As a creative agency looking to set its mark on the digital world, you should consider strategies that will keep your business afloat and make a profit. One of the most crucial methods you should undertake is successfully pricing your work.
Businesses often undersell their value in the hope of retaining clients or attracting more clients. Is this a good strategy? How do you set your creative agency’s price to be successful and guarantee a steady flow of cash and profit?
What Should You Consider When Pricing?
A ton of factors can affect pricing and the demand for your services. But before you dig into other factors, like the local economy, competition and your capacity, it’s a good idea to understand the different pricing models that you can use, as well as the benefits and shortcomings of each.
Common Pricing Models
Here are the typical pricing models most creative agencies use:
· Penetration pricing strategy
· Competition-based pricing
· Value-based pricing
· Project-based pricing
· Hourly pricing
Penetration pricing strategy
Penetrating a new market means you have to price your product and services lower than your competitors. You may operate your creative agency with little profit in the early stages just to make sure the market understands and accepts your services before you can increase your charges.
Here’s an example:
If Company X and Y charge $15,000 and $17,000, respectively, for website design and content creation, you may consider pricing your services at $14,000.
Although this is a faster way to acquire new clients, increasing your prices and retaining your customers will be difficult. Like discount pricing, it may create expectations among clients that the service will always be a low price.
• Attracting new customers: By setting lower prices, the agency could attract customers who may have been hesitant to try its services. This can be most effective when an agency is running a little lean on cash flow is desperate to move money into the business.
• Increasing market share: The agency may capture a larger market share with reduced prices, which will benefit the agency in the long run by helping to position it as an industry leader.
• Testing new services or products: Penetration pricing can be used to test new services or products, as it allows the agency to gauge their demand and adjust before launching them at the total price
• Reduced profit margins: Lower prices will lead to reduced profit margins, especially if the agency cannot increase its sales volume enough to compensate for the lower prices.
• Damage to brand image: Customers may perceive the agency as low-quality or low-value if the prices are too low, damaging the agency's brand image
• Difficult to increase the price: This pricing strategy makes it difficult for marketing agencies to increase prices later on and retain clients simultaneously
Overall, there are possibly more, and more severe, downsides to penetration pricing. Outside of generating ‘emergency funds’ it’s not necessarily a great pricing model.
Competition-based pricing is a pricing strategy in which you base pricing on your competitors' prices. To gain a competitive advantage in the marketplace, you may set its prices lower than your competitors. However, this pricing model may not consider factors such as the cost of production or the target market.
Here’s an example:
If Company Y offers social media management services at $3000/month and company Y offers the same services at $3,500, you may have to price your services at $3,300.
Overall, it’s similar to penetration pricing but not explicitly to acquire new customers. Rather it’s a long term (possibly ill-fated) pricing strategy.
Again, not a strategy I’d necessarily recommend.
• It can help your creative agency stay competitive by ensuring that prices are in line with other creative agencies
• Your agency can respond quickly to changes in the market, such as price changes from your competitors
• It can help businesses increase market share by undercutting the prices of their competitors
• You can maintain market share since your clients are less likely to move from your brand to your competitors
• It can pressure creative agencies to lower their prices, even if it means cutting their margins to maintain market share
• Creative agencies may focus on price at the expense of product quality or customer service
• It can make it difficult for your agency to justify why you charge less than your competitors
• Hard to set your agency apart from your competitors
• It can also be challenging to raise your agency fees for clients who have already been acquired during the implementation of competition-based pricing
Value-based pricing is a pricing strategy in which the price of a product or service is determined based on the perceived value it provides to the customer rather than the cost of producing it or the time spent providing it. This approach considers factors such as the benefits provided, the target market, and the competition.
Here’s an example:
The agency might propose a website with a custom design, an e-commerce platform, and a content management system with a fixed price of $75,000. The agency would explain that the custom design will help to establish a strong brand identity for the client, the e-commerce platform will increase sales, and the content management system will allow the client to easily update the website, providing long-term value.
This approach aligns the interests of the agency and the client, as the agency is incentivized to deliver a high-quality website that offers real value to the client, and the client can budget and plan for the project's cost with more certainty.
Value-based pricing can be beneficial for creative agencies because it allows them to charge a fair price for their services based on the value they provide to the client. This is when you are an industry expert and know exactly how the outcome will be. It can also help to establish a long-term relationship with the client, as they are more likely to be satisfied with the value they receive.
But in value-based pricing, you should be careful not to undercharge for your services as you could fail to cover the costs of the project. Remember, when you undercharge your clients, they may view your services as less valuable or professional. This may lead to a negative impact on your reputation and future business opportunities.
To avoid underpricing your agency, you should consider the tasks and resources required to complete the project. This is where project-based pricing is helpful, which will be tackled below.
• By pricing based on value, creative agencies can ensure that they are charging customers a fair price for the value they receive
• Creative agencies can be incentivized to develop new and innovative ideas that will increase the value of their services
• This pricing model helps creative agencies charge more for their services than they would if they used a project-based pricing strategy
• There is a risk of misjudging the value of your services and risking overpricing, which can lead to lost customers
• You must have a very thorough understanding of your internal costs before considering the value of the deliverable to make sure that you are not undercharging
Project-based/Fixed rate pricing
Another common pricing is the project-based pricing method. You charge your clients a flat fee for the project by determining the scope of work, the complexity of the project, and the resources required to complete it. Most creative agencies, and their clients, prefer this pricing model to hourly projects because of the cost-assured nature of the model. Budgets are often set internally for clients and they may be most comfortable with a set price.
With the project-based pricing model, your clients know the total cost of the project before the work begins, and your agency's revenue is predictable. However, mis-judging the level of work can lead to quotes that are too low to be profitable. Likewise, scope creep can often rear it’s ugly head and lead to a drained profit and frustration.
• Both the client and the agency know the project's exact cost and expected outcome
• Clients can budget more effectively for a project when they know the fixed price in advance
• Agencies can set prices based on their desired profit margin, leading to more predictable and stable revenue
• Agencies may have difficulty accommodating the scope of the project or accommodating the price if the project's requirements change
• Agencies may have difficulty accurately estimating the time and resources required for a project and risk underpricing their services.
• Agencies may have to limit the project scope to fit the fixed price and may not be free to explore creative solutions
Hourly projects can be problematic for creative agencies because they can lead to scope creep. This is where the project's scope gradually expands beyond what was initially agreed upon with your clients resulting in extra work. It is also difficult to estimate and budget for the project, making it challenging for your agency to predict its profitability accurately.
Of course, in hourly billing, you ‘should’ be paid for all of your time. But an unknown overall price combined with scope creep can lead to unhappy customers, failed payments and pressure to rush to completion.
• Can be seen as fair because the client is only paying for the actual time spent working on their project
• Allows flexibility in the project's scope as additional work can be billed hourly
• Allows clients to see exactly how much time is being spent on their project and how much they are paying for that time
• Good for projects where it’s difficult estimate in terms of scope and timeline
• Clients may be uncertain of the final cost of a project if the project takes longer than expected
• Hourly-based pricing can be more expensive for the client than a fixed-price or value-based pricing model
• It can be challenging for your creative agency to predict cash flow and profits
Our recommendation for most projects? Consider a blend of Project-Based pricing with a Value Pricing model.
That strategy establishes the scope of work in detail so that you thoroughly understand the project’s cost to you in terms of your staffs billable time, contractors, materials, any related costs. Then add on your some room for the inevitable contingencies, then your profit margin, and markups. Now that you have your baseline price, consider the value that you are generating for your client. Is the pricing fair to you? Fair to your client? Find the price that reflects your value and it’s less likely that you will be leaving profit on the table.
When clients see value in your services, it leads to more satisfied customers and higher profits. This pricing blend will also enable your agency to be innovative and creative, which are key to the success of creative agencies.
Dryrun will help you smooth out the ‘feast and famine’ in your revenue by delivering a unified forecast of your cash flow, sales and expenses in a simple and flexible tool.
Spot the peaks and valleys ahead of time so that you can adjust your capacity, backfill sales, and pick and choose the best projects, generating more money with the same team.
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