Latest / Agency Uncovered / Agency Pricing Models Explained: Retainers vs Performance-Based Pricing | Mads Singers
Transcript
- 00:00:00 — HOST Creating the right pricing model for your agency. We are here with Mads Singers, so let's get started. What are the different agency pricing models available to agencies? 00:00:12 — MADS Yeah, so agencies have many options, and the most common one is tiered pricing. The majority of agencies typically have a couple of price tiers — depending on what they're selling to the customer, it's priced slightly differently. But for the majority of agencies out there, they're basically pricing based on a monthly retainer. 00:00:32 — MADS Now, the most successful agencies that I know of and see are typically agencies going in a slightly different direction: they price more based on performance. This is typically the case with agencies that are more marketing- and sales-driven. If you're driving sales revenue, you often have way more impact on the bottom line, and therefore it can make a lot of sense for the client to give you more incentive to deliver really good performance — incentivizing you, if you will, to make sure you do your best work. 00:01:05 — MADS One of the most common models I see in that space is in lead generation, where a lot of people either sell leads at a cost per lead, or they have a monthly retainer with a bump up based on various parameters around the leads. The benefit is, when you're selling individual outcomes, clients are way more comfortable paying. If you go to a customer and say, "We do social media marketing — pay us five grand a month and we'll do great things for you," it's not easy for the customer to see and understand what the return on that payment is, so they're generally a lot more hesitant to pay. Whereas for me, the big benefit of the pay-for-performance model is that people are generally very comfortable paying, because they know what they're getting. If they're paying a set fee per sale or per meeting, they can make sure that it's more than feasible for them to pay those rates — and therefore they can make sure they're running a profitable business. 00:02:17 — MADS As an example, in a couple of our businesses we actually use external agencies, particularly around email marketing, and we typically pay them per appointment. Rather than paying a set monthly fee, we pay per appointment — and that really incentivizes them to generate more appointments. We're incentivizing them not just to send out a bunch of emails, but to make sure the emails work and actually drive the success criteria, which for us is appointments. It makes it way more interesting for them to scale it up: when they have a campaign that's really good, they push it, which is very beneficial for them because they can make a lot more money. And we're generally always happy to pay, because we know the rates are less than our profit margin — so we know it's always profitable for us. 00:03:05 — MADS That's an angle that typically works really well. Now, it varies depending on what you're doing — not everything works in this model. For many, many agencies, a set monthly retainer does make sense. If you're building a website, for example, it's not really up to you what the outcome of that website is, and typically you're not paid on a monthly basis — that's typically a one-off. There are many services where it's not driven purely by the outcome. 00:03:44 — HOST Right. And what would be the difference between hourly-based pricing and value-based pricing? 00:03:50 — MADS Generally, the concept is: when you're doing monthly or hourly pricing, the key thing is that you try to set a number that's reasonable for your business. One of the mistakes I see agencies make again and again is that they set their pricing when they're very small and have very little overhead. Very often it's the owner themselves delivering the service, and they set a price that's comfortable at that level. However, when you're growing an agency, you need to put in layers of management, quality assurance, things like that — so you have to make sure your prices have the capacity for that while still generating a comfortable profit margin. 00:04:33 — MADS I typically say, when people are operating agencies, you want to make sure you have at least a 30% profit margin. If you go much below that — one, you're running a significant risk, and two, if it's not very profitable running the business, it becomes a lot less fun. One of the clients I was working with a couple of months ago was sitting at around 7–8% profit margin. Even though the business was doing around 2 million, it was still very, very high risk — if they lose a couple of big clients, they're very quickly in the negative. And because the profit margin was so low, they didn't have much cash flow, they didn't have much of a safety net. You really want to make sure you have a decent level of cash flow coming in. 00:05:21 — HOST That makes sense — because it's easy not to be as incentivized when your profit margins are so low. That's very helpful. 00:05:44 — MADS And I would say, on the other model — when you're not doing hourly — you generally want to be either very good at what you're doing, or have a very, very low cost base. A good example: I know a lot of people who do lead generation through SEO, and the actual cost to generate those leads is often not super high. It might take a little while, but they can afford to take the risk, because what they're putting in is not that much compared to the potential outcome. And as I said, I've seen it in email marketing quite a bit: you can go set up some campaigns, run them, and see what the outcome is. It will cost you some money, it will cost you some risk. But if you get a customer on board where the campaigns work really well, the potential upside can be massive. 00:06:54 — HOST Right. So just to go back to monthly retainers — like you've pointed out with the hourly pricing and the value-based pricing, it's a bit of a risk for a business that's, say, starting out. They want that assurance of income for the next couple of months with clients while building the relationship. Can you expand on more reasons why agencies choose monthly retainers? 00:07:15 — MADS Monthly retainers are generally good when you're new, and they're generally good for predictability. When the client knows exactly what it costs and when they're paying it, it's obviously way more predictable. The majority of agencies run this model because of the predictability. But it typically also has a bit of a ceiling — many agencies never grow above a certain level. There are some people out there who are very good at scaling that model, which is great. So I don't think either model is right or wrong — they're just different. 00:07:55 — MADS Where I see the monthly retainer work really well is particularly for new agencies. You don't have a lot of money, you don't have a lot to work with — so if you get a couple of clients paying you a set amount per month, it lays a bit of a foundation. It is also a little bit risky sometimes, because occasionally you end up in a situation where, with one or two clients, you're okay, you start hiring people — but then if you lose just one client, the whole thing potentially falls down. It can be a tough situation. But at the same time, in the early days you often have less time to wait to generate leads and generate a significant positive income. So in the early days, it's the model most agencies go for. 00:08:35 — HOST Right. And if a newer agency is considering performance-based pricing — would you say it's a risk, or is it something they should consider instead of a monthly retainer? 00:08:50 — MADS Again, it's not right or wrong. I would say, if they come into it with a skill set and they're confident they can do it, it totally makes sense. I know people, particularly in the pay-per-lead game, who have gone from literally starting out — being good at SEO but not having anything — to making over 10K a month in less than three months. I've seen some people go very quick. 00:09:18 — MADS What I would say is: agency life is often a lot different than what people think it is. Most people think agency life is about delivering a great service. But really, agency life — either model — is about handling customers, dealing with the sales part. Most agencies struggle because they're not good at the sales, the communication, and the client back-and-forth. That's often where they lose out. It's rarely because they don't have the skill — it's the other part of the equation, which they tend to underestimate. 00:09:48 — HOST Yeah. Playing devil's advocate here — if one model is clearly better, why doesn't everyone just use it? 00:09:56 — MADS I think the real answer is there's no model that's always better. I would say, when I look at the most successful agencies, they're definitely getting paid for impact. But that's easier in some areas, and it might also be easier when you've built solid client relationships. When you're first starting out with a client you don't know — you just met them — it might be easier in the early days to just charge them a set amount of money to build up a bit of a relationship and trust first. 00:10:27 — MADS When you're working with people on a value-based pricing model, you often need a bit of trust. You want to make sure they're not just lying to you. And many clients don't know their numbers that well. If you get on the phone with, let's say, a plumber, and you ask, "If I generate you ten leads, how many do you typically close?" — they'll say, "Oh, I close 60% of them." The reality might be 20. When they don't know their numbers, they often over-exaggerate a lot, and then the calculation you're doing might not be that accurate. 00:11:15 — MADS And the second thing is simple things like picking up the phone. One of my very good friends, James, does a lot of this stuff, and when they start generating leads in a particular area, they tend not to work with just one client at a time, but actually three at a time — sending each a portion of the leads to see who actually closes the most. You could say, from a lead-gen standpoint, that shouldn't be your problem. But if you know that one person closes a lot more leads than the others, the leads are much more valuable to them — because if I close 60% of my leads and you close 20%, I can afford to pay a lot more for the leads. 00:12:04 — HOST Right, okay. And what should an agency owner understand before choosing a pricing model? 00:12:10 — MADS I think the risk appetite. When you're paid based on performance, it's way more of a partnership, and it's definitely higher risk for you as the supplier — whereas the risk for the customer is way less. So consider the risk appetite you have, and also how experienced you are. If you're brand new in an area, it might be easier to sign a retainer to get some money in. Whereas if you have a lot of experience already, going for the more performance-based model could make more sense.