When it comes to setting up a solid company strategy, one of the key elements is choosing a pricing model for your business that will bring you maximum profitability.
There are several ways to go about setting up your own pricing structure, and each one has a direct effect on how you sell your products or services and who you bring onto your team. Two common pricing models for businesses are the retainer model and the lump sum model. Read on to find out more about both model types, as well as to discover helpful tips for choosing a pricing model for your business that will lead to increased conversions and revenue in 2020.
A retainer is an agreement between the client and your company for the client to pay you a set fee before any work is done. This negotiable, pre-paid amount is determined by a set time or a set number of deliverables/services.
A time-based retainer model is set up when your client agrees to be billed for a set number of hours each month. For example, if your client purchases 40 hours of work for the month at $100 per hour, you will make $4,000 from this single client. Typically, unused hours do not roll over into the next month. However, you can add a clause to your contract that allows for this if you so choose.
Under a service-based retainer model, your company agrees to produce a set number of deliverables each month for the client. For example, if you run a digital marketing agency, your client could pre-pay for a social media management package. Packages could include creating posts, scheduling posts, providing images, cross-posting across several social media platforms and more. With this type of model, it’s your job to decide what services you will offer in each tier and how much you will charge per month.
Some clients, especially larger companies, prefer using the retainer model for budgeting reasons. This method can help them plan ahead financially by eliminating unexpected charges. However, start-ups and smaller businesses may be wary of agreeing to a retainer plan due to more limited funding. It can be a daunting thought to drop thousands of dollars for time that may not be used, or services that may not be necessary at the moment.
Agencies with longstanding relationships with larger clients will see the best results from using a retainer model pricing system. This method can also work well for companies that are capable of producing a large volume of work in a month.
Retainer Model Pros:
The fee is paid up front, which gives you the peace of mind of having a guaranteed income. It’s an attractive model for well-established businesses, and it allows you to grow your company at a faster pace.
Retainer Model Cons:
In general, this method of pricing can be a difficult sell to new clients and smaller businesses. It may also not be as profitable if you choose the route of offering service-based retainers. This is because projects may take more time than expected, which can lead to a reduction in profitability.
Lump Sum Model
As with the retainer method, there are several types of lump sum pricing strategies. They can be project-based, performance-based, value-based and hourly. Each one is paid upon the completion of services/deliverables at the end of the month.
The project-based lump sum method is one of the most popular pricing models for agencies. It’s actually one of the simplest, too! You simply charge the client a lump sum fee based on the entire project at hand. For example, if you run a social media marketing company, you may charge a flat rate for managing a Facebook ad campaign. These projects don’t have to be huge either. Take a graphic design agency, for example. They could offer an entire branding package for a total lump sum, and also offer a logo-only deal for a separate lump sum. This allows an agency to cater services to better suit client needs. It may be a good idea to incorporate this pricing method for new clients so that they can try out your services before committing to a long-term business relationship.
Similar to working on commission, the performance-based pricing structure will have you being paid in a lump sum based on how well your work performed. For example, a digital marketing company that offers copywriting services could be paid based on how many sales their copy produced by the end of the month. This is a very lucrative structure that’s easy to scale quickly. However, if your work doesn’t perform well for any reason, you may not get paid at all.
If your company has a powerful reputation in your industry, you could benefit greatly from using the value-based pricing model. The client will pay you a lump sum based on the expertise you bring to their company. If your business is the only one that can present a solution to the client’s problems, then you are offering a high-value service. The downside is that this pricing model depends solely on the current demand for your specialized services. This can sometimes be difficult to sell.
The final lump sum method that you could choose to incorporate into your business is the old-fashioned hourly rate. This ends up being paid out at the end of the month and is a straight-forward method that clients understand. As the simplest pricing model, all you need to do is set your hourly rate and bill your clients according to how many hours you took to complete their service or project. For example, a post-production company may charge $300 per hour for video editing. Completing 10 hours of editing time will have you making $3,000 from that particular client. This is an easy sell to clients because it gives them more of a breakdown of what they are paying for.
Lump Sum Pros:
This type of billing system is typically much easier to sell to a new client. It’s also a great way to establish a good business relationship between your company and theirs.
Lump Sum Cons:
With lump sum payments, you will not receive payment until the end of the month. If you have chosen the performance-based method, you may not get paid at all. This type of pricing structure is also more difficult to scale than the retainer model.
Wrapping Up Pricing Models for Businesses
Now that you know the differences between retainer and lump sum pricing models, you are better positioned for choosing a pricing model for your business. For more assistance growing your company and improving your revenue stream, check out SharpSpring’s marketing automation platform or contact us for a demo.