How to select the best price model for your digital agency in 2020

Almost all digital agencies are using one out of three price models, but which one is best suited for your business? In this post, we revise the most common options and help you decide which way to go - or not.

The different types of price models for marketing agencies

Choosing the right price model is crucial in terms of profitability, client satisfaction, and financial stability, among other things. The most common price models are:

Fixed fee/retainer

With a fixed fee as price model, an agency calculates the cost for a specific project by presenting an estimate on the number of hours required, the hourly rate per employee/agency and then adds buffer fee or margin. This also includes working on a retainer.

The fixed fee model suits clients that have a specified budget and want to know exactly how long a project will be and what it will cost. A typical problem related to this model is the fact that projects usually change a lot as time goes by. The agency needs to be very focused on project management to be certain that their business will, in fact, make a profit. There’s a possibility that the client might feel that the agency only cares about hitting the time budget each month - without regards to the actual outcome. On the other hand, the agency might not want to suggest new ideas along the way because of the fear of adding to much time on the project that is not included.

Percentage of spend

This is a price model where you price the services based on the marketing spend. If you increase spend your agency probably need to put in more hours into manage it . If you’re afraid of running into problems like the ones suggested under the fixed fee model, the percentage of spend might be a better option for you. The clients don’t have to be afraid of not being informed on suddenly increased costs, and the agency can focus on the end service.

This is an advanced model that has proven to be very effective for many companies. The agency has to make sure that they really know what is valuable to the client and focus on tracking and measuring the client's performance and results. The challenge with this model is that the interest for the client and agency are not aligned. The client goal will never be to increase spend in Google Ads, it will always be increase conversion, revenue or result.

Billable hours

This usually means that an agency set a specific price per hour and the estimates the amount of hours each month. This pricing method has met critique in the industry since it focuses on the agency costs rather than results or client value. An agency gets more paid if the work draws on time. The balance between agency and client is uneven since they don’t work against the same goal with this price model. It’s hard for the agency to predict profits and the client can easily have issues with the fact that project costs surpass the original agreement.

Percentage of ad spend - a model increasing in popularity

An industry report made by WordStream, published in March 2019, shows some interesting insights to the state of internet marketing agencies, based on surveys of hundreds of digital marketing agencies. This report shows that half of the agency customers use a fixed fee model to charge their clients for their services, which is around the same figure as last year.

Percentage of spend has become much more popular compared to last year, with an increase from 25% last year to 34% in 2019. Paid search services with billable hours stay around 11% like last year, but those using an alternative model has seen a decrease from 12% to 5%.

How can I align interest with my Google Ads agency?

Small improvements to your pricing models can have a significant impact on your agency’s focus to reach your own goal.

At Keywordio we don’t believe fixed fees, percentage of spend or hours per month align interest with our customers. Thats why we always offer one alternative that are aligned with our customers goals. Typical a percentage of revenue from the Google ads channel or if you have a big part of brand traffic in your account we setup the pricing model based on your Non-Brand revenue ( Revenue coming from your new customers). So in order to grow we need to grow you first. Get in touch to get to know more about us!