If you are a small or medium sized company that is looking for growth, it is time for you to look into your local advertising agencies Los Angeles and find the right agency for you. While marketing agencies across the globe have various models of working, customers are often baffled about the way to work with a marketing agency. How to Work with an Marketing Agency? – Lets try to understand.
Pricing Models of Marketing Agencies:
The most important reason for a company to outsource their marketing efforts is to decrease the costs and the second one is to increase efficiency. Hence, pricing models adapted become an important factor.
Charging an Hourly Rate
Charging by the hour is the original method advertising agencies used with their clients. The agency to charges a fixed hourly price and keeps track of the amount of work-ours required to complete the project. The profit is built into the hourly rate, and the client is usually charged after the work has been completed. Another variation may be that the agency quotes a certain number hours and the client pays them in advance with overages invoiced after the project is completed.
For example, if the agency’s rate is $50/hr, and a project takes 100 hours, the overall cost will be $50/hr x 100 = $5000.
Hourly pricing has become less common with modern advertising and marketing agencies.
Another traditional method of charging clients involves the agencies receiving a fixed percentage of the money the client spends on media as a fee. This is called the “Agency Discount” which averages 15% of the media budget and is essentially a commission. These are popular among Agency dashboard.
For example, if the client wishes to spend $10,000 on a radio campaign, and the agency discount is 15%, then the radio station charges $8500 and the agency keeps $1500 as commission.
Commission-based pricing is still very common and is often a part of a hybrid model of pricing, or possibly one of many options an agency might offer a client.
A retainer means the client pays the agency a fixed amount every month, quarter, or year to manage their marketing efforts. This fee is the equivalent of paying a consultant or a business coach on a monthly basis to help you with your business, etc.
For example, an agency may charge a fixed amount, say between $500 and $5000 a month to manage a company’s advertising efforts, depending upon the size of the company and their marketing budget. Or, they may charge a fixed percentage of the overall marketing budget as the retainer fee. The fixed percentage fee is paid in addition to the marketing budget.
The retainer-based model is still common and is sometimes used as part of a hybrid model in combination with another pricing model such as commissions, etc.
Fixed-Pricing (Project-Based Pricing)
Fixed-pricing, or project-based pricing, refers to a pricing model where the agency charges the client a fixed price for a specific advertising campaign. By charging a fixed price, the agency estimates the amount of time, effort and other costs necessary to accomplish the campaign. They factor in a profit margin and then sets the price. For example, if a client has $1000 for a print campaign, the agency runs that campaign and must manage all their costs and the costs of the campaign within that $1000 budget, or lose money on the campaign.
Fixed-pricing is very common with limited-scope advertising campaigns or projects such as website development, SEO etc.
Value-Based Pricing Models
All of the above pricing models are traditional cost-based pricing models which involve calculating the costs of the project and adding margins to calculate the price you charge.
A value-based is different in that it calculates the value of the campaign based on benefits that a client receives in terms of its own profitability. The price is determined by the potential success of the project and the overall benefits to the client. These benefits can be numerically tangible and/or intangible in nature.
There are a couple ways of creating a value-based pricing model. A results-based, or performance-based model involves the client paying the agency only for predetermined results. For example, the agency may agree to receive a certain amount per sale that results from the performance-based campaign.
Another way of determining the value is to look at either the Life Time Value (LTV) or the client’s Current Marketing Cost of Acquisition (COA). Based on one of these criteria, the agency and advertiser negotiate how much the client is willing to invest to acquire a certain number of clients and that is the fee for the advertising campaign. This is a slight over-simplification, but hopefully you get the idea.
An intangible value may be something like “brand recognition” or “customer goodwill” that is difficult to quantify and measure, but still considered valid.
For example, the lifetime value of a retail client may be $3000: $250 in initial product purchases and then an average of $2750 in purchases over the next several years. The client may be willing to invest 40% of the average customer’s LTV, or $1200 per customer. The advertising campaign goal may be 10 customers per month, or $12,000. That would determine the value-pricing. The agency would take the $12,000 and create an advertising campaign that would generate 10 sales and still be profitable to the agency. Also, the agency may negotiate a certain amount for any sales generated above the stated metric.
Hybrid Payment Methods
A hybrid method uses two or more of the previous methods in conjunction. Since many of the aforementioned payment methods are more advantageous to either the client or the agency, using a hybrid model can allow for a balanced agreement.
A common way to do this is to take a value-based pricing model, a very popular choice for clients and combine it with one of the other methods to reduce the risk for the agency.
For example, I often use a project-based model in conjunction with a commission-based model. I’ll create several online properties for a client and a TV commercial at a fixed price. Then, I will receive a 15% commission for the TV campaign that uses the commercial and drives traffic to the online properties.
Another way my agency uses a hybrid model is by charging a monthly retainer for advertising management and then project-based pricing for websites, commercials etc. Also in these situations, I might waive the agency discount I receive from the media outlet and pass that savings on to the client, since I am already receiving a retainer.
Which Advertising Agency Pricing Model is “Best”?
In my personal opinion, a hybrid payment model offers the best of both worlds, ensuring both the client and the agency have a fair deal. None of the cost-based methods (hourly-based, commission-based, retainer-based and fixed-price) is intrinsically bad in themselves. Nor does the value-based model work in all situations. However, a combination of a value-based model and a cost-based model provides the “best of both worlds”, as it were, and allows the agency to make money while being incentivized to perform well while minimizing the risk to the client.
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