Agency pricing models: what each one leaves unpriced.

The main agency pricing models are hourly billing, a fixed project fee, a monthly retainer, value-based pricing, and pricing tied to results, either as a percentage of the client's ad spend or as a fee per lead or sale. Each one sells something different, whether that's hours, a described result, a month of capacity, an outcome or the management of somebody else's budget. Each also leaves one kind of client request without a price, so the model worth choosing is the one whose gap you can close with a single written line before any work starts.

The pricing articles we read for this piece list pros and cons and mention scope changes only as a risk in passing, so we'll take the models through one agency instead. Kestrel Lane is a six-person web and marketing agency in Columbus, Ohio, that bills $170 an hour and runs a different model for each of five clients, which makes it easy to see where each model goes quiet when a client asks for more.

What are the main agency pricing models?

Six models cover almost everything a design, development or marketing agency sells, and the last three only suit particular kinds of work:

• Hourly billing, where the client pays for the hours worked at an agreed rate.
• A fixed fee, one price for a project both sides have described in writing.
• A monthly retainer, a set fee for an agreed amount of work or time each month.
• Value-based pricing, a price set by what the result is worth to the client.
• A percentage of ad spend, a share of the media budget the agency manages.
• Performance pricing, a fee per lead or sale, or a raise when targets are hit.

Published lists don't agree on the count, and they don't need to. Bonsai's guide for marketing agencies names four models (project, retainer, hourly and performance), KlientBoost's guide to PPC agency pricing names five, adding a management fee plus a percentage and fees that rise as goals are hit, and COR's article on agency pricing strategies reaches seven by counting tactics such as competition-based and penetration pricing alongside the models themselves.

Tiered packages and cost-plus pricing are ways of presenting one of the six. A tiered offer, like the floor, ideal-client and halo packages an agency owner describes in a Social Media Examiner interview, is a fixed fee or retainer sold in three sizes, and cost-plus is how agencies handle things bought on a client's behalf, as in COR's example of a $100 freelance article billed at $125.

What does each pricing model actually sell?

Each model sells a different thing, and what it sells decides which requests the client has already paid for. Here's what Kestrel Lane's five clients are buying, and the request each arrangement leaves without a price:

None of these gaps is a reason to avoid the model, but each one is a reason to write one more sentence into the proposal, and the sections below show what that sentence says for each client.

What happens when an hourly client asks for more?

Under hourly billing a request that grows simply keeps adding hours, and nobody has to agree to the total until the invoice arrives. Copper Kettle Catering in Dayton called Kestrel Lane when a plugin update broke the booking form on its WordPress site, and the agency estimated 10 to 14 hours to find and fix the fault. Hourly billing suits that kind of work, because nobody knew what was wrong until somebody opened the site up, and the fix took 12 hours, or $2,040.

Then the owner asked, since the agency was in there anyway, for the four menu pages to be rebuilt so customers could filter dishes by dietary needs, and that took another 21 hours. Billed as plain hourly work, the invoice came to $5,610 for a job the owner had been picturing as about two thousand dollars, and nobody had ever estimated or approved those 21 hours. COR's article describes the same drift on a smaller job, a 10-hour estimate at $80 an hour that ran closer to 15 hours once the client asked for extra rework and meetings.

Kestrel Lane's hourly agreements now carry a threshold: any request expected to take more than four hours gets a written estimate and a not-to-exceed figure, and work stops at that figure until the client approves more. The menu pages would have gone out as a $3,570 estimate the owner could accept, trim or turn down, and the awkward call about the invoice wouldn't have happened. Our comparison of time and materials vs fixed price goes further into who carries the risk when the hours run over.

Where does a fixed fee leave a gap?

A fixed fee covers what the scope describes and says nothing about anything else, so its gap is every request the description never named. Ridgeway Animal Shelter, a nonprofit shelter north of Columbus, bought a new website from Kestrel Lane for $30,600, priced from an estimate of 180 hours at the agency's rate, with adoption listings, a volunteer signup form and a donation page linking out to the shelter's existing donation processor.

In week five the development director asked for monthly giving, with donors choosing an amount, the processor charging them each month and the site sending its own thank-you emails. That's 18 hours, or $3,060, and on a scope that said "donation page" without saying what the page did, it could have become a week of arguing about whether monthly giving was included all along. Our piece on in scope vs out of scope covers how to write that boundary so the question never comes up.

What settled it in a day was one sentence in the proposal, saying that work the scope doesn't describe is quoted at $170 an hour and approved in writing before it starts. The agency sent the estimate, the director approved it, and the fee moved to $33,660 with launch a week later than planned. A fixed fee is still the right default for a project you can describe, but it only stays fixed while the scope shows where the work ends.

What does a retainer do with a request bigger than the month?

A retainer sells a month of capacity, so a single request bigger than the month either swallows the routine work or quietly pushes the agency into unpaid hours. Fairbrook Farm Market, a family farm store with a delivery service outside Columbus, pays Kestrel Lane $5,780 a month for 34 hours of website upkeep, email campaigns and small design jobs, which works out at $170 an hour, and a normal month uses about 30 of those hours.

In early November the owners asked for a holiday gift box shop page and a six-email sequence to sell it, which was 26 hours of work on its own. Absorbed into the retainer, November would have meant 56 hours of work for $5,780, about $103 an hour, or the routine newsletters slipping into December.

Fairbrook's agreement says any single request over eight hours is quoted separately, so the gift box project went out as a $4,420 estimate, was approved the same week, and November billed $10,200 with the routine work delivered on schedule. Our breakdown of the monthly retainer draws a similar line at sixteen hours for a larger client, and where you draw it matters less than drawing it. A website care plan needs a much smaller one, because the edits inside it are meant to take minutes rather than days.

Can value-based pricing put a price on a change?

It can, but only if the proposal says how changes are priced, because a value-based fee never gave the client any hours to measure a change against. Halvorsen Marine Supply, a boat parts store in Duluth, Minnesota, takes most of its orders by phone and wanted an online store customers could order from without calling. Kestrel Lane's own estimate came to 170 hours, or $28,900, but the agency priced the project at $38,000 on what moving those orders online was worth to the owner, which comes to about $224 an hour if the estimate holds.

In week seven the owner asked for a parts lookup by boat make, model and year, which would take 37 hours. He'd been sold an online parts store and finding the right part is the whole point of one, so his view was reasonable, and with nothing written about changes both sides would have been negotiating the value of a feature halfway through a project, which is the worst moment to do it.

Value pricing still needs a described scope, and it needs a rate for whatever falls outside it. Kestrel Lane's value proposals now list what the price includes and attach a rate card for changes, so the parts lookup became a $6,290 change at $170 an hour, approved in writing before the work began. The agency could have priced the change on value as well, and some agencies do, but a change priced by negotiation in the middle of a project tends to land wherever the more stubborn person wants it.

Where do percentage and performance pricing stop?

A percentage of ad spend pays the agency to manage a budget, and it stops at the edge of the ad account, so any production work a campaign needs sits outside it. KlientBoost's guide reports that some agencies charge 10% of ad spend while others aim for 15% to 20%, and it warns that landing page design can eat an account's hours without touching the ads, which under a percentage means work the fee doesn't pay for.

Sundial Solar, a residential solar installer in Columbus, pays Kestrel Lane 12% of a $26,000 monthly Google Ads budget, which is $3,120 a month. When Sundial launched a battery storage promotion it needed three new landing pages, 23 hours of design and build, and its agreement says the percentage covers account management only, while landing pages, video and new ad creative are quoted per piece. The pages went out as a $3,910 estimate instead of disappearing into a fee that moves with the ad budget and has no idea how many pages exist. A percentage also gives the agency a reason to recommend a bigger budget, which is why our marketing scope of work template charges a flat fee that only rises when spend crosses a written band.

Performance pricing, a fee per lead or a raise when targets are hit, has the same edge with more at stake, since the agency only earns once results arrive. Bonsai's guide notes that out-of-scope work under performance pricing may be charged at hourly rates or as project fees, and that's the line worth writing, because a performance deal that also absorbs production is one where the agency pays for the client's results.

How do you choose a pricing model for your agency?

Choose by the shape of the work rather than by which model sounds most profitable. A project you can describe in advance suits a fixed fee, because the client can compare it and approve it, and you're the one rewarded for getting faster. Work nobody can describe until it's opened, like Copper Kettle's broken booking form, suits hourly billing with an estimate threshold, a steady stream of small requests suits a retainer, and media management can run on a percentage or a flat fee with spend bands, as long as production is priced on its own line.

Value-based pricing earns its place once you've delivered the same kind of result often enough to know both your hours and what the result is worth. Most agencies end up with a mixed book like Kestrel Lane's, and plenty of projects use two models at once, with a fixed fee for the build and a retainer for the care afterwards being the commonest pairing. Our piece on how much to charge for a website works that fixed fee out from the hours and the rate.

Whatever the mix, set your hourly rate first and the model second, because every model above converts back to the same $170 an hour once a request lands outside it, and a rate the client has already seen makes extra work easy to quote.

A pricing model is a promise about which requests are already paid for

Kestrel Lane's five arrangements differ in nearly everything, yet each one held up in the month it was tested because of a sentence of the same kind: four hours on the hourly work, a rate for undescribed work on the fixed fee, eight hours on the retainer, a rate card on the value deal and a production line on the ad account. Between them those five sentences priced $21,250 of requests across five clients that would otherwise have been absorbed, argued over or sent as a surprise on an invoice.

That's where the models really differ from one another. Each one decides in advance which requests the client has already paid for, and whatever it doesn't cover needs its own price and an approval before anybody starts on it. Docket handles that second step: the agency sends the client the price and the hours for the request, the client approves it with one click, and the approval sits in the project log with its date. Our notes on handling scope creep cover the conversation around it, and what scope creep costs an agency shows what those requests add up to over a year.

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