Pricing Models for Services: How to Build Your Pricing Strategy

Discovering the ideal agency pricing strategy can feel like navigating a maze without a map or any guidance on how to find your way out. There are numerous factors to consider, and it's understandable how it can feel like an impossible task.

Don’t worry, I'm here to introduce you to the fascinating world of service pricing, explore various models to consider, and how to avoid common pitfalls.

Understanding service pricing

Service pricing is vital for business revenue and profitability. It requires understanding factors like costs, demand, competition, and customer willingness to pay. This section explores key concepts to help you make informed business decisions.

Key service pricing terms

To better understand service pricing, you need to know about these fundamental terms:

• Profit margin: The difference between revenue and total costs (including overheads), expressed as a percentage. A higher profit margin indicates better profitability.

• Overhead costs: Fixed expenses that remain constant regardless of the number of customers or services provided, such as salaries, rent, utilities, and equipment depreciation.

• Markup: The amount added to the cost price before selling the service at a specific price point.

Six types of pricing models for services

As a general rule, there are six common pricing models.

Time and overhead

The time and overhead approach to pricing models refers to billing for the time spent working on a project, plus any overhead costs associated with the work. This includes expenses such as software and equipment use, office space, specialists’ fees, and other materials.

Companies that use this model typically require a minimum fee to cover their overhead expenses, regardless of the project size or the amount of work.

Pros: This is one of the simplest, most straightforward pricing models for agencies. If you’re looking for a no-fuss, yet competitive pricing strategy, this is it. 

Cons: It can be difficult to accurately predict and estimate the time it takes to deliver projects, especially when you consider that different clients have different needs.

Project-based

The project-based pricing model is based on the specific project you have been contracted to complete. Most times, the agency and client discuss the project, scope the work, estimate the costs, and agree on a fixed price for the entire project.

Pros: This type of pricing model can be easily understood by both the agency and the clients. Since everything is scoped and agreed upon, there’s (theoretically) no risk of miscommunication or hidden costs.

Cons: Estimating project costs can be difficult, especially for projects that require creative services. Moreover, if the client is a bit pickier, you may end up having to run extensive revisions on the project, which will incur additional costs.

Subscription/recurring

Subscription (or recurring) pricing models are attractive, particularly because the subscription economy is on the rise. This pricing model allows clients to pay a fixed fee for continuous access to an agency’s services for a specified period of time. In order for this model to work well, agencies should take a look at cost based pricing first in order to accurately estimate their costs, overhead, and profit margin.

Pros: There’s a reason subscriptions are popular: they simplify everything for everyone. Subscription agency services make no exception to this rule: they create a predictable cash flow for the agency, and they give clients an easy way to access services regularly.

Cons: When it comes to service-based businesses, a recurring service can be tricky to put into practice. You’ll need to know how much to charge for a recurring service, and how many revisions you can offer. This usually requires that you’ve done a few projects already. For some agencies, churn and retention rates may also be challenging to control.

Retainer

Retainer-based pricing involves clients paying a fixed monthly fee for services. Agencies calculate this fee based on the scope of work and estimated hours. The work delivered each month may vary, but it balances out over time.

Pros: Like subscription models, retainers offer financial clarity and predictability.

Cons: Retainers can be challenging if clients request more services than originally agreed, potentially leading to over-delivery.

Tiered pricing

The tiered quantity-based pricing model allows agencies to charge based on a specific volume of work, with anything extra being charged on top of the agreed fee. This model is often used in larger projects, such as website builds, that require a lot of resources and different skills. It’s also a good model for agencies focused on delivering large quantities (such as scaled content production, for example.), as well as agencies that can productize their services into price packages.

Pros: One of the main benefits of the tiered pricing model is that it can be an incentive for clients to order larger quantities in advance. This not only helps the agency better plan its resources, but it can also give them more room to negotiate and offer discounts.

Cons: The downside of this model is that it can be difficult to estimate the cost upfront. Agencies will have to calculate the costs for their services based on past projects, which requires a bit of trial and error to get to a point where the profit margin becomes satisfactory.

Value

The value-driven pricing model is all about pricing a service based on its perceived value to the client. This type of model helps agencies better reflect the work they do, as well as the results that come with it. This is why it works well for creative projects, advertising (particularly video and social media campaigns), and even consultancy services.

Pros: Value-based pricing makes it easier to show your clients the true value of what you can do for them, and it reflects the results that come with it. It also allows you to focus more on the actual work and the quality of what you offer, rather than counting hours or deliverables.

Cons: One of the drawbacks of this pricing model is that it can be difficult to prove to your client why they should pay a certain fee. You will need to have clear evidence of the value you bring. This can be difficult in creative niches, where the results are intangible and hard to measure.

Customized

This pricing model customizes fees to meet client needs, offering flexibility and allowing agencies to negotiate discounts and perks.

Pros: Agencies can adjust pricing per project, facilitating negotiation and discounts, which can enhance client satisfaction and attract more business.

Cons: Managing this model is challenging due to varying project prices, and tracking profit margins is tough since discounts and incentives often close deals.

Experimenting with different pricing methods

Besides the six pricing models mention, consider the fact that you may not want to have the same pricing strategy throughout your entire business lifecycle. Changing both your prices and your pricing model is perfectly fine, as long as you’re doing it in a healthy, systematic, and logical way.

For instance, a penetration pricing strategy might help you get more clients when you’re just starting out, and as such, it may focus on your time, overhead, and how to get people hooked on your product or services. But once you’re a few years in, and the demand for your services increases, think about switching to premium prices that better reflect the value of your work.

Additional criteria to consider when choosing a pricing model

At the end of the day, the reason you start an agency is that you want to do things your way. You want to offer quality services, while at the same time making sure you get a fair return on your work. This is why it’s important to choose the pricing model that works best for your specific situation, services, and clientele. Here are some additional criteria to consider when choosing your pricing model.

Market demand

Basic economics say that when market demand is high, but supply is low, prices will increase. This means that if your services are in high demand, you should consider a pricing model that allows you to charge more. For instance, if you are an SEO agency and you serve only a limited geographical area, you might be able to use a value-based pricing model and charge more for your services.

Ideal client

Who your ideal client is can also influence your pricing model decision. If you serve mostly big brands and corporate clients, then value-based pricing might be the way to go. But if your niche is smaller businesses with more limited budgets, you will have to consider one of the other models—like a subscription, project, or time and overhead-based one.

Offered services

What are the services you offer? Are you uniquely equipped to offer them? Is it something complex, or is it more of a commodity? Answering these questions will help you determine which pricing model is better-suited for your business.

For example, if you offer high-end video production services for the online advertising industry, a value-based pricing model might be the way to go. On the other hand, if you offer basic social media management services, it might be best if you settled on a time and overhead or subscription-based pricing model.

Your resources

Do you have the resources to provide high-end services and ensure that each client is treated with individualized care? If not, it might be best if you went for a simpler pricing model that doesn’t require as much manual work (like a subscription or time and overhead one).

Value proposition

What is the value you bring to the table—and do you have a proven track record you can showcase? If you have a clear value proposition and can back it up with evidence, then a value-based or retainer pricing model may be the way to go.

Your goals

Finally, what are your goals? Are you looking to make a quick profit or build long-term client relationships? Depending on your goals, you will have to decide which pricing model works best. Keep in mind that if you have ambitious financial goals for your agency, you need to:

• correlate to the quality of the services you offer,

• how much time and effort your entire team puts into the project, and

• how well you market your services.

Your tool set

If you are willing to invest in quality software, you can better gauge your time, effort, and expertise to choose a pricing model that fits you in every way. Good tools eliminate the hassle and allow you to focus on what you do best—instead of running into manual chores that put a halt on your evolution (and thus, limit your pricing model selection array).

For example, SPP was created specifically to act as a client portal for agencies that want to offer one-time and recurring services in a smooth, straightforward manner.

Our tool integrates billing, referral management, order management, and helpdesk features into one affordable and easy-to-use package—all so you can focus on skyrocketing your agency’s success.

Your costs

Calculating costs is key to pricing agency services correctly. Start by summing fixed overheads like salaries, rent, utilities, with variable expenses such as travel or equipment. Consider your desired profit margin as a percentage of revenue, 20% for example.

Next, choose a markup that balances profitability with customer affordability. This might involve researching competitors and assessing the value proposition to set an optimal pricing strategy.

Take into account industry standards, client budget constraints, and other factors when determining the right price point. A flexible approach will help you find a balance between generating revenue and meeting client needs.

Your flexibility

Are you flexible with your pricing? For example, would you be willing to offer a discount to work with a company and get them on your portfolio? Or simply because you really believe in what they do?

If you can adjust your pricing on a case-by-case basis, then you can have better control over the pricing of your services and make sure that every client gets exactly what they pay for. This type of approach also allows you to pick your clients based on non-financial criteria (such as, for example, only working with eco-friendly businesses).

How to make the final decision

There’s no perfect pricing strategy, but one fits your business model. Pricing services is challenging due to various factors and models. Ultimately, ask: which strategy offers the most client value and profit?

Analyze the market, research competitors, and explore options to find what suits your agency, audience, and services. No need to rush pricing decisions.