The Ultimate Guide To Agency Pricing Models (And Why Value Pricing Beats Them All)

Introduction

When I reflect on the work I do as a business coach, I like to see if I can spot any similarities in the businesses of my highest performing clients. 

Success leaves clues, as they say – learning what one business does to win in their specific market often gives an insight into what it takes to win in general too. 

Last month, we talked about the power of establishing a clear niche for your business (you can read that here if you missed it). 

And yes – across time, I’ve seen well-niched agencies outperform their generalist competitors 9 times out of 10. But there’s more to running a high-performance agency than simply choosing a good niche – if only it was that simple!

As for the other commonalities…

I was preparing some case studies for my website recently and came across an interesting example I’d like to share with you. 

PR agency Pedroza Communications sought me out to assist with their business. They had been around for five years but were facing challenges around growing the agency sustainably. 

Bear in mind this was an agency that had defined their niche, won plenty of customers and established a respected position in the marketplace… 

But despite having these wins under their belt, they were still struggling to shift to the next level. 

I got to work, digging deep to find out into what was holding them back from achieving the results they sought. It quickly became apparent that their pricing model was a key issue. Upon review, we decided that the business needed to move from a time-based pricing model to a value-based one (more on that a little later). 

With some bravery on the part of the MD (to make this shift), this process – coupled with some other interventions on my part – helped the agency grow their profits by 66% in just over a year. 

We’ll return to this case study a little later in the article, but for now, just bear in mind that big improvements often come from taking small corrective actions, including shifting your mindset. 

As an agency coach, I’m used to helping clients deal with a variety of problems. Staffing, strategic planning, winning new business and client retention – I’ve had clients contact me to assist with all these areas and more. 

But hands down, one of the most valuable things I do as a coach is to help my clients get their pricing right.

Value pricing and selling is a huge part of building a successful agency, but most of the information floating around online doesn’t truly teach you how to implement a value-based pricing and selling strategy. 

In this article, we’ll be diving deep into the topic of value-based pricing and specifically HOW you can implement it in your agency.

Here’s what we’re going to cover: 

• The standard pricing models you’ve probably heard of (and why they’re not a good choice for your agency)
• Why value pricing is the best option for your business
• The four things we sell to our clients – and which ones we should emphasise in our pitches 
• What buying bottled water in a desert can teach you about selling your agency’s services
• My personal experience with value based pricing
• The three truths of value pricing (and what this means for your agency)
• An interesting case study of an agency just like yours that has successfully implemented these principles in their businesses
• My favourite resources for simplifying the process of value pricing & selling 
• The exact steps you can take to put value pricing to work in your agency immediately

So if you’re ready to break free of time-based pricing, start earning the fees you deserve and dramatically boost your agency’s profitability, read on!

Standard Agency Pricing Models (And Why They’re Not All They’re Cracked Up To Be)

Before we get onto the topic of value pricing, I think it’s important to first get clear on the standard agency pricing models you can choose from. Here are the three most common pricing strategies you could employ in your business: 

Time-Based Pricing

This is simply where you charge your clients based on the time you spend working on their account. You might have an hourly or daily rate, likely different hourly or daily rates for different team members that work on the account. The prices you quote to clients are based on:

1. The time the job will take, and 
2. Who will complete the work

Simply put, it’s a direct trade of resources (i.e. labour hours and materials used) for pay. It’s a standard model, one that many agencies employ when they’re still finding their feet in a market. 

There’s nothing wrong with it, per se – but tying your income to your time will hold you back as you try to scale your agency. 

There are only so many hours in the day that you can work. And depending on your market/niche, quoting high hourly rates can be a huge turnoff for prospects (when you’re selling based on time, at least).

Of course, charging higher hourly/daily rates is a viable strategy. That’s essentially what the next model allows you to do. 

“Cost Plus” Pricing (Fixed Fees)

On the face of it, this might look similar to value-based pricing… but the difference lies in where your focus is. 

With a “Cost Plus” or fixed fee pricing model, you focus on inputs and outputs i.e. the resources you use to complete work for the client. 

For instance, a web developer might figure out the price for a particular project by outlining the various components of a project. That could look like the following:

1. Meeting with the client to develop the brief and outline the project 
2. Developing the wireframes
3. Initial page designs 
4. Edits 

And so on. 

Once that’s done, you would then move to assign a cost to each part of the project. 

For instance, maybe you estimate that developing the wireframes will take two designers four workdays to complete. Perhaps the initial meeting requires two hours of preparation on behalf of the Creative Director, etc. Essentially, you’ll figure out how much time & resources the project will take, then assign a cost to each. 

When you have completed this step, you’ll have an estimated cost for the total project. And this is where “Cost” based pricing diverts from value pricing. 

In this case, the final price quoted to the client is dependent on the cost of time/materials used, plus some fixed percentage (e.g. 20%). 

For example, if you estimated it would take 10 hours of a designer’s time and their internal cost to you is £600 for this time, you would charge the client £600 + 20% mark up resulting in a total cost to the client of £720.  

(We’ll return to this web design example a little later on in the value pricing section, so keep an eye out for that!)

This “Cost Plus” approach can sometimes be used to negotiate a fixed fee for the project. This is a double-edged sword: if the project goes to plan, you’ll make as much profit as you forecasted (or even more if it goes well). But if it should happen to drag out longer than you planned for? You’re left with two choices… 

1. Take the hit and complete the project (even if the work stops being profitable)
2. Return to the client and renegotiate the fee (which is awkward and can make it harder to deliver a satisfying final result)

Neither scenario is great. When you also consider that the fee you quote could simply be based on a fixed hourly/daily rate + a fixed percentage, it’s easy to see how you can end up working on projects that aren’t beneficial for your agency. 

The next pricing method on our list is another common one that takes the idea of charging a fixed fee and improves upon it slightly. 

Retainers

A retainer is where you agree a fixed monthly fee and outline the work you will do for that fee. For example, say you run a PR firm. You could negotiate a fixed monthly PR retainer of £3,000 per month with a client. For that amount, you might agree to the following deliverables:

• 2 press releases
• 1 case study
• Top 10 feature followup
• Press office support
• A monthly report and meeting to discuss your progress together

A retainer-based agency can often be more profitable than ones using the previous models. This is because their income is independent of their time. With this approach, you get paid the same whether it takes you 10 hours or 100 hours to complete the work required. 

The price you quote for a retainer is often derived from how long you estimate a standard deliverable will take to complete but allows some scope for variance depending on the client (which is good). 

However, while it’s a step in the right direction, it’s not the best option for your agency. It’s still an exchange of resources for money – just in this case, the resources in question are the various deliverables you’re obliged to work on (and not your time). 

Additionally, most agencies will still get sucked into quoting a retainer price that reflects the effort they have to put into the work (and not necessarily the value it creates – more on that shortly). 

When we look at these approaches presented so far, what’s the flaw common to each of them?

They focus on inputs and outputs… not outcomes and impact. 

Not sure of the difference between these terms? Read on to learn what they mean (and why you should care). 

Inputs, Outputs, Outcomes and Impact – The Key To Understanding Value Pricing

All of the pricing models we discussed in the previous section are acceptable choices, but they each share the same common flaw… 

They are based on YOUR agency and what YOU are doing i.e. your inputs and outputs. 

This is a problem because clients only really care about their own business. By this, I mean:

• They don’t really care about how much it costs you to complete the work 
• They don’t care what you have to do, or how much time & effort it requires on your end 
• They don’t even care about how well-crafted the work is for its own sake

That’s not to say they don’t care about quality or deadlines (these things obviously matter), but what really matters are the OUTCOMES and the IMPACT of your work. 

Let’s take a second to define precisely what these terms mean. 

When we sell to clients, we sell four things: 

• Inputs are the resources used to deliver a project – people, time, software etc. 
• Outputs are the completed tasks & deliverables e.g. a logo design, a press release, or a new website 
• Outcomes are the results the client gets from your work, typically characterised as a transformation e.g. unaware prospects start to notice their business or their branding goes from non-existent to some awareness 
• Impact is the long-term benefit of the work you’ve done – e.g. securing a leading position in their niche, getting many new enquiries, increased sales & profits etc.

Inputs and outputs are easier to quantify, but they matter a lot less than outcomes and impact. 

Focusing on the former two is a hallmark of agencies focusing on the wrong thing and therefore likely to lead to misunderstandings and shorter-term relationships.  Rather than framing their work in terms of how it will benefit the client, they instead spend their time worrying about the stuff that’s easily measured. Sadly, this is one of those cases where choosing the simpler upfront option holds you back in the long run. 

A press release might take five hours’ worth of labour to complete. The inputs and outputs, in this case, are easy to measure (‘research’, ‘time to write’ and ‘the press release’). But how do you go about articulating the outcomes & impact of that positive press release? Of coverage achieved (outcomes) Of a stronger brand? Or a more receptive market (impact), thanks to your efforts?

I’ve lost count of the number of agencies I’ve encountered over the years who fail to spot the mismatch between what they’re selling (inputs & outputs) and what the client is truly buying (outcomes & impact). This lack of alignment costs them new opportunities, profits and a chance to build a much bigger business…

And rectifying this mismatch is where value pricing and selling comes in. 

Why Value Pricing Is The Best Choice for Your Agency

As we just discussed, there’s a variety of standard pricing models you can employ in your business, but in my experience, the best pricing model for agencies is a value-based one. 

There are many reasons this is your best approach. Consider these two quick stats: 

• According to Hubspot, taking a value-based approach to pricing can boost profits as much as 50% over a traditional market-based approach 
• Small changes to your pricing models can have a big impact – studies by pricing experts out of McKinsey & Company found that a 1% bump in prices can result in an 11.1% increase in profits – a 10x return! (HBR)

So the facts are clear – a value based pricing strategy is the way to go if you’re running an agency. But what exactly is value pricing?

Simply put, it’s buyer-centric (not supplier-centric like the other methods). 

The price you quote is based on the value delivered to the buyer (the outputs & outcomes), and is not based on how expensive it is for you to deliver (i.e. the inputs). It’s often referred to as outcome-based pricing for this very reason. 

Value pricing allows you to get paid based on the perceived value you create for clients (and not just on the resources you expend in creating deliverables for them). 

Consider a web design agency. If they employ a time-based pricing model in quoting a project to a prospect, they might find it hard to justify more than £5,000 based on the hours it will take.

This might feel frustrating for the agency owner, but that’s because we’re still trapped in a limited paradigm (i.e. time-based or “Cost Plus” pricing). By shifting to a value pricing approach, we can begin to charge more than £5,000. 

Let’s say that you’ve worked with similar clients in the past, and were able to increase their on-site conversion rates to the point where they were earning an average of £200,000 more per year directly from their websites.

That’s £200,000 in profit directly attributable to your interventions. In this case, it would be very reasonable to charge say 10% of that as the project fee (i.e. £20,000). 

By learning to frame the project in terms of value for the client (and not just simple inputs and outputs), this web design agency could earn four times as much from a single project. 

(Note that this £200,000 figure doesn’t have to be an average or even a figure you’ve personally produced for a client. Ultimately, your goal is to get the prospect to tell you the value of your proposition by exploring with them the goals of the project and what ‘success looks like’. If you do this, you’ll be framing a value-based price).

Hypothetical web design agency aside – how well does this approach work for real businesses?

You’ve already read about the success of Pedroza Communications above (who boosted profits 66% in a year after implementing a value pricing model).  This experience isn’t unusual – I’ve seen other clients snap out of slumps and boost their profits by double-digit amounts in a matter of months. 

And even as a coach, I know that the day I shifted towards value-based pricing was the day I started getting paid the fees my work deserved.

You’ll read more about my personal (hard-won) experience with value pricing later in this article. For now, let’s address the question that’s been at the front of your mind since you started reading this article… 

How can you put value pricing to work in your agency?

How To Use Value Pricing In Your Agency

Now, you might have read the previous section and thought, “There’s no way I could justify charging x% of my client’s earnings as the project price”. 

And yes, sometimes that’s true…

But when you think about it, value based pricing is everywhere. 

It’s more obvious in some sectors than others, of course. For instance, consider the fashion industry. The same basic material is used to manufacture Primark shoes and Nike ones – but Nike shoes can retail for 5-10 x the cost of their cheaper equivalent. All that separates the two is belief in the value of the brand. 

Another example is seen in the construction industry. No one prices based on the cost to build + a margin of profit… it’s all down to what people are willing to pay. In a way, that’s the ultimate value sell!

Selling clients based on value requires you to take a different approach. Rather than focusing on yourself, you need to become intimately aware of what your client is hoping to achieve. 

You can’t possibly hope to deliver value to them without first understanding what they value. How can you succeed if you don’t know what success is? More importantly, how can you create value for their business if they don’t truly know what they want themselves?

This process starts with asking better questions.

The quality of the questions you put to your prospects will determine how much value you can add to their business. Your goal is not to figure out how much you can charge them – it’s all about determining what a valuable solution is worth to them. 

Inputs and outputs are secondary. Outcomes and impact are what you need to be worrying about. Getting a crystal-clear picture of how they will gauge success is of the utmost importance. 

Once you’ve figured out: 

• What success would look like to them (i.e. what outcomes and impact they’re after)
• How they’ll measure this success
• How important this success is to them (it’s better to solve big problems than minor ones)

You’ll naturally be able to align your proposal with their desires. That goes for pricing, too – once you know what they need & how much value that can bring to them (financially), you’ll be able to give them a higher price point that works for both of you. 

In our web design example, the agency in question had experience and a track record of delivering results to similar businesses. That made it easy for them to pitch their value – they had evidence to point to their impact, and a compelling story to tell about their value proposition. 

If you’re in an industry where it’s harder to quantify these things, there are two other methods you can employ. 

1. You can make reasonable estimates as to your impact. E.g. if you’re a PR firm, you can conservatively guess that no (or even worse, bad) publicity for their business could cost them x% of their sales (say 5%). Once you have an idea of their annual revenues, you can base the value of your intervention based on this figure. If you’re solving a big problem, even conservative estimates will still allow you to deliver massive value to prospects
2. You can discuss value based on the results enjoyed by businesses in similar industries (e.g. a case study detailing a dentist’s increase in bookings thanks to a well-integrated website & advertising campaign could be of great interest to lawyers, physiotherapists, or other professionals)

Whatever the case may be, remember that figuring out the true impact you can have on their business is what will enable you to get paid value-based fees…

And the process starts with asking better questions. 

Don’t take their stated goal of wanting more website traffic as their definitive goal. Dig deeper: look for the true impact you can deliver for them (keep asking ‘why’ questions so you can align your project to their business goals). 

If you’re interested in learning more about having effective (value-based!) sales meetings, check out the resources section below for a free copy of my Value Selling eBook. Additionally, you’ll also find a link to a webinar I recorded on the topic. 

Using this material, you’ll find it easier than ever to figure out what clients really want – so you can be the one that supplies it to them. 

What Buying Bottled Water In The Desert Can Teach You About Selling Your Services

Let’s consider the realities of value pricing by changing tack for a minute. 

Consider one of the most widely available substances in any shop in the world – bottled water. 

If we apply the pricing models we’ve previously discussed, we can see how we could come to very different values for the same product depending on how it’s presented to us. 

Let’s take a simple 500 ml (16 oz for my American readers) bottle of store-brand water.

If you have a time-based pricing mindset, you might estimate how long it took to manufacture the bottle, and how long it took to locate the spring it was filled from. Say the end cost is 60p. 

If you were a little more generous and used a “Cost Plus” model, you’d add a margin of profit so the seller has an incentive to work with you. Let’s say the end cost is £1 in this case. 

Both fairly modest prices, but they’re quite in keeping with what you’d expect to see. However, what would happen if we applied a value pricing paradigm?

To consider how this could happen, imagine the following situation: 

You’re walking through the desert. With the sun beating down on you, the sand beneath your feet feels like it’s on fire. There’s nothing but dunes for miles around… 

But worse than the burning sand is your thirst. You’re desperate for a drink, and you’d pay any price for it right now. 

Then in the distance, you see a figure on the horizon. It’s another lost traveller, just like you – but they seem to be in much better condition. As they get closer, you see why: they’ve got a bag filled with little plastic bottles of water on their back!

In this moment, how much would you be willing to pay for one of those little bottles? 

As the sun beats down on you with no reprieve in sight, wouldn’t it be fair to say that a little bottle of water could be worth far more than 60p?

Odds are you’d pay whatever you could just to get your hands on it. £10, £20, £100 – it all depends on just how thirsty you are. 

And if you were thirsty enough to hand over £100 to this well-stocked traveller but they only charged you £20, how happy would you be?

Likely jumping out of your skin at the great deal you got!

That’s what the value based pricing strategy is all about: figuring out how badly your client needs a drink, then giving them that drink at a cost that excites them (i.e. that makes working with you a no-brainer). 

Granted, the situations you face as an agency aren’t as life and death as a wander through the desert, but the moral of the story still applies: 

Clients don’t buy time, effort or input. 

Clients buy results. 

Once you internalise this lesson, you’ll be in a much better position to both deliver great results to clients and get paid much more attractive fees. 

To drive home the importance of this shift in mindset, I’d like to share with you a story from the very early days of my coaching agency. 

Value Pricing – My Personal Experience

Let’s take a trip down memory lane together as I recount a tale from the early days of my coaching business. 

I remember it like it was yesterday… 

I had met a great prospect, and things were going well. They were receptive to my pitch – they were even interested enough to ask for a quote.

Without giving the matter much thought, I quoted them a day rate I felt was reasonable for both of us. I didn’t have much to base this on bar a little research I had done on some of my competitors.

The price didn’t seem to concern them (in hindsight, this was a red flag: I should have seen that I was clearly too cheap) – they said they’d think about it and let me know. 

A few days later, that prospect got back in touch with me. They were eager to work with me, totally sold on my proposition and offer to them… 

Except there was one little hitch. 

They had been in contact with another coach whose day rate was £100/day less than mine. And unless I was willing to price match, they were going to go with my competitor. 

Being new to the coaching game, I felt I had no choice but to discount my prices to win that first client. There was no escaping the Price-Match Trap in this instance… 

But as I established my business, the lessons I learned from that first encounter proved invaluable, namely: 

1. Selling time to clients makes you into a commodity (so it’s easy for prospects to bargain you down by comparing you to your competitors)
2. Your technical skills are a commodity (e.g. web design or SEO).  It’s your experience, strategic insights and creativity in generating great client results are what set you apart – so focus on selling these 
3. Clients don’t really care about how long something takes you. If you can frame deliverables in terms of value (and not in terms of cost), you’ll earn far better fees for your work

Let’s expand on these three points now. 

Three Truths of Value Pricing

1. Time Is a Commodity 

Time is a commodity. When you quote a price to your client based on how long something will take you to complete, you leave yourself vulnerable in two ways: 

1. Your competition could deliver the work faster than you 
2. Your competition could charge a lower hourly/daily rate than you 

In either case, it’s very easy for prospects to compare your proposal to what other agencies are offering too. And not only is pricing based on time easy to compete against – it also fails to take the client’s true desires into account (i.e. the outcomes and impact they’re after).  

In my case, there was no discussion of the value my competitor and I could bring to the table – it was purely a matter of cost. Because I had chosen to quote a day rate (and hadn’t taken the time to properly articulate my value), I was bargained down.  

2. Skills Are a Commodity 

Being able to perform some technical task isn’t what sets you apart from the competition. Copywriting, web design, SEO, PR management – these skills are commodities. There are hundreds of other businesses out there that can do those same basic things. 

What sets you apart is your experience and your creativity in generating great results for your clients… but so often, agencies get bogged down in the technical side of their work. 

Your skills are a prerequisite but remember: the real value you can offer clients comes from your experience and creativity. 

A run-of-the-mill web design agency is competing with cheap freelancers in Eastern Europe & Asia, website building software such as Wix and GoDaddy, and a dozen other local firms all offering the same services. In this environment, it’s easy to see how competing based on price is a race to the bottom. 

However, if they can learn to use their experience serving a particular niche (or their creativity in delivering great results) to their advantage, they can more easily stand out from the crowd. Discussions of price will fade into the background in the face of the new reality: 

All your competitors could be cheaper upfront, sure – but what you’re offering is so much better. 

3. Clients Only Really Care About Outcomes

As we’ve already covered in this article, clients don’t really care how much the work costs you, how long it will take you, or if you’re proud of the final results. 

All they truly care about is the value you can create for their business. 

If you can learn to frame your relationship in terms of value (and not just how much you cost), then you’ll be in a position to earn far better fees for your work. 

These three truths were hard-won for me (to be honest, this wasn’t the only client I let talk me down to a lower rate!), but I’ve been able to spare my coaching clients plenty of headaches by passing these lessons on. 

If you find yourself competing based on price, bargaining with clients (and losing), and even losing out to other businesses that don’t deliver as much value as you do… 

Then consider how you could best sell your value to prospects. 

Develop systems for communicating your worth, and for figuring out precisely what your clients are looking for. One way to do so is to collect customer data by surveying potential clients on how much they would pay and which features and benefits they value most in your product.

If you can internalise these truths and use them in your dealings with clients, you’ll be in a much better position than your competitors. 

In the next section, we’ll look at a relevant case study that will show you how effective using a value pricing model could be for your agency. 

Client Case Study – Pedroza Communications

I’ve mentioned their name a few times throughout this article already. That’s because I think you can learn a lot from this case study if you’re currently trying to implement a value pricing structure in your agency. 

Pedroza Communications is a PR company working in the education sector. They took me on because, despite being pretty well-established in their niche, they felt they were not growing as much as they could. In fact, they felt as if they constantly taking one step forward and one backwards, never getting any closer to that endpoint they were aiming for. 

My work as an agency coach is rarely a simple “one and done” proposition. We dig deep and look to see what’s really going on in the business. Oftentimes, the client is surprised when we find the real cause of their troubles. 

In this case, we made a few minor changes to the operational structure, workflows, and the like… but the single biggest area of concern was their pricing model. 

Like many other agencies, Perdoza Communications employed a time-based pricing model when pitching to new prospects. And while that helped them to secure plenty of business, the work they were doing wasn’t as profitable as it could be.  

We looked at their pricing model and identified a few key changes they could make (maybe you could use these too?):

1. We stopped talking about time in proposals. This is the most important point. Note that it doesn’t mean you’ll never talk about timelines and delivery points – it simply means you don’t give a detailed breakdown of how long you will spend working on various parts of the campaign 
2. We changed the structure of sales conversations they were having with new prospects, placing more emphasis on figuring out early on what success would look like for them
3. We mapped out their services against these different outcomes (to ensure there would be no misunderstandings further down the line)
4. We created a clear standard scope of work for their service offerings to show what was included (and what was not included). This is very important: spending time to get this right up front makes it much easier to deal with “scope creep” when it arises

With a little bravery, the MD committed to making these changes. We worked together on the next brief, and by using this approach, we came to a price that was substantially higher than they would have charged previously…

But despite this increase in price, they were still able to easily land the prospect as a new client. It was almost a no-brainer, considering the value they brought to the table. 

Just one year later, they had switched over to using this approach with all their prospects. And the results?

Their profits were 66% higher than they had been just 12 months prior. 

I’ve seen results just like these happen for agencies in many other markets too. The same rules apply, regardless of your niche: learn to sell based on value (and not just on time), and your business will reap the benefits. 

The Best Resources For Value Pricing & Selling

In this article, we’ve dug deep into the topic of value selling and pricing. 

Switching to a value-based pricing model can seem quite challenging with lots of questions and excuses including:

• How can your agency possibly justify charging more than the competition? 
• What will you say to prospects when they ask you for a discount?
• How can you bring up the topic of increasing prices for existing clients?
• How do we change our model from time or cost-based to value-based?

Answering these questions can be tough… 

But luckily, I’ve got some great resources to help you with the process. 

First off – you can get a free copy of my Value Selling eBook (click here), which outlines the 10 steps you can take to implement value selling and pricing in your business. Inside, you’ll get the exact steps for selling based on value, how and when to have the value conversation with prospects, and much more. 

Here is a more detailed 30-minute webinar I ran on value selling and pricing.

Additionally, Hubspot has some great content on value pricing frameworks. You can read more about that here. 

In case you’re sceptical about how well these techniques will work for your business, here’s a case study of a small design agency that revolutionised its business by switching to a value-based pricing model. 

Finally, here’s a link to a book called “Breaking the Time Barrier”. Published by FreshBooks, it’s a short read, but very valuable. And best of all, it’s free!

Your Action Plan

We’ve covered a lot of information in this article. At this stage, your head is probably spinning at the possibilities before you!

To help you get started with the process of value pricing, I’ve outlined the very next steps you should take in a handy One-Page Action Plan. 

To get your copy for free, fill in the form below to get instant access.