Agency Pricing Models and How to Use Them

Introduction

I’ve been pricing agency services for over 15 years now, and if there’s one thing I’ve learned, is that there’s no magic bullet. Clients come with all kinds of expectations and you can’t make everybody happy. But, there’s also a lot of pitfalls you can avoid. (There’s nothing worse then getting called out on some poor pricing logic by a client and being ill-prepared to justify your thinking).

One of the traps you need to avoid is the idea that you need to embrace a single philosophy or strategy and stick to it. You don’t. Granted, if you’ve got a 50+ person team, you’re going to need to have guidelines and documentation to support your pricing process but that doesn’t mean you can’t be creative. If you’re in the 2-20 head count range, you’ve only got a few people doing pricing so you there’s not a lot stopping you from trying things out.

In the end, the goal is always to figure out how much money you need for the work, how much money you need for the business, how much money you need to mitigate risk, and how much money you need to guarantee profit and do your best to price based on those needs.

I realize my approach isn’t as sexy as the “Agencies are all doing pricing wrong, and here’s why articles,” but aren’t we all tired of those? This article won’t solve all your problems, but it might add a few pricing ideas to your tool belt.

Core Pricing Fundamentals

Before we dive into specific models, let’s talk about some foundational principles I wish someone had explained to me when I started:

Know Your True Costs

This seems obvious, but it’s not always easy to figure out.

When we first started at my agency, we priced using an hourly rate that seemed reasonable to us at the time. I think it was maybe $120 an hour. It seemed like a lot at the time. It worked alright, but we weren’t tracking our hours and we had no idea how long any given project would take. I based our pricing on I had learned online and by talking to other agency owners. We can up with fixed costs for things like logo design, and website design. But I wasn’t accounting for all the non-billable time, the software costs, the office expenses, healthcare, taxes, and countless other things that eat into revenue.

So my first recommendation is to track your hours from the start. This is not necessarily to give you pricing info. This is to get cost information. See how long projects actually take versus how long you think they take. Calculate your overhead per employee. Then add at least 20% because you’re probably still missing something.

Only when you know your true costs can you set prices that actually generate profit.

Pricing Psychology Matters

I used to think clients made purely rational decisions about agency services. They don’t.

A $10,000 project isn’t just twice as expensive as a $5,000 project in the client’s mind – it often represents a completely different category of investment with different approval processes and expectations.

I’ve found that certain price points trigger psychological barriers. Many smaller clients have a mental ceiling around $3,000-$5,000 for initial engagements. Push past that, and the sales process changes completely.

Understanding these thresholds has helped me structure proposals that are more likely to get approved.

What You’re Really Selling

This took me forever to truly understand: Clients aren’t buying hours, deliverables, or even projects. They’re buying outcomes and transformations.

The pricing model you choose should reflect how those outcomes are best delivered and measured. Sometimes that’s through hourly work, sometimes it’s through projects, and sometimes it’s through ongoing partnerships.

The 4 or 5 pricing models

Generally, when you read about pricing models you will learn about these 4: time-based, project-based, value-based, and retainer pricing. To me “value-based” is a misnomer. All pricing is value-based. But the idea is that you price to the value you are brining the client. This is something that can be considered in time-based, project-based, and retainer pricing, so calling it one of the 4 is a bit odd. We also have performance based pricing where pricing is based on outcomes. In other words, if you don’t deliver the results, you don’t get paid, (or you don’t get paid as much.)

Time-Based Pricing

I know hourly billing gets a bad rap these days. The “value pricing” crowd loves to bash it, and I’ve certainly moved away from it as my primary approach. But it still has its place.

When Hourly/Day Rates Work Well

New client relationships When I don’t know a client well yet, hourly billing provides protection against scope uncertainty. It’s like dating before marriage – you get to know how they operate before making bigger commitments.

Discovery and strategy work Some initial phases are genuinely hard to scope. I’ve found hourly billing works well here, before transitioning to project fees for execution.

Maintenance and support For unpredictable, reactive work like website maintenance, hourly often makes the most sense. We’ve experimented with flat-rate maintenance packages, but they either overcharged clients or left us holding the bag for complex issues.

Expert consulting For specialized advisory work where the value comes from access to expertise rather than specific deliverables.

The Real Problems With Hourly Billing

It’s not the concept that’s flawed; it’s the implementation.

Commoditization When you bill hourly, you’re implicitly saying one hour equals one unit of value, which isn’t true. An hour of strategic work that solves a critical business problem is worth far more than an hour of routine execution.

Efficiency Penalty Becoming faster at your craft should earn you more money, not less. But under pure hourly billing, that’s exactly what happens.

Administrative Burden Tracking, reporting, and arguing about hours is a pain for everyone involved.

Limited Upside There are only so many hours in a day, which creates an income ceiling.

How I’ve Made Hourly Work Better

Differentiated rates: We charge significantly different rates for different types of work (strategic work is 2-3x the rate of production work).

Blended rates for teams: Instead of tracking different rates for every team member, we use role-based blended rates, which simplifies billing and discussions.

Time blocks instead of open-ended billing: We sell 10-hour, 20-hour, or 40-hour blocks rather than just having the clock running indefinitely. This creates natural checkpoints.

Project-Based Pricing

Project pricing was a game-changer for my agency, but implementing it well took years of refinement.

The Core Approach:

Set a fixed fee for a clearly defined deliverable or set of deliverables. Simple in concept, challenging in practice.

When Project Pricing Works Best:

Well-defined work: When you’ve done similar projects many times and can confidently scope requirements.

Production-focused deliverables: Design, development, content creation, and other execution-oriented work where the process is relatively predictable.

Budget-sensitive clients: Organizations that need cost certainty for approval processes.

Process-efficient teams: When you have streamlined your delivery processes and want to capture the value of that efficiency.

Real Challenges With Project Pricing:

Scope definition: The hardest part is defining what’s included and what’s not. I’ve lost money on projects because I wasn’t specific enough about deliverables and assumptions.

Client change requests: Without clear boundaries, “just one small change” can multiply and destroy profitability.

Team estimates: Getting accurate time estimates from team members is consistently difficult. People are naturally optimistic and forget to account for meetings, revisions, and unexpected issues.

Risk premium: You need to build in a cushion for uncertainty, but too much makes you uncompetitive.

How I’ve Made Project Pricing Work Better:

Detailed scoping documents: We create extremely specific statements of work that outline exactly what’s included, what’s not, and what assumptions we’re making.

Phased approaches: Breaking larger projects into smaller phases reduces risk and improves estimate accuracy.

Change order process: We have a formal, simple process for handling scope changes, including a brief form that outlines the change, its impact on timeline and budget, and requires client approval.

Post-project reviews: After each project, we compare estimated to actual time to improve future estimates. This data has been invaluable.

Retainer-Based Pricing

Monthly recurring revenue changed my business by creating predictability, but retainers can be tricky to structure correctly.

Types of Retainers We’ve Used:

Fixed-scope retainers: The client gets specific deliverables each month (e.g., 4 blog posts, social media management, and monthly reporting).

Access retainers: The client purchases a certain amount of access to our team each month (e.g., 20 hours of development time, priority support).

Results-based retainers: We commit to achieving specific outcomes each month and are paid based on meeting those commitments.

When Retainers Work Best:

Ongoing marketing programs: SEO, content marketing, PPC management, and social media are naturally suited to retainer arrangements.

Platform maintenance and support: Websites, apps, and other digital assets that need regular updates and monitoring.

Advisory relationships: Executive-level guidance and strategic support.

Established client relationships: Retainers work best after you’ve built trust through successful project work.

Common Retainer Pitfalls:

Scope creep without boundaries: Without clear parameters, retainers can become all-you-can-eat buffets that drain your resources.

Value perception decline: Over time, clients may begin to take your work for granted if you don’t regularly demonstrate value.

Resource allocation challenges: Balancing retainer work with project work can create capacity planning headaches.

Complacency: Long-term retainers can lead to creative stagnation if you’re not careful.

How I’ve Made Retainers Work Better:

Clear deliverables and processes: Even access-based retainers need boundaries around how time can be used.

Regular value reviews: We schedule quarterly reviews to discuss results and adjust the retainer as needed.

Tiered options: Offering different levels of service allows clients to find the right fit and provides natural upgrade paths.

Minimum commitments: Most of our retainers require at least a 3-month commitment to ensure we have time to demonstrate value.

Performance-Based Components

Adding performance elements to pricing can align incentives and increase upside, but fully performance-based models rarely work for agencies.

Types of Performance Components:

Success bonuses: Additional payments for achieving specific, measurable goals.

Revenue sharing: Taking a percentage of revenue generated through your work.

Tiered pricing based on results: Base compensation plus additional tiers based on performance benchmarks.

Equity or profit participation: Taking ownership or profit share in client businesses (usually for startups or new ventures).

When Performance Components Work Best:

Marketing services with clear attribution: PPC, email marketing, and direct response where results are easily measured.

Launch or growth partnerships: When helping bring new products to market where success metrics are clear.

Long-term client relationships: Where trust has been established and historical performance data exists.

When you have high confidence: Only when you’re very confident in your ability to deliver results.

Realistic Challenges With Performance Pricing:

Attribution problems: It’s often hard to isolate the impact of your work from other factors.

Client-side execution issues: Your results may depend on client implementation that’s outside your control.

Cash flow uncertainty: Performance-based compensation can create revenue unpredictability.

Misaligned time horizons: Results may take longer than the client’s patience or your cash flow needs.

How I’ve Made Performance Components Work:

Hybrid structures: We almost always combine performance elements with base compensation that covers our costs.

Clear metric definition: Extensively documenting how performance will be measured, when, and by whom.

Client commitment requirements: Defining what the client must do for the arrangement to work.

Controlled testing: Starting with a small performance component before scaling it up.

Incorporating Value Considerations Across All Models

Value isn’t a pricing model itself – it’s a mindset that should inform all your pricing decisions.

What “Value-Based” Actually Means:

At its core, value-based pricing means aligning your fees with the client’s perceived value of the outcomes, not your inputs.

Practical Value Assessment Approaches:

Quantitative value discussions: Having explicit conversations about expected ROI, cost savings, or revenue impact.

Qualitative value exploration: Understanding strategic priorities, competitive factors, and internal political considerations.

Value segmentation: Recognizing that the same service may have different value to different clients based on their size, industry, or situation.

Anchoring to alternatives: Helping clients compare your solution to other ways they might solve the problem.

How I Apply Value Thinking to Any Model:

In hourly pricing: Differentiated rates based on the strategic importance of the work, not just the seniority of who’s doing it.

In project pricing: Scaling fees based on business impact rather than just the hours involved.

In retainers: Structuring different tiers based on value delivered, not just deliverables included.

In performance pricing: Ensuring the success metrics actually measure what’s valuable to the client.

Hybrid Approaches: Combining Methods Effectively

After years of experimentation, I’ve found that hybrid approaches often solve problems that pure models create.

Effective Hybrid Models We’ve Used:

The Safety Net Hybrid

How it works: Fixed project fee with hourly billing for scope changes. Why it works: Gives clients budget certainty while protecting the agency from scope creep. Example: A website redesign with a fixed fee of $30,000 for agreed requirements, plus hourly billing at $150/hour for changes or additions.

The Phased Certainty Model

How it works: Hourly billing for discovery, fixed pricing for execution. Why it works: Acknowledges the uncertainty in early phases while providing certainty for production. Example: A 20-hour discovery phase at $175/hour, followed by fixed-price implementation phases once requirements are clear.

The Stepping Stone

How it works: Start with project work, transition to retainer. Why it works: Builds relationship through successful projects before committing to ongoing work. Example: A website build project followed by a monthly maintenance and optimization retainer.

The Value Accelerator

How it works: Base retainer plus performance bonuses. Why it works: Ensures baseline compensation while incentivizing results. Example: $5,000 monthly retainer for PPC management with additional 10% of ad spend for any months exceeding target ROAS.

Implementation Considerations for Hybrid Models:

Client education: Hybrids require clear explanation since they’re less familiar to clients.

Internal systems: Your project management and billing systems need to accommodate mixed approaches.

Contract clarity: Hybrid models require especially clear contracts to avoid confusion.

Regular reviews: Hybrid models should be evaluated regularly to ensure they’re working for both parties.

Strategic Pricing Implementation

Having a great pricing strategy on paper isn’t enough – implementation makes or breaks it.

Client Segmentation and Tailored Approaches

I’ve learned that not all clients should be priced the same way. We segment our client base and adjust our approach accordingly:

Enterprise clients: Usually prefer retainers or large project engagements with clear deliverables and timelines.

Growth-stage companies: Often work well with hybrid models that include performance components.

Small businesses: Typically need more project-based work with clear scope and fixed budgets.

Startups: May benefit from phased approaches that align with their funding stages.

Pricing Communication Strategies

How you talk about pricing is almost as important as the pricing itself:

Focusing on outcomes: Leading with business results rather than deliverables or hours.

Presenting options: Giving clients choices rather than a single take-it-or-leave-it price.

Using proposal structures that emphasize value: Discussing business impact before revealing numbers.

Addressing objections proactively: Anticipating concerns and addressing them upfront.

Proposal Best Practices

Through hundreds of proposals, I’ve refined our approach:

Executive summary focus: Leading with a clear understanding of the client’s situation and desired outcomes.

Options with clear differentiation: Presenting multiple options with meaningful differences, not just small price variations.

Visual presentation: Using design to highlight important information and guide the reader.

Social proof: Including relevant case studies or testimonials that demonstrate capability.

Next steps: Making the decision process clear and actionable.

Transitioning Between Pricing Approaches

Changing your pricing approach is tricky but sometimes necessary.

Signs Your Current Pricing Isn’t Working:

Profitability issues: Projects consistently going over budget or using more resources than estimated.

Client satisfaction problems: Clients frequently questioning bills or expressing confusion about pricing.

Team burnout: Staff feeling pressured to work unpaid hours to meet budgets.

Opportunity costs: Turning down potentially valuable work because your model can’t accommodate it.

Growth plateaus: Hitting revenue ceilings because your pricing model doesn’t scale.

How to Test New Pricing Approaches:

Pilot programs: Testing new approaches with a few clients before rolling them out broadly.

New client applications: Implementing new pricing only for new clients initially.

Optional transitions: Giving existing clients the choice to stay with the current model or switch.

Gradual implementation: Making incremental changes rather than dramatic overhauls.

Managing Client Expectations During Transitions:

Advance communication: Notifying clients well before changes take effect.

Clear rationales: Explaining how changes will benefit clients, not just your agency.

Grandfathering options: Allowing loyal clients to maintain previous arrangements if needed.

Transition support: Providing extra attention during the change period.

Measuring Pricing Effectiveness

You can’t improve what you don’t measure, and pricing is no exception.

Key Metrics to Track:

Effective hourly rate: Total revenue divided by total hours, regardless of pricing model.

Project profitability: Expected versus actual profit on project engagements.

Client profitability: Revenue versus resource consumption by client.

Proposal win rate: Percentage of proposals that convert to paid work.

Scope change frequency: How often projects require change orders or scope adjustments.

Client satisfaction scores: How pricing affects client perception of value.

Regular Review Processes:

Monthly financial reviews: Examining profitability by client, project type, and team.

Quarterly pricing assessments: Evaluating the effectiveness of different models and making adjustments.

Annual strategic pricing planning: Aligning pricing approaches with business goals for the coming year.

Post-project retrospectives: Analyzing what went right and wrong with pricing on completed projects.

There’s no perfect pricing model that works for every agency in every situation.

The most successful approach is one that:

• Aligns with your agency’s values and goals
• Respects your clients’ needs and constraints
• Provides fair compensation for your team’s expertise
• Evolves as your agency and market change

I’ve made plenty of pricing mistakes in my agency career. I’ve undercharged, overcharged, created models too complex to explain, and stuck with approaches that weren’t working for too long.

What I’ve learned is that pricing is a journey, not a destination. It requires continuous experimentation, honest assessment, and willingness to change.

The right pricing approach isn’t about following industry trends or adopting whatever model is currently fashionable. It’s about finding what works for your specific situation and being willing to adapt as circumstances change.

I hope sharing my experiences helps you avoid some of the pitfalls I’ve encountered and accelerates your path to a pricing approach that works for your agency, your clients, and your team.

I’d love to hear about your experiences with different pricing models. What’s worked? What hasn’t? What questions do you have about implementing some of these approaches? Drop a comment below, and I’ll do my best to help.