s a fixed project I’ve got a pricelist, but if it’s open ended I charge an on-going hourly rate”.
Less used by agencies, but probably most interesting is the method of value-based pricing (VBP). This pricing process looks to put a price on the value-add that your consultancy or agency offers over your nearest competitors. For example if, in addition to web design, you offer in-house PPC, but your two nearest competitors outsource their PPC — what is the value to potential clients of maintaining their PPC within the same team?
Reputation and industry credibility both add value to your offering, so should be considered in this model of pricing. It can, quite quickly, become a complicated calculation. Perhaps the biggest impediment to implementing value-based-pricing is that it is dependent on making assumptions surrounding what your clients value most.
Client expectations in terms of ‘perceived value’ are inextricably tied to pricing levels. Luke Brynley-Jones cites situations where there’s actually a risk to being competitive on price:
“If you’re pitching to a large company and you come in at a price below the other agencies, the client may assume that the quality of your services won’t be as high. Sometimes you need to cost in those expectations during the pricing process”.