In addition to guest posting on the UpCity blog, Post Modern Marketing is featured as one of the Top Digital Marketing Agencies in the United States. Check out their profile here.

Often, when we get to the negotiating stage with a customer who is really excited to work with us, price is mentioned and the mood in the room goes cold. I got an email just today where a potential client said, “I really like your company, but I’m having a hard time understanding why the price is so high when other bids aren’t.” So, where’s the disconnect between marketing companies and their potential clients when it comes to expectations on price?

The digital marketing industry, in general, has no baseline standards, no transparency, and no open competition.

The makeup of a digital marketing agency varies wildly from one company to the next. In one of our company’s service regions, our top four direct competitors are: a guy who works from his home, a small team working out of a coworking space, a firm of 4 or 5 people, and another firm similar in size to ours. Each firm has different pricing structures and different scopes of work they’re proposing to the same client (we’re the only one of the five that publishes our pricing online, so I am basing this off seeing proposals from them out in the wild).

How do you know your pricing is in-line and reasonable?

As agencies, we’re not like the gas stations that see each other’s prices across the street, so doing comparative and competitive pricing is either impossible or difficult. Plus, there is always someone out there willing to undercut you. If your competitor is outsourcing their work, they can afford to cut into their profit margins to get the job.

I stopped negotiating prices several years ago, and it was by far one of the best decisions I made for my company’s health and long-term stability.

Instead of worrying about competitive pricing, we base our pricing, like many other businesses, on our costs. If you’ve been in the business long, you’ve seen marketing agencies appear and disappear, one right after another. I suspect this has a lot to do with their pricing models being geared towards getting jobs, instead of actually profiting from them. There are many other factors like reputation, the balance of running a business versus doing the work itself, and so on, but the stories I hear and see most are financial ones.

So how do you figure out what your pricing should be? Don’t worry, I’m not leaving you hanging! Below is my guide to breaking down your costs and determining how much you, as a digital marketing company, should be charging for your services.

Determining how much it costs to run your agency

Since we charge based on our hourly rate, whether it’s a fixed number of hours on a retainer or hourly work, our general breakdown for how we determine cost is going to follow the general formula of costs divided by productive work hours per employee. Let’s break down a typical agency’s costs:

Office expenses

The first, most obvious cost to a business is its facilities. This may vary based on your business model and setup, but it should always be accounted for, even if you’re working from home (and if you are, don’t forget how the IRS determines how much of your home can be used for office expense and deduction purposes). The common office expenses are:

  • Rent
  • Utilities
  • Internet
  • Janitorial
  • Maintenance
  • Furniture
  • Office Supplies
  • Equipment (computers, phones, accessories, etc.)
  • Security

Production expenses

In order to do our work, whether it’s building websites or running an SEO campaign, we have to invest in tools and software to be efficient and successful for our clients. These can easily get overlooked when breaking down expenses! Things that contribute to our typical digital production costs include:

  • Website hosting and management
  • Design software (Adobe or other)
  • Office productivity software (like Microsoft Office or Google Docs)
  • Email Hosting
  • SEO tools like rank tracking and backlink monitoring
  • Reporting platform
  • Social media automation software
  • Email marketing
  • Stock photography membership
  • Communication tools like Slack
  • Task management software
  • CRM

Salaries and benefits

The most important part of a successful agency, and often the most expensive too, is its people. Whether you’ve got a large staff, contractors, or work alone, you need to account for the cost of human resources. And, if you’re an agency owner, do not forget to pay yourself! There’s no reason to work so hard and not get compensated for your time. Trust me, the mental health you gain from benefiting from your own company is worth the expense. And, if your company is set up as a corporation, you legally have to pay all shareholders and officers a reasonable, comparable salary. Employment costs include:

  • Salary
  • Sales commission
  • Contractor costs
  • Health, dental, and other insurance
  • Vacation time
  • Sick time
  • Bonuses
  • Payroll taxes and unemployment Insurance
  • Training costs
  • Volunteer Time
  • Miscellaneous costs like employee lunches and other minor benefits

Professional fees and taxes

I see far too many firms try to save on costs by eliminating external professional fees. From my experience in the formative years of our company, hiring experts outside your field to support your business pays for itself many times over. So, don’t skimp on the following types of costs if you can’t cover them competently in-house:

  • Payroll service
  • Banking and credit card processing fees
  • Bookkeeping
  • Attorney fees
  • Business and financial auditing
  • Tax professionals
  • Leadership training and mentorship
  • Loan fees
  • Corporate taxes
  • Government licensing fees
  • Business liability insurance (you should always have this!)

Marketing, travel and other variable costs

Another area that digital agencies forget to budget for themselves is the one thing they know best: marketing. The amount you should budget for marketing may vary based on your business and goals, but you should always allocate something. Additionally, travel and other costs always crop up when we don’t think about them ahead of time. Fees like these include:

  • Travel, including employee mileage
  • Accommodations
  • Conference Fees
  • Sponsorships
  • PPC costs
  • Ad placement costs
  • Directory fees (for sites like the one you’re on now)
  • Donations

Bad debt

Often overlooked in budgeting, but never forgotten at the end of the year, bad debt is something we absolutely should account for. We allocate 5% of our revenue for uncollected receivables, which has been a fairly safe number, but if you’re working with lower-cost clients or provide any kind of automated software or services, this number could be significantly larger. Account for it at the beginning of the year, and if you overestimated, the leftovers are a nice little bonus!

What is your hourly cost to run the business?

This part gets a little difficult to follow, so I’ll do my best to describe it, but we’ll also link a worksheet that you can use to help clear up any confusion.

Now that you’ve listed all of your costs out, break them down to an annual rate – so monthly costs like rent should be multiplied by 12 and hourly payroll costs by 2,080 (40 hours per week by 52 weeks), and so on. For variable costs, estimate based on your best guess or averages from past operating years. When estimating, always be conservative and use the higher end of the cost range. You should now have the total cost to run our company for the year.

But we’re not done. We can’t simply take our costs and divide them by the working hours in a year, as there are other variables we need to consider. We can’t base our pricing on just the hourly costs of the business; we need to break our costs down into productive hours.

In our company, we’ve got several employees who do work that is unbillable. The CEO, the bookkeeper, the management team and so on. These people don’t directly contribute to the production of work, but we need to account for their cost in our overall calculations. After all, our goal is to determine what to charge our clients for an hour of work, and to ensure we are compensated for that hour. It also helps us account for the costs associated when we hire more employees, as we often hire productive employees before we hire management or support.

So, we first take our annual costs and divide that number by the total number of productive employees. Productive employees are defined as anyone directly producing work. In our field, this includes web developers, graphic designers, copywriters, marketing associates, and so on. So now we have our annual expense per productive worker.

From there, we have to determine how many productive hours there are in a work year. We always tend to forget things like holidays, vacation time, sick time, training days, and other days where the employees are not producing work for clients.

And one last thing we absolutely have to account for is the productivity time of the average person. No employee is 100% efficient and producing every minute of the day. There are breaks, bathroom breaks, chatter with others, internet browsing distractions, and the ever-present ‘staring at the clock at the end of the day.’ We need to account for this when coming up with our productive hourly costs. A fairly safe number to assume, if you have an amazing team, is that each employee is productive 80% of their working day. It could be much lower, depending on your work culture and environment.

So, to get your actual productive hourly cost, you’re going to have to divide the annual expense per productive worker by the total number of productive working hours. It might look something like:

Cost = Annual Expense/(Total Hours * 0.8)

How much should you charge hourly?

Now it gets easy! You’ve determined the cost to do one hour of work for a client, so from there, you take that number and add your profit margin to it.

But, what should your profit be? Let me emphasize something that gets overlooked or lost a lot. Profit is not a dirty word. Every business needs profit to thrive, to have a safety net, to invest in growth, or just to compensate the owners who risked so much to get it in the first place. And your customers should understand this too. Don’t ever compromise on this and reduce your rates to cost just to win a deal. Value your time, and make sure that your customers value it too. If they don’t you’ll find that they not only lack respect for you, your team, and your time, but will end up dominating your energy and effort with no payoff in the end. I have, more than once, ended agreements with customers who cut into our margins (or worse) and didn’t value what we did for them, and it saved me in the end.

Even if you have a large client that is responsible for a large amount of revenue, and even if you’re afraid to lose them, they’re not worth it if they’re not profitable. You can shift that energy and time into other clients who are profitable, or into finding new ones.

How do you set up your pricing structure?: The importance of time tracking.

Now that you know what to charge on an hourly rate, there are several different ways to set up your pricing structure, and there’s no one-size-fits-all here. Find the best fit for your marketplace, internal management, and ease of marketing. Here are some thoughts on ways you can set up your pricing:

Hourly billing

The easiest way to price out your services, now that you’ve got your hourly rate, is to bill hourly. But you absolutely must be diligent with tracking. You’ll eat into your margins if you don’t stay on top of time tracking and instead base your hours on a general “I think it took about 2 hours” approach. On top of that, if you ever get into a disagreement with a client on a bill, you need to be armed with the full breakdown of hours worked on their project. Invest in a good time tracking app (we use Harvest, but there are a lot of good options out there) and make sure everyone on your team is using it appropriately.

Retainers and fixed fees

The easier way to setup your pricing structure, and my preferred method, is to work on a retainer or fixed-fee basis. Internal time tracking is still important for auditing your work and making sure your prices reflect your costs accurately. But by having fixed fees, you eliminate the detailed time reporting required for proper billing and customer communication. Those things can be a huge time and energy sink if they’re managed thoroughly. Track your average hours for a service (and remember that each employee is going to work at a different speed) and come up with a conservative estimate on the time each task takes. Base your pricing off that, and audit it regularly.

Don’t be afraid to correct course

If you’re just starting off with a new pricing structure, you’re going to have to make a lot of estimates and assumptions. Once you start tracking your time and costs, you may find out that you were wrong and underestimated or overestimated how long various tasks take. That’s okay – there’s nothing wrong with correcting course and adjusting your pricing.

Don’t just spring price increases on your clients. Communicate with them well ahead of time, be thorough with the reasoning and lay out the options if the pricing change is major enough to be disruptive. Don’t sacrifice the quality of your work to keep your costs down – that doesn’t best serve the goals of your clients. But don’t take a loss to avoid rocking the boat, either.

'Don't sacrifice the quality of your work to keep your costs down.' - Josh Rubin Click To Tweet

Thoughts on competitive pricing

Once you know the actual cost of doing business, and set your pricing accordingly, you might find yourself in the same shoes I often do – your bids are significantly higher than other digital agencies you’re competing with.

Is this a problem? No. Is this a challenge? Sure.

Remember that you now know the costs associated, and if another agency wins the bid for the same scope of work, they’re not going to be able to sustain it for long. Don’t fret, you’ll get the next one, and the quality of clients you have will improve as the ones you do get are not price-oriented, but rather results-oriented.

But how do you address this price discrepancy when you’re in the interview or negotiation phase of the sales funnel? Don’t hesitate to be transparent with your clients. Since we’re working with other businesses, they understand how business works. I’ve never had a potential client tell me, “No, you should take a loss to work for us.” Be honest with them, even discuss what this article breaks down and assure them that your higher costs are worth it, because you pay your people well, you invest in the best systems, and you are going to be stable and reliable long-term as you support them over the course of your partnership.

'Don't hesitate to be transparent with your clients.' - Josh Rubin Click To Tweet

If you’re still unsure about how to price your marketing services, this interactive agency pricing worksheet will make the process a breeze!

Josh Rubin

Josh Rubin grew up in Southern California, and first discovered an interest in web design when he built his first website in the mid-1990s, and began his Internet marketing career in 2003 as a graphic designer and web developer. He developed an expertise in SEO, web development, and overall marketing strategy, and has run marketing campaigns for both startups and established national companies. In 2009 he launched his own SEO and web design company, Creative California, and in 2016 merged his company with Post Modern Marketing and subsequently became the owner and CEO. In his free time, he volunteers with Sacramento’s SCORE, suffers through one terrible 49ers season after another, and explores Sacramento’s countless brunch offerings.