Pricing digital services is a balancing act. If you price too low, you don’t cover your costs. Too high and you’ll drive away clients.
You don’t want to lose out on profits. But you still want a fair markup on what you offer.
For all digital agencies, the price you charge impacts your business. The basic rules of setting prices are straightforward:
- The price has to cover costs and generate profits, with a markup for the added value you provide.
- The only way to lower prices is by lowering costs.
- You must review prices often to ensure they keep pace.
- Costs, market demands, competitive responses, value-based output, and profit objectives affect price.
- The price you establish must attract sales.
Correct pricing should create a foundation for your business to prosper. Incorrect pricing creates problems that a business may never overcome. Of course, this is easier in theory than practice.
Let’s go into more detail on these areas.
How to Determine Business Costs
Your business has a set of both fixed and non-fixed costs. Fixed costs include salaries for your staff. Non-fixed ones are those that vary every month, such as utility bills and other payments.
Some costs to consider include:
- Ad placement and social marketing fees
- Website hosting costs
- Consulting and freelancer payments
- Design package costs and add-ons
- Financing costs
- Monthly subscription services (i.e. SEMrush, Dashlane, etc.)
Operating expenses also include costs associated with the cost of services sold. For example, the fees you pay to use certain services. You need to deduct these costs from your total income to derive your profit.
Keep a spreadsheet with all this information. This helps you track costs, profits, and trends over time.
Finally, don’t forget to price your time and services. Many small business owners, do everything but pay themselves. This is not sustainable. Make sure you have the money you need to keep the business going.
How to Price Your Services
Pricing involves many factors like:
- Your target client
- Competitor prices
- The value you add
- Quality of service
Too many businesses make the mistake of believing that it is the price on its own that attracts sales. In fact, the selling price is just one factor in a business’s ability to sell.
For example, Rolexes don’t tell more accurate time than Seiko watches. Instead, they achieve their inflated prices because of their brand equity. Customers pay for the Rolex name more than anything.
You won’t be able to charge Rolex prices for your services, but keep this in mind as you determine prices.
Avoiding under or overpricing
Overpricing and underpricing are the main pitfalls when it comes to setting prices.
Overpricing is unwise. Clients are sensitive to how your prices compare to the competition. Setting prices above what a client wishes to pay will decrease sales.
Underpricing can also spell disaster for your business..
Many businesses try to convince clients what they offer is the least expensive. They hope to drive up the volume. But clients want value for money. And the majority of them are unwilling to buy from sellers they believe are too cheap.
You can get a sense of prices by doing industry research.
In Singapore, the average digital marketing consulting fee per hour ranges between $100-300. The average price of a project is between $1000-5000.
How do you determine where you fall on this scale? Do some self-reflection with the following questions:
- How old is your digital agency?
- What was your largest project?
- What has your average project price and per hour price been?
- What has been your profit margin on these projects?
- Have you received pushback on your fees?
- Do you have repeat clients?
- What do similar competitors charge?
Find your competitors online to get a sense of the prices or services they offer. If you can’t find prices online, ask them for a quote on a similar project your company would do. You can then create a price range based on the industry norms.
Understand your other business priorities
Profits aren’t everything. You also need to focus on increasing market share. This can help you reduce costs or increase your value the more people use you.
Being known for quality, rather than price is important. You want clients that value you and pay what you’re worth.
After establishing your reputation, set higher prices to reflect your experience and expertise.
When a downturn hits, it may be prudent to set prices so that sales recoup enough money to keep your head above water.
For newer digital agencies, a consistent business should be a focus. You can’t charge a lot in the beginning. But keeping the lights on and gaining experience will help you increase prices in the long run.
Set a value-based rate
If the services you offer can be differentiated from those of your competitors and are perceived as adding value, consider value-based pricing.
This is a strategy of setting prices based on a client’s perception of the value of your service. Value pricing is client-focused pricing. You can base your pricing on how much the client believes a service is worth.
Know your clients
Before you discuss prices, research your ideal client. See what they need and what their goals are so you can tailor your service to them.
Split your clients into definable segments:
When you identify the segment you want to target, you can better price your services. If you know how to manage your time, you can make money from these demographics.
For example, you can offer packages that vary from basic to deluxe. A basic package may include two blog posts per month and an analytics report for $400. Deluxe package could include 8 posts per month and a range of online marketing services for $3600.
Offering this low entry point gives clients an opportunity to dip their toe in the water. Many clients will opt for more expensive packages after seeing these initial results.
Have a revenue target
Revenue targets tell you how much revenue you would like the business to be making. Be ambitious, yet realistic.
When you have different services, it’s important to divide the revenue target by each item.
For example, WithContent charges $600 per blog post. Or they charge $1600 for long-form digital content. From here, they can set monthly targets for what they want in each category.
Know your competition
Your clients will check out your competition. So you should too. If they offer comparable services, use their pricing as a benchmark.
Armed with this knowledge, assess whether your services offer any added value. This will enable you to set a higher price.
Know where the market is heading
None of us can predict the future. Analyse trends and plan ahead. Keep an eye on your competitors as well.
How will your competitors react to the introduction of new services? Is it likely to lead to a price war?
Use SEO analytics to track your performance and your competition’s. This is the best way to prepare for the future.
Watch your pricing
To be sure what you sell is having a positive cash flow effect, focus on the profitability — or lack of it — every month.
Other habits to get into include:
- Listening to clients on a regular basis about your pricing
- Tracking competitors by getting interns to track what the competition is up to
When to Raise and Lower Prices
To decide whether to increase or lower the price, you need to understand what is selling and why. Doing more of what works and doing less of what doesn’t requires analysis.
What is making money and what’s losing it? This also calls for you to be on top of your costs. Are costs too high or is your price too low? Do clients feel they are getting value from your services?
If you’re considering raising prices, you’ll need to test prices on a regular basis. Try out new offers, new bundles, and premiums to boost sales at a better price. When you raise a price, offer a new bonus, or add value with a special service. Then track any increase or decrease in sales volumes. Also study the total gross profit generated.
You don’t want to alienate existing clients by raising prices too steeply. Develop a strategic plan over a period in which you can increase prices on a gradual basis.
Do not stop client suspicions that costs are going down while prices are going up. It will backfire.
To get people to try your services and attract attention, choose to offer discounts. Otherwise, you could give clients an added service for free.
In general, lowering prices is not considered good practice. That is, unless you are using the practice to encourage a bigger market share. Or when your competitors are lowering prices too.
Another tactic is to offer less but charge the same price. This is about reducing costs without appearing to cut value.
Instead of lowering prices, many digital agencies offer free services. These include quick audits, 1-hour consulting sessions, and other strategies. Your goal should be getting clients to see the advantages of your agency.
You can do similar things for existing clients. Try offering an inbound email tutorial to show the advantages of email marketing. Regardless, always focus on increasing engagement and boosting conversion with all clients.
Test yourself on what you have learned
- What does the price for a product or service have to cover?
- When are you able to lower prices without affecting your bottom line?
- Are you adding the value your services offer into your price setting?
- How do you measure the costs of what you offer?·
- Where can you find industry pricing trends?
- What is the value of knowing your clients?
- What are the pitfalls of overpricing and underpricing?
- When should you raise prices?