In the second of our ‘agency profit series,’ Rory Spence of expert accountancy firm The Wow Company explained how to make the most of your pricing structure, according to the top 10% of UK agencies.
Despite it being a crucial part of growing any business, a number of agencies struggle to dive into and understand the best approach to pricing. This means that, more often than not, successful smaller agencies don't yet have the right structure and fees in place to maximise profit.
There are two main ways that agencies currently charge a client – either using a blended rate or a tiered rate. According to The Wow Company’s annual BenchPress report, the biggest of its kind for marketing agencies, the split between these two options in 2021 was nearly half and half. 51% of respondents said they use a blended rate while 49% opt for tiered rates.
Participate: BenchPress Survey 2022
Before going any further, it will be useful to give a short breakdown of the two options.
A blended rate is a single price, regardless of skill set, solution type or delivery type.
A tiered rate is based on the level of capability of the service that you’re building into the project. Essentially, it’s charging for skill rather than time.
The profit percentage margins for those using a blended rate, on average, are 39%. This is 9% lower than those using a tiered approach, with averages sitting at 49%. To put this into perspective, the average gross profit margin percentage of an agency in the UK is 44%.
Charging for skill rather than time can allow agencies to offer different pricing options depending on what is required for the project. By offering three ‘levels’ of service, agencies could expect to see healthy growth.
Traditionally, bronze/silver/gold have been used to refer to the three service levels. If you’re not currently using this model but are thinking about it, start by identifying what your good/better/best offerings would look like. Once you have an idea about how this could be put into practice, it’s time to think about a price.
Now that you have your different service levels drawn out, you can begin to think about what price you will be offering them at. To do this, think about the biggest client you’ve ever won. What are you charging them and add a little more to it – 20% for example. When presenting the pricing tiers to a client, always start with the top package. The reason for this is to anchor their minds to this higher price. For the sake of this article, let’s say this is £100,000. If £100K seems too much for them, a drop to the ‘mid’ tier, e.g £50K, will seem like a big drop and good value to them. Your last option will be the absolute base level, perhaps a £20K service package.
Using this approach can be useful in working out a prospect’s budget if they’re not giving you any clear figures. By starting at the top, they may feel this is either about right, or too much. In this case, somewhere around the mid-tier option could be more suited to them.
At the opposite end, if they don’t have the budget for a basic service level, you should consider whether you can justify taking them on as a client. If not, don’t be afraid to turn them down.
It’s important to be clear with the client about the specifics of what they get at each level. They might not need services reserved for top-tier packages off the bat, but they may do later down the line. It allows you to say “we can help with this, but we’ll need to charge extra.”
This is because you’re selling the value at each tier, rather than hours and time.
It seems like a common-sense question, but are you charging for everything that you could possibly charge for? Results taken from the BenchPress survey show three key areas where agencies aren’t charging for the service.
40%, for example, are not charging for project scoping, despite it being important in ensuring that the client is getting everything out of the benefits.
Alongside this, 27% of participants do not charge for account management and 9% don’t currently charge for project management.
By including these areas in your services, you could easily increase the profit percentage of a project by 20%.
Increasing the price of your services is not an easy decision, and it can be quite daunting when introducing them to current clients. It’s all about confidence. As inflation rises and costs increase across the board, if you don’t reflect this by increasing your own prices, it will soon begin to eat into your profits.
To test the waters, start by introducing the pricing structure to new clients. Play around with figures and see what you can achieve before getting some pushback. A little pushback is good, it means that you are pricing around the right level. Of course, introducing a new pricing system is always going to be easier when you’ve got a good pipeline of potential clients.
You might be particularly nervous to introduce a price rise to existing clients. Try approaching the subject by saying something like “when you started with us, you were being charged this level. We now have clients that we are charging up here. How would you feel about bridging that gap?” This puts the ball in their court. If they don’t value your services, they will flatly reject any increase. That puts the ball back in your court. For those who do value your service, they might say something like “we thought it was about time, we’ve been expecting this call and we value what you do for us.”
There may also be those that are somewhere in the middle that will try to negotiate their new fee. For these clients, you could offer them potential timescales, i.e. give them a grace period before moving them onto a new pricing system.
In order to really put a price on the value of your service, rather than the time, think about what you’re the best in the world at doing.
Specialising in one area will make it easier to quantify what you can offer to a client. Have a think about you are the best in the world for providing it for. Are they in a specific sector? Do they have specific challenges that only apply to a certain industry? These are questions to ask yourself as part of planning for a price change.
If you’re considering changing your pricing structure, here are the key takeaways from this article that you can begin to put into practice today.
In our next session, we’ll be looking at how to manage projects to ensure maximised profitability. This will include scoping to ensure you’re not overstretched, what to do when things creep, and using your team and technology to keep your projects running efficiently.