What is a pricing strategy?
A pricing strategy refers to the methods through which businesses define the sell price of their products or services. It’s a common misconception that profit is the main driving factor in setting prices. While to an extent that’s true, there are many other considerations and factors to take into account when establishing prices.
Factors that influence pricing include:
- Local economic conditions.
- Market competition.
- Production and distribution costs.
Why are pricing strategies important?
Pricing strategies are important for several reasons:
- They maximize profits. A well-designed pricing strategy directly contributes to a business’ bottom line. As we’ve already discussed, this doesn’t just mean charging as much as possible, but instead pricing intelligently to win market share and retain customers.
- They reflect the brand. A business’ price point reflects the value of its brand and market segments. For example, let’s take Apple’s iPhone. The relatively higher price of this product helps represent Apple as a high-quality, cutting-edge and experiential brand.
- They attract the right customers. On a similar note, the price of a product or service portrays its perceived value. A high-priced service could be considered as expensive or high quality depending on the market segment. While a low-priced product could be thought of as cheap and poorly made. In this sense, pricing is almost a market strategy: attracting the right type of customers and pushing away the wrong ones.
- They leverage growth. Many businesses focus on acquisitions as a growth tactic, but undertaking a price analysis and making changes can also help boost growth. A study by consulting firm McKinsey found a 1% increase in pricing on average leads to an 8.75% increase in profits.
Different types of pricing strategy
There are many different types of pricing strategies, and the most effective depends on your business goals. Let’s take a look into the most common pricing strategies.
Competition-Based Pricing Strategy
What is competition-based pricing?
As the name suggests, this pricing strategy focuses on the market rate for a product or service. It’s where a marketing agency sets its pricing in line with its competitors to compete. This pricing strategy doesn’t factor in fixed or variable costs.
Example:
Let’s say we have three marketing agencies; Agency A, Agency B, and Agency C.
Agency A offers a monthly SEO package at $500 per month. Agency B offers a similar SEO package at $580 per month. And agency C is about to launch SEO as a new service.
As agencies A and B both offer a similar service, the team at agency C decide to set their service at a lower cost of $540 per month, the halfway point between A and B. Now with this price, they “reverse-engineer” the service to maximize profits.
Pros:
Competition-based pricing is an effective strategy in competitive markets. Often in competitive spaces, the cost can be a deciding factor for many price-sensitive customers. So this pricing strategy allows marketing agencies to attract new customers and win new business.
Cons:
When competing on price, marketing agencies have to lower margins and devalue their services. This means lower revenue for the business and a lower fee for the consultant. And competitive pricing can set expectations of consistently low fees with clients, making it harder for agencies to increase their prices once the client is onboarded.
High-Low pricing strategy
What is high-low pricing strategy?
A High-low pricing strategy is whereby a product is sold at a high price, and then reduced and sold at a lower price. Also known as discount pricing, it’s commonly used to create urgency, and therefore get clients to make a decision sooner, as the lower price often has a time limit. This is an example of psychological pricing.
Example:
A marketing agency wants to expand its portfolio with more social media work so decides to discount its social media services for a limited time to win new business. It sells social media management as a monthly subscription.
The product was previously priced at $400 per month, and the agency discounts it to $300 per month for a limited time only.
Pros:
Across all industries, consumers like to feel they’re getting a good deal, which is why events like Black Friday and Cyber Monday are so popular. By reducing prices and setting a deadline for the promotion, marketing agencies can create excitement and buzz around their offer and close more deals.
Cons:
By constantly engaging in high-low pricing strategies, marketing agencies risk devaluing their services and creating expectations among their clients that there will always be discounts. This then makes it difficult to increase prices. Consumers can also be distrusting of constant promotions and this discredits the brand.
Cost-plus pricing strategy
What is cost-plus pricing?
Also referred to as markup pricing, cost-plus pricing is whereby businesses add a set margin, as a percentage, to their product’s COGS to determine its sell price. It’s used when businesses want to operate set profit margins.
Example:
In marketing agencies, cost-plus pricing can be used when engaging with freelancers and external providers. For example, a marketing agency provides blog writing services to its clients and uses a freelance content writer to produce the articles. The writer charges the agency $100 per article, and in turn, the agency charges the client $125 per article. This would be a 25% markup.
Pros:
As centered around the margin, cost-plus pricing guarantees profits for businesses. It’s also a very simple pricing model that doesn’t require in-depth competitor or market analysis. You simply take the COGS and add the margin as a %.
Cons:
It’s a very rigid model that doesn’t take into external factors, like markets or competitors. And to keep profit margins the same, the sell price would need to increase with any fluctuations in the COGS.
Penetration pricing model
What is penetration pricing?
Penetration pricing models work the opposite of skimming pricing models. It’s where businesses launch a new product at a low price to “penetrate” the market, hence the name market penetration pricing. It helps businesses disrupt the marketplace, and effectively steal away business from competitors.
Examples:
Let’s go back to the three marketing agencies we used as examples to explain competition-based pricing. As we established, Agencies A and B already provide SEO services at $500 and $580 respectively. Agency C is planning to launch SEO services, and so opts for a penetration pricing strategy. They decide to undercut both agencies and provide a similar service for just $390 to launch.
Pros:
Penetration pricing helps firms win new business quickly and gain market share over competitors. This means marketing agencies can build their customer base and then sell higher-margin services to them.
Cons:
Similar to discount pricing, it may create expectations among clients that the service will always be a low price. This makes it difficult for marketing agencies to increase prices later on and retain clients at the same time.
Hourly Pricing Strategy
What is hourly pricing?
Hourly pricing is where marketing professionals, often freelancers, set their prices based on time. They set an hourly rate and then calculate how long a project will take them in hours.
Hourly rate x estimated time for project = price
How much a professional charge per hour depends on a variety of factors, with geographic location and experience being among the most important.
Example:
Let’s take a freelance WordPress developer who charges $80 per hour.
A client contacts them to create a website from scratch. The developer assesses the projects and decides it will take them 10 hours. Therefore the price to the client is $800.
Hourly rate $80 x 10 hours = $800
Pros:
The biggest benefit to hourly pricing is transparency. Clients are much more likely to understand the cost of a project when they see how many hours will be invested. And for the agency, it ensures a fair fee.
Cons:
The biggest challenge for hourly pricing is scope creep, rework, and inaccurate time estimations. For example, our WordPress developer estimates they can complete the project in 10 hours, but the client demands a lot of rework and meeting time. In the end, the project actually takes closer to 15 hours to complete. The developer can’t charge the client more and so they end up working for less.
Value-based pricing
What is value-based pricing?
Value-based pricing is based on the customers and what they’re willing to pay. To adopt value-based pricing, marketing agencies first need to define their market segments to create value and define the right price for their target market.
Example:
Copywriting is an example of value-based pricing in marketing agencies. Generally speaking, copywriters charge more for landing pages than blog posts as they tend to be more “bottom of the funnel” and so contribute more quickly to profits – this being the value. Whereas blog posts are usually “top of funnel” and don’ quickly contribute to profits. Therefore, they have a lower, perceived value.
Pros:
Value-based pricing helps create customer loyalty, as the service is customer-focused and therefore the customer’s desired outcome. It also helps drive a higher profit margin as it doesn’t factor in competitor pricing or discounts.
Cons:
Value-based pricing takes a lot of research into market segments and time spent creating customer avatars and defining buyer personas. It can also be a case of trial and error until a business figures out what customers want and how much they’re willing to pay. Value-based pricing is also exposed to competitors undercutting prices.
Project-based pricing
What is project-based pricing?
Project-based pricing is where agencies and freelancers charge a flat fee per project, as opposed to charging per hour. The fee is based either on the perceived value of the deliverables or the estimated time for the project.
Example:
Our WordPress developer also completes some SEO work for his client and charges it all as one project. The website will cost $800 and the SEO tasks $500, so the price to the client is $1300.
Pros:
Project-based pricing gives your customers clarity; they know exactly how much the project will cost them. Contrast this with hourly-based pricing, where the client won’t know how long the work will cost until completed.
Cons:
Scope creep is a real problem with project-based pricing, and marketing agencies need to be clear from the beginning the amount of rework included in hours. Many marketing agencies accept lots of small changes from clients, which soon add up and this affects the overall profitability of the project.
What are the best pricing strategies for marketing agencies?
As service-based businesses looking to create value for their customers and clients, the best pricing models for marketing agencies are:
- Project-based
- Hourly-based
- Value-based
What are the challenges when using these pricing models in marketing agencies?
While pricing per project, hour, and based on value are the best strategies for marketing agencies, they’re not without their challenges. These are some of the most common problems for marketing agencies using these pricing strategies:
- Scope creep. This is where work “creeps up” on the project, creating additional tasks that weren’t factored into the project price. Client meetings and reworks are common causes of scope creep. As they want to create value for their clients, many marketing agencies accommodate client requests, even if they go beyond the scope of the project. This is a problem because it leads to longer completion times, which has a negative effect on profitability.
- Time tracking. Similar to scope creep, when charging by the hour, many marketing agencies find their projects take much longer than planned. This is because many firms don’t accurately track time (or don’t even track at all) and therefore lack the data to back up their time estimations. As they don’t have an accurate idea of how long projects take, they miscalculate their time investment, and often don’t charge for all billable time. This means lower hourly fees.
- Transparency. With hourly fees or value-based pricing, marketing agencies often struggle to justify their prices with clients. This means they’re unable to negotiate better fees and increase their profit margins. This is down to a lack of transparency around the project, meaning clients find it hard to see the value as they don’t fully understand the work involved. A lack of transparency often means a lack of operational visibility within an agency. If an agency doesn’t have visibility over its workflows and resources, how can it share this information in its negotiations with clients?
- Efficiency. Marketing agencies need to ensure their project teams work as efficiently as possible to protect their margins and fees. The problem is many firms are yet to embrace digital transformation and automation, and so creative teams waste time completing repetitive and time-consuming tasks, such as invoicing. And this means members spend less time on billable work, which directly impacts profitability.
- Quality of deliverables. With a lack of time tracking and automation, project completion time is often underestimated. This means creative teams have to spend longer working on deliverables than planned, at the same fee. This devalues their hourly rate, which has a negative impact on morale and in turn on the quality of the deliverables. It also means creative team members may take on work beyond their capacity, which can lead to burnout and high staff turnover in agencies.
How does COR help marketing agencies overcome these pricing challenges?
The COR platform leverages artificial intelligence to help marketing agencies deliver more profitable work, on time and of a higher quality. It’s a next-generation solution that helps professional service firms manage projects, teams and finances so they’re more efficient, productive, and therefore more profitable. This is how COR helps marketing agencies overcome pricing strategy challenges.
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It automates time tracking so firms agencies accurately price projects and avoid scope creep
This means agencies can easily build up a picture of how long different projects actually take. As automated, team members don’t need to remember to track hours. It also tracks all billable time spent on projects. This means marketing agencies now have the data to accurately estimate how long projects will take, helping them avoid scope creep and maximize their profits.
Our client, Diego Romero, Director of Operations at VLMY&R, has found time tracking especially useful in their business.
“With COR we have been able to measure all types of deliverables and have clear estimates of the time it takes for each task”
He continues: “COR makes us more competitive. These tools are a great excuse for the big changes within a company”.
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It provides visibility so agencies can be more transparent with their clients and negotiate higher fees
COR streamlines project, financial and resource management into one platform, allowing project managers full visibility over the progress and status of tasks and team members. This allows PMs, at the click of a button, to accurately calculate the resources and time needed for each project, as well as see the capacity of each team member and collaborator. This means greater transparency over project costings and time frames, which can be shared with the client to create value and negotiate higher fees.
Our client, René Baquero, Managing Director or HOY and COO of Havas Group Colombia said this was particularly useful in their business.
“A tool like COR helps with negotiations and transparency. When a client has visibility over the agency in a much more technical way, it allows for a better relationship and the ability to measure the work”.
Renne continues: “COR has helped us deliver on a promise to be much faster, much more efficient, and to have much more creativity for the present.”
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It automates time-consuming tasks so creative teams can spend more time on billable work
Time tracking, invoicing and task creation are just some examples of repetitive and time-consuming tasks that COR can automate. This frees up the time of creative team members, meaning they can spend more hours on billable work, and thus take on more projects and be more profitable. It also means they’re less likely to reach burnout, which means happy team members and, in turn, higher-quality deliverables. A marketing agency that retains talent and produces high-quality work creates value for its clients, which means it can command higher fees.
Our client, Camilo Plazas, Chief Innovation Officer at MullenLowe SSP3, comments:
“The internal digital transformation is synonymous with loyalty that returns as profitability, and that is what COR has allowed us to do.”
- It displays data in real-time, so teams can see which projects and clients are profitable and which aren’t.
Through artificial intelligence, COR allows teams to see the profitability of a project in real-time, and make adjustments before they finish in a loss. It also allows teams to see which clients and projects are most and least profitable, so firms can decide which projects they should and shouldn’t bid for. This real-time data also allows marketing agencies to see what their most profitable services are, allowing for optimization and growth.
Our client, LAVALENTINA Design, found this feature especially useful in driving profitability.
“COR lets me understand how I was spending my time, what my team was working on and how much it cost me to produce each project,” says CEO Valentina Giraldo.
Before using COR, she said, “We calculated how much a project would cost, but we didn’t have accurate information on how much it cost to produce that project.”
She continues “When I began to understand, as a company, where I had my team’s time investment versus where I had profitability, and which projects works, I began to make more strategic and intelligent decisions”.
Conclusion
There are a wide variety of different pricing strategies that marketing agencies can use, but the most effective are:
- Hourly-based pricing
- Value-based pricing
- Project-based pricing
While these are the right pricing strategies for agencies, they do have downsides and pose challenges. The COR platform helps agencies easily overcome these difficulties to become more profitable.
