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How Inbound Marketing Agencies Develop Value-Based Pricing

By John McTigueNov 10, 2014

is-your-inbound-marketing-agency-worth-the-price

You're ready to get started with inbound marketing. You've done your homework, attended workshops and webinars and now you're thinking about hiring an inbound marketing agency to get things rolling. Maybe it's too early to build your own team and you're not certain how to hire the right people and deploy the best technology. Maybe Senior Management isn't on board yet and you need to demonstrate ROI for inbound marketing to get full buy-in.

These are great reasons to hire an agency, but which agency? How do you evaluate them to get the best value and a partner you can trust to accomplish your goals? There will be a number of important factors to consider, but the one that may get your attention first is price. How do inbound marketing agencies price their services, and more to the point, how can you compare them to pick the right agency for you?

The Traditional Pricing Model

Most agencies work from some variation of cost-plus-profit model. How many hours will it take to complete the necessary tasks in a statement of work (SOW), and how much does that cost the agency? Summing up those costs and applying a reasonable profit margin, and you have either a fixed price for a standalone project or a monthly services fee for ongoing engagements. Profit margin will depend on the agency's financial goals, efficiency and competition in their niche. The Devil is in the details of course.

  • What service level is needed to achieve your business goals and timeframe?
  • What deliverables and pace is needed to support the service level?
  • What external costs, such as marketing technology and paid media are needed?
  • What is a reasonable price for deliverables such as a blog post, eBook or website?

These specifics are usually included in an agency SOW, and they can provide you with points of reference for comparing costs and fit of the agencies you're considering. What's important to remember is the deliverables alone don't necessarily get you to the promised land. As HubSpot's Arjun Moorthy put it in a recent post, "Pricing by cost means that you determine how much a job will cost you and add a markup. However, this means that your client pays for your efficiency (or lack thereof)."

Nowadays, content quality and relevance have a lot more to do with attracting and converting qualified sales leads than the number of blog posts or campaigns you publish each month. That's why some agencies are more expensive than others when it comes to a comparable quantity of 

deliverables. In general, agencies that invest at least 30-60 days in getting to know you and your customers through buyer persona and buyer journey analysis before launching content marketing campaigns perform better than those that dive in head-first. It's the attention to detail and focus on strategy that drives reputation and enables agencies to charge more for their services. They deliver value rather than quantity.

By asking the right questions about "how" and "why" an agency prices its services, you can make a more informed decision, but is that everything? You might also consider how well an agency markets their own services, and at some point you want to get to that ROI thing for proof of concept for your Management Team. Be wary of any agency that promises you positive ROI or achievement of specific revenue goals without working with you first. Why? Because they need to understand how your sales process works, how your customers will respond to inbound marketing and what internal and external barriers might be in the way for achieving your goals. Smart agencies will ask you a lot of questions during their sales process and during onboarding, but the real catalysts and barriers usually take a few months to reveal themselves.

Value-Based Pricing

So it can make sense to move to a value-based pricing model in which an agency is rewarded for meeting specific growth objectives rather than performing repeated tasks. The question is when? Usually after 6-12 months you and your agency should be familiar enough with one other to entertain a change in fee structure.

Are they doing what they said they were going to do and how well are you doing with fundamental metrics such as website traffic, new leads and new customers from your inbound marketing program? Your agency should be recommending new strategies and tactics along the way that help to improve results. Your agency should also be giving you feedback about your involvement in the program. If there are significant barriers to success, they should be telling you about them and recommending ways to overcome them. The relationship should be rewarding for both you and the agency. If not, a value-based pricing model may be too risky for both you and your agency.

Different Types of Value-Based Pricing Models

The simplest would be a base fee for agency labor plus a bonus structure for meeting revenue goals. This approach is feasible if the revenues directly associated with inbound marketing can be tracked through a CRM integrated with an inbound marketing platform like HubSpot or Marketo. Another approach might be to set goals and track sales-related metrics like sales qualified leads (SQLs) or opportunities generated by inbound marketing. This requires some analysis, planning and negotiation to set reasonable benchmarks and goals. A more sophisticated approach, say for a SaaS company, would be to track free trials, trial-to-customer conversions, customer LTV and CAC and monthly recurring revenues. The immediate benefits of this kind of value-based compensation include:

  • ROI can be easily measured
  • Increased alignment between Sales and Marketing
  • The agency is incentivized to maximize performance
  • Inbound marketing budgets can be justified
  • Your company can achieve financial goals and measure progress

When you're considering hiring an inbound marketing agency, it pays to be thorough and to find out what's behind the different pricing models your candidates present to you. Think about the relationship you will have with your agency and how you can see it develop into something more like a partnership through value-based pricing. Starting with that style of relationship is risky, however, so take your time and get to know each other first. In the end, you will build a stronger bond and ensure inbound marketing delivers on its promises.

 

Buy-in, Budgets, & Best Practices

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The Author

John McTigue

With over 30 years of business and marketing experience, John loves to blog about ideas and trends that challenge inbound marketers and sales and marketing executives. John has a unique way of blending truth with sarcasm and passion with wit. You can connect with John via LinkedIn, Twitter and Google Plus.
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