Agency growth depends on getting your prices right. Set them too high, and you will lose out on great opportunities. Set them too low, and you will find yourself struggling to turn a profit.
Many small agencies set their prices too low because they are too eager to close new business. They focus on top-line revenue rather than bottom-line profit.
Getting your prices wrong means that you are more likely to overwork your team or find yourself falling short of your personal goals.
So how do you find the right balance to make sure that you will be compensated fairly for your work?
Start by setting your price floor.
You need to know what it costs to provide the promised scope of work for your client. That means you need to engage in proper project budgeting.
Your project budget needs to include all of the costs for service delivery, including labor hours, out-of-pocket expenses, and an allocation for agency overhead.
The better you get at estimating the amount of effort required to execute on your proposals, the more likely you are to set an accurate price floor.
Of course, your total project cost isn’t the price floor. There’s not much point to being in business if you just break even.
Typically, if you double your project cost, that represents a pretty good estimate of the minimum amount you should charge a client to generate a healthy profit. However, you should run the numbers yourself to make sure this rule of thumb works out well for your actual business model.
Know the value that you create.
It is much more challenging to find the limit to how much you can reasonably charge for the services you are providing.
Establishing your ceiling requires some information gathering followed by trial-and-error.
The reality is that most agencies aren’t charging anywhere near as much as they can (or should) for the value that they are creating.
To discover that limit requires understanding the real value that you do create. It is not about the actual deliverables, but rather what those outputs do to drive outcomes for your client.
That means that you need to understand your client’s business beyond the direct request that they have made of you and your firm.
What are that organization’s pain points that you can solve or opportunities that you can help them benefit from?
That’s one of the reasons that concentrating on similar types of businesses can be so useful for agencies — you gain a lot of market knowledge in the process that makes these calculations much easier.
Find your price ceiling by testing the market.
Even with this knowledge, though, you will need to test the market to see what you can charge.
The simplest test is whether or not you are getting prospects who decline your services because they are too expensive.
However, there is a big asterisk with this statement. Lots of prospects use cost as a shield so they don’t have to get into the real reasons they are saying no.
So you really want to see if prospects say no to you and then subsequently go with a less expensive (but comparable) option.
If you never hear clients object to your cost, you are definitely charging too little.
If you never close business because prospects go elsewhere for similar services at less cost, you may be too expensive.
That constant process of testing helps you find your ceiling.
Negotiate prices without sacrificing margin.
A key principle of floor-to-ceiling pricing is that you can still be flexible on prices as long as you know how to adjust your service offerings to meet changing budgets.
If you know the value that you create and the cost to deliver services, you have the information you need to navigate budget conversations with clients.
Some will advise that you should never give discounts. That’s simply bad advice.
You can give discounts — as long as you get something in return.
Remember that there is a difference between negotiating and haggling. It’s not about giving a lower price for the same product.
You can negotiate all sorts of things that can allow the prospect to spend less without cutting in to your bottom line.
Some of the things you can get in exchange for a discount include a reduced scope of work, better payment terms (including more money upfront), longer delivery timeframes, public promotion (including endorsements or case studies), and more.
Just remember to get something whenever you give something in the negotiation.
Get better at pricing by tracking expenses.
The project budgeting that allows you to set your price floor isn’t a one-and-done exercise. It only works if you consistently review your pre-engagement estimates throughout the service delivery process.
Your account and project managers should be tracking the time and expenses required and mapping them against the initial budget.
When the work concludes, you should be determining if you need to incorporate any adjustments into your future budgeting efforts to make them more accurate.
Over time, you should become better at the estimating game so that you can be more assured that you have established a fair and accurate price floor.
In some cases, you may need to make adjustments to your workflow to improve efficiency and reduce cost. That’s especially true if the price floor and ceiling you have established is close together. The narrower that gap, the less wiggle room you have for inefficiency.
Involve your team in the pricing process.
Too often in small agencies the owner plays things very close to the vest. There’s a concern that letting employees know too much about pricing and expenses will cause problems.
The exact opposite is true.
Employees — especially account leads — need to be intimately aware of and involved in the pricing process.
Take advantage of all of the knowledge that you have built to create more accurate time and cost estimates.
As important, make sure that your team knows the assumptions built into the price. If they don’t know the precise scope of work (along with what is not included) and the assumptions about the amount of time required, they have no way of trying to accomplish tasks within those bounds.
That leads to overservicing and profit leaks.
The more transparency and collaboration that you include in the pricing process internally, the more likely you are to produce the desired results.
Pricing models impact pricing choices.
Effectively pricing your services isn’t just about setting the monetary amount, it is also about how you actually charge your clients.
There are a myriad of different pricing models to choose from, including fixed-price projects, hourly billing, performance pricing, retainers, and more.
These models can be used to better maximize profits (by reaching closer to the ceiling) and minimize risk (by addressing uncertainties that make finding the floor more difficult).
The pricing models can also be a valuable tool when engaging in price negotiations since it offers another lever for you to control in the dynamic of getting something when you give something.
You will find that when you know the price ceiling and have different price models at your disposal that it becomes much easier to find arrangements that make both parties happy.
Pricing is part of positioning.
By establishing your floor-to-ceiling pricing range, you have a vital piece of information that will help you to better position your agency in the marketplace.
Your ideal client definition and your public marketing efforts should be designed to attract clients who have budgets within your range.
At the same time, you should use your positioning to discourage prospective clients who fall outside of those ranges since it will likely waste your time (and theirs) engaging in dead-end discussions.
Similarly, if you have decided to make your relative pricing a cornerstone of your positioning (either as a budget or premium agency) then you need to make sure that you are building a service offering that has a floor-to-ceiling price range that matches.
As your agency grows and evolves, you may also choose to adjust your pricing philosophy. That’s fine because floor-to-ceiling pricing is a dynamic process that should be regularly reviewed to ensure that you are getting the desired results for your clients and profits for your business.
Learn to position your price effectively.
Knowing your price floor and ceiling allows you to better present your pricing to prospects.
If you know the value that they are likely to receive from your work and the cost it will take you to deliver the promised results, you will be able to create more effective price options in your proposals.
When you have initial conversations with prospects, make sure that you anchor them by talking about pricing at or slightly above your ceiling.
After you know more about the actual requirements and know what solutions you will propose, you can use pricing options to maximize their perception of value.
Never present options that you can’t execute profitably or that won’t deliver strong value for the client. That might generate short-term cash flow, but it will harm your agency business in the long-term.
Use the options that you present to help focus the client on the one that you think provides the best solution for their needs while generating strong profits for your firm. Typically that involves offering three options, with the middle ground being the most likely landing place.
Like everything else, you need to use the knowledge that you gain by pitching and closing prospects to continuously refine your pricing strategy and options.
Getting your prices right means that you will be able to produce real value for your clients while creating a thriving business that you can be happy to operate.
It involves some trial-and-error, but more importantly it requires information gathering to better understand your cost of service delivery and the actual value that you create for your client organizations.
Pricing evolves as the agency does, and that means you need to consistently increase your knowledge about the marketplace.
Knowing your price floor will keep you out of financial trouble. Finding your price ceiling will deliver real financial rewards.