Do you ever wonder how full-service marketing and advertising agencies set their prices for the services they offer? Why does a web site or landing page cost 30 percent more at one agency than at another? Why would hourly rates vary between two agencies that are directly across the street from each other?
Let’s unpack the mysteries of agency pricing…
BUYING MARKETING SERVICES IS LIKE BUYING A CAR
So you want to build a website. Picking a marketing agency to build your site can be like shopping for a car without the high-pressure salesman. You can buy a new car for $20,000 or $100,000. Both will have tires, brakes, a steering wheel and a variety of other similar offerings. But the differences are huge, in terms of the materials and technology used, as a result, the performance of each vehicle will differ greatly.
The same is true when comparing B2B marketing and advertising solutions. Take a simple B2B product brochure… You must ask yourself: “How many images need to be used? Can you use library images or do you need custom photography? How much text needs to be written, and how technical is the text? How many charts, graphic images, and special design elements are needed?” Things like image quality, paper size, decorative print, finishes, and other considerations go into a solution’s final price.
This is why almost all B2B marketing and advertising projects are custom or semi-custom. One agency’s or client’s definition of quality can be very different than another, subsequently, the resulting price will vary and often people are duped into buying a lemon.
THE AGENCY BUSINESS PRICING MODEL REVEALED
Ninety-nine percent of all full-service B2B marketing agencies are all structured in a similar way. In fact, most general service companies, such as consulting firms, local plumbing companies, legal firms or any other service organizations with more than 10 people, run their business in the same way. They calculate the number of hours it takes to complete a project or task and multiply it times an hourly rate. They then add in any outside goods and service costs (i.e. printing) and multiply those costs by a small markup to determine the total project cost.
THE HOURLY RATE
Rates are established by multiplying the agency’s hourly cost of an employee multiplied by needed income by agency (X – usually between 2-4, with 3 being the typical industry average).
Hourly Rate = Employee Cost(X)
The formula looks at input such as workable hours in a year, percentage of workable hours an employee has available to work on client projects (75 – 80 percent is typical) and what percentage is allocated to other functions at the agency.
The multiplier provides the needed income to cover the cost of a fully burdened employee, including rent, utilities, benefits, training, accounting, administrative support staff, business insurance, computers and equipment, plus a little profit. It’s no different than a technology company marking up its software to cover its overhead. In full-service B2B and B2C marketing agencies, the software is the people.
All service companies, from lawyers to consultants, use the same basic formula with a bit of variation depending on the industry. Smaller B2B and B2C advertising and marketing agencies where the people are working remotely will mark up the hourly rate between 2 and 2.5x to be positioned as a low-cost provider, while mid-size agencies of ten or more will be in the 3x range, and larger, global agencies will use 4x or even 5x.
The other major factors are the price and experience of the talent used to develop plans, create, and execute projects and campaigns. If you have a creative director at one agency who you are paying $100,000 a year and another agency is paying $50,000 for the same position, the hourly rate would be less for the same position that is working on the project, strategy or campaign.
However, you should expect a better product working with an agency that pays higher salaries for better-seasoned staff. More experienced staffers typically take less time to complete their tasks/projects and can offer exceptional insight as well as forward thinking. Like everything else in life, you get what you pay for.
BLENDED RATE VS RATE CARD
Sixty-eight percent of full-service marketing agencies in the United States use a blended rate in terms of calculating an hourly rate for an employee. They take their entire staff and figure out a rate that blends all salaries. The average blended rate for a full-service agency in today’s market is $150 an hour to $200 an hour in most markets. In the bigger markets, it runs closer to $250 an hour.
The other approach is to use a rate card that creates a specific hourly rate for each employee or position in the agency. Non-blended rates can run anywhere from $100 an hour for a lower level employee to $750+ an hour for a top-level strategist or creative out of New York.
OUTSIDE GOODS AND SERVICES
Most firms will buy certain outside goods and services and mark them up anywhere from 5 to 30 percent depending on the service or good purchased. This is to cover the cost to source, acquire and carry the paper (usually vendors of the agency are paid before the agency receives their client’s money and they take a risk that client will not pay their bill.) The markup helps offset the costs and risks associated with the agency floating this debt.
VALUE PRICING AND FIXED PRICING
The big buzzword a few years back was something called value pricing. In other words, you charge what the client thinks the value of a certain effort is worth. If your time and materials equal $5,000 for a project, but the client values it at $3,000 then you charge the $3,000. The idea here is that clients can get basic services (say an email blast) at a certain price from lower-cost vendors, so they don’t value it as much as maybe custom branding work, which could be priced above what standard hourly rate may indicate.
Fixed package pricing is another model used where an agency prices certain tasks and deliverables at a specific price and has the client pick a package that most closely fits their needs. It assumes that marketing services can be put into similar boxes and sold as a commodity.
Both pricing models had some initial success, but the agencies that employed these models have not had the kind of growth in terms of developing relationships with bigger brands that one would expect. Time will tell if these models work long term with bigger clients.
HOW ELEVATION PRICES – THE BENCHMARK RATE
The model I feel is best, and the one we use is a benchmark rate model. We have two firms that annually survey more than 200 agencies across the United States, providing us data on what the top 100-120 typical marketing campaigns, and branding and strategy projects cost based on region, size of the agency and a few other data points.
Our process involves budgeting a project based on the client’s requests or needs, then checking the benchmark to see if our estimate falls inside the average ranges. We do this to make sure we are being fair to us and our client. We will rarely be the cheapest (there are always agencies out there that compete on price even if they say otherwise), likewise, we are rarely the most expensive. It all becomes a customized value proposition for our clients. Does our price deliver the best ROI and their specific desired outcome?
YOU GET WHAT YOU PAY FOR
Agencies are living, breathing value propositions. If they price too high for the value they bring, then over time clients will find other solutions. Normally, agencies that have been around for 10 plus years have figured out their value proposition, and it has been validated by the marketplace over the long run. For example, many of our low-cost competitors who got some of the business that we think we should have retained are long gone. They excelled at low pricing but failed to deliver either on time, on budget and/or with the highest quality. We are constantly fixing work that cheaper agencies did for our clients.
In this industry, quality remains long after charming low prices. Our investment in delivering quality solutions and remarkable client experiences is a testament to why we’ve been in business for the past 20 years and why our company continues to prosper.
I recently wrote a follow-up article to this one which goes in further in-depth on how agencies specifically price digital paid media lead generation services. Be sure to check it out here.