Pricing Models for Services: How to Build Your Pricing Strategy
Key points
- Different businesses require different pricing models, and it's important to choose one that fits the specific needs of your business.
- Subscription-based pricing models can be effective for services that require ongoing maintenance or support.
- Hourly rates are a common pricing model, but they can lead to inefficient work and unpredictable costs for clients.
Finding the best pricing strategy for your new business can feel like you’re lost in a maze without a map—and no instructions on how to find your exit either. There are a lot of considerations to keep in mind, and it’s easy to see how it can all drive you to the brink of anxiety.
I get that.
In this article, I’ll introduce you to pricing models for services:
the main pricing models and what they entail
the main criteria to consider
how to choose the right pricing for your agency
Read on if you want to escape the information maze and define an agency pricing strategy that’s perfect for you and your target audience.
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 models rely on the idea that clients pay a fixed monthly fee for an agency’s services. The agency will usually calculate the retainer based on the scope of work and estimated hours, then provide services accordingly. Typically, with a retainer fee, the work delivered in a month might not be the same as the work delivered in another month. However, they balance each other out.
Pros: The main advantage of a retainer model is similar to that of a subscription-based one: it makes the financial aspect of the relationship clear and predictable for both parties.
Cons: Retainers can also be tricky to manage, particularly if clients suddenly start asking for additional services. If you are not careful, you can end up having to provide more than what was agreed upon in the original retainer fee.
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 is all about tailoring a fee structure to fit the specific needs of each client. It allows agencies to be flexible and provide more customized services, while also giving them room to negotiate discounts and other perks.
Pros: This model allows agencies to be more flexible with their clients since they can adjust their pricing to the exact requirements of each project. It also makes it easier for them to negotiate and provide discounts, which can help bring more business and satisfaction among their clients.
Cons: The downside of this model is that it can be difficult to manage, since the pricing changes for each individual project. In addition, it can also be difficult to keep track of your profit margins, as you are often relying on discounts and other incentives to 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.
Grow your industry knowledge
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 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
While the best pricing strategy doesn’t exist, there’s one that fits your business model. With that said, pricing services isn’t an easy feat. On the contrary, it’s pretty daunting, especially considering all the factors and different pricing models mentioned above. At the end of the day, it all comes down to one question: which of the common pricing strategies allows me to provide my clients with the most value and make a profit?
Take your time to analyze the market, research what other agencies are doing, and explore each option until you find the one that best suits your agency model, audience, and services. You don’t have to price your product or service overnight.