Have you ever wondered how do marketing agencies get paid? Do all agencies charge their client the same way? If you’ve been in or around the advertising business for a while, you have probably heard stories of major clients bringing their advertising agencies to task for not being very transparent about their pricing. Advertising agencies in the 1990s got a bad reputation for “padding the hours” or otherwise not being very accountable with their clients’ marketing dollars. A similar issue has been brought up in more recent years with Internet marketing agencies, especially SEO agencies. Generally speaking, there tends to be confusion about how marketing agencies charge their clients.
If you’ve worked with marketing agencies in the past, you’ve probably encountered several different pricing models. It’s important to understand the various ways agencies charge in order to make an educated comparison between them. It’s also important to understand the true costs involved with the different pricing models. Each model has its pros and cons and they can make a significant difference in the performance of the agency.
Here we look at the seven most common pricing models used by creative agencies:
1. Time & Expenses
One of the oldest and most commonly used models, this sees clients charged for the hours it takes the creative agency to deliver a project. Any external costs are either passed on to the client or marked up to create additional margin.
2. Opaque Pricing
This model provides little or no clarity to the client on how the price is calculated. As today’s clients demand greater transparency from their suppliers, this pricing model is less widely used than in the past.
3. Monthly retainer
This is a familiar model to many advertising and PR agencies, whereby the client pays an agreed fee each month. The agency then takes care of allocating all the resources required to deliver any services up to the value of that retainer. However, as a result of the recent recession, clients are under pressure to achieve more from their marketing budgets and they prefer to know exactly how these are being used.
Working to an agreed scope of work, creative agencies use this pricing model to provide clients with a quotation for the resources required to deliver a project. Resources are allocated, based on an estimation of the number of hours or days it will take to complete the work.
5. Fixed Fees
When agencies apply a fixed fee option, they typically agree to a single price for the completion of a project. It can be an attractive model to clients, and agencies often use it to win business. However, the agency carries a risk to their profitability during the project lifecycle.
6. Performance Based Pricing
A growing number of agencies are choosing to take on projects and be paid, based on a combination of fixed costs and bonuses. These bonuses can be based on achieving agreed service levels, marketing or brand results, or reaching financial targets. However, performance-based remuneration (PBR) sees agencies risk some of their profit for the opportunity to earn even greater margins.
7. Value Based Pricing
As a way of building long-term and mutually beneficial relationships with new and existing clients, a growing number of agencies are choosing to adopt a value-based remuneration (VBR) model. This sees agencies paid according to the value of the work they undertake, based on its contribution to the client’s business performance. This value can be measured against any number of KPIs such as volumes of new business leads or sales revenues.
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