Ask five video agency principals how they price their work and you will likely receive five very different responses. Three of those responses will be contradictory. At least one response will be accompanied by a grimace. This is due to the fact that most video agencies did not create a pricing model. Instead, the pricing model was created based upon the request of their first large client. Once the model was created, the agency made no changes to the model as its business structure evolved around the pricing model. The creation of a pricing model for an agency does not simply determine the method of invoicing clients. A pricing model also determines an agency’s ability to have predictable revenue streams, the maximum possible margins an agency can generate, the level of administrative costs associated with each client and which type(s) of clients an agency will have sufficient resources to produce high-quality work for.
Regardless of the model selected by a given video agency, all of the models listed above are being used to apply the cost of the same video editing services to clients (i.e., talking head, vertical, user-generated content, tutorial, etc.). As such, the question regarding pricing is essentially asking how a given agency should package and invoice clients for their video production capacity, rather than how much video production capacity should be built.
There are four common pricing models currently in use among video production companies and creative agencies:
Hourly Model
Per Project Model (Fixed Fee)
Retainer Model
Value-Based Model
Each pricing model offers trade-offs in four areas that ultimately impact a video agency’s operational efficiency; namely, margin predictability, cash flow, client fit, and administrative load. No single pricing model is inherently superior to the others; therefore, the appropriate pricing model will depend upon the agency’s current size, monthly sales volume, and existing degree of standardization within its production processes.
Comparing the Best Agency Pricing Models: The Most Common Agency Pricing Models Side-by-Side
It’s helpful to compare these four pricing models next to each other using the things that are going to determine if they’re effective for your shop versus sounding good during a sales call.
|
Model |
Margin Predictability |
Cash Flow |
Client Fit |
Admin Load |
|
Hourly |
Low -swings with productivity, PTO, and non-billable revision time |
Unstable -revenue fluctuates month to month |
Clients wanting full transparency and no long-term commitment |
High -every hour must be tracked, justified, and invoiced |
|
Per-project (fixed-fee) |
Medium -solid if scoped well, fragile if scope drifts |
Predictable per project, lumpy between projects |
Clients with a single discrete deliverable and a fixed budget |
Medium -front-loaded at quoting, lighter during delivery if scope holds |
|
Retainer |
Medium-high -stable once volume is dialed in |
Predictable, recurring monthly revenue |
Clients needing ongoing, repeatable output (weekly social cuts, monthly ad refreshes) |
Low-medium -process runs on rails once set up |
|
Value-based |
High -priced to outcome, not hours, so margin holds even as efficiency improves |
Highly stable, often the most consistent of the four |
Established shops with a proven track record and clients who can quantify ROI |
Low ongoing, but demands strong reporting/attribution infrastructure |
These types of agency-pricing studies show this type of trend – hourly as the least stable and value based as the most. A study by Teamwork cites one example of an operational analysis. This study found that when agencies use hourly pricing models, a single event such as onboarding a new employee can decrease profit margins for an agency from approximately 14.96 percent to 12.8 percent. In addition, according to this study, if an agency has two events happen at once (onboard a client and onboard a new employee), the agency could end up losing money. Conversely, this study found that when agencies implement a value based pricing model, the addition of both a client and a new employee at the same time increases profit margins for the agency. These results occurred because the revenue generated by the agency was not dependent upon the amount of hours worked by the employees hired. (Teamwork, “Agency Pricing Models 101”).
None of these models survive inconsistent output. A brand file – the client’s guidelines, style preferences and previously approved work kept in one reference – is what lets any editor on the account hit the same baseline, and that consistency is what makes a fixed fee or a retainer priceable in the first place.
The Hourly Model: Managing Client Perceptions Around an Hourly Rate
While the hourly pricing model may provide the highest level of transparency and understanding for clients regarding how much they pay (i.e., you completed X hours of work at Y rate per hour, so here is the total invoice), this transparency limits what your revenue can earn. For example, each increase in productivity among your editing staff, and/or improvements made in your overall business processes to improve efficiencies will result in reduced revenue for your agency, not increased profitability. Additionally, there is a significant administrative overhead associated with tracking, categorizing, and defending all billed hours, which increases directly with the size of your staff rather than decreasing as you become more standardized.
As a result of these factors, hourly pricing tends to be more applicable to small businesses in the early stages of their development and before they have developed a repeatable production process for pricing. Hourly pricing is also used for one-time engagements for specialized services (e.g., creating a large-scale animation/motion graphics project with potentially unforseen requirements).
Per-Project Pricing: Aligning Deliverables with a Predictable Flat Fee
Clients are quoted a single fixed amount for a specific deliverable. A 90 second brand video, a series of three product explainer videos. The deliverable is agreed upon prior to the agency commencing work. Clients prefer fixed fees as they provide a known cost and allow them to test new vendors in a controlled manner. Fixed fees reduce the risk associated with engaging an agency and enable clients to limit their long-term commitment.
The risk however rests with the agency. Agencies will have predictable cash flows during each project but may experience irregularities in terms of receipt of payment as revenue is received in large, infrequent installments based upon the completion of milestone-deliverables rather than regular small payments. Additionally, agencies’ margins are directly dependent upon the accuracy of estimates. If the original brief lacked clarity or the agency did not cap revisions -which represents the type of failure modes discussed in our article regarding pricing and preventing scope creep -an agency’s margins can quickly deteriorate as additional hours worked by the agency directly correlate to reduced gross income due to a previously negotiated fixed fee that cannot be readily adjusted once a contract has commenced.
Per-Project pricing best suits those agencies which produce discrete units of work over fixed periods of time versus continuous output -a launch video, a singular campaign asset, a one-time event recap. As such, agencies performing these types of engagements would benefit from utilizing per-project pricing where there exists a well-defined beginning and ending point to each piece of work.
Retainer Pricing
Retainers bundle recurring work under a defined scope into a fixed monthly fee. For example, a set quantity of social cut weekly, a monthly ad creative update, or consistent production of content. Retainer pricing is attractive to many agencies producing high volumes of video-related services, as it allows agencies to transition from unreliable, project-to-project sales models to dependable, recurring revenue streams. Recurring revenue provides agencies with improved predictability relative to staff levels, financial forecasts, and hiring strategies.
However, for an agency to maintain profitability through retainer pricing, the scope must remain truly limited and adhered to by both parties involved -similarly to how revision limits protect agencies’ margins on an individual project basis, limiting retainer clients’ requests in order to ensure their monthly fees do not exceed the costs incurred to service them. In addition, retaining clients while simultaneously pursuing new opportunities can become increasingly difficult when your entire team is committed to providing ongoing support to existing clients, as retained clients reasonably expect priority treatment.
Value-Based Pricing Model: Structuring Fees Around Measurable Outcomes
Value-based pricing ties the fee paid for an agency’s services to either the desired outcome(s) of an agency’s efforts or the resultant business value derived from the successful execution of an agency’s strategy -i.e., a video campaign is valued based upon the anticipated increase in conversions or pipelines generated, as opposed to being valued solely on the number of editorial hours required to create it. Value-based pricing represents the model with the greatest potential for margin expansion for several reasons: Firstly, efficiencies gained through process improvements result in increased profit for the agency as opposed to merely increasing productivity and decreasing billed hours. Secondly, value-based pricing shifts an agency’s role from vendor to strategic partner as the agency earns compensation based upon performance metrics, as opposed to mere compliance with requirements. Thirdly, although establishing a track record increases the likelihood of success with this model, selling value-based pricing is the most challenging model of all to successfully market. This is primarily due to two factors: First, prospective clients need to trust an agency’s ability to achieve the desired results prior to actually experiencing the results themselves. Second, clients must establish quantifiable measures of outcomes (business value) created by an agency’s work, which may be beyond the capability of younger agencies, or rejected by clients who lack the ability (or willingness) to measure or understand business value.
When Each Model Works By Shop Type and Order Volume
There’s no perfect “best” model – as far as which model works best for you and when; the model will probably track pretty well with your overall volume of orders and the level of standardization of your production processes.
Editors who work alone, and very small shops (less than 20 orders/month), are usually either working on an hourly basis or completing projects individually due to their volumes not being large enough to establish a retainer base, and/or their production processes have not developed to a sufficient degree to enable them to price confidently at a fixed rate. Hourly models should continue to be used until the time the shop increases its volumes and achieves greater levels of production consistency.
Shops growing quickly (about 20-100 orders/month), are typically where retainers become viable. At these volumes, there is enough repeat business from existing clients to create a significant number of ongoing monthly commitments, and there has been enough development in the production processes to develop a good idea of what each commitment entails. Blended models are most successful at this volume as well – retainers for the steady stream of regular clients, and individual per-project rates for occasional/one-time work.
Large volume shops and resellers (more than 100 orders/month) resemble productized companies more often than not – pricing decisions are made based on the cost of doing business (unit economics) at a given volume, rather than what specific project costs for each client. It is also at this volume level that a white-label video editing relationship begins to take place instead of hiring internal staff to complete video editing, as the limitation on fulfillment capacity occurs long before limitations occur with client demand. There are two basic forms that appear as a company grows to a larger size, and regardless of whether or not the company is healthy, they charge dramatically different prices:
• High volume / low ticket: approximately 160 orders/month @ $88 avg. per completed order – a model that relies on throughput & efficiency in the production process to achieve margins through volume & low order-specific overheads.
• Low volume / premium: approximately 51 orders/month @ $498 avg. per completed order – a model that relies on providing personalized service & developing deep relationships with clients to provide pricing power, resulting in achieving margins through individual order pricing vs. achieving margins through the quantity of orders completed.
From all of the different types of orders we see across the board, the lowest per order price was approximately $18 and the highest price was approximately $498. Averaged over the course of many completed orders, the typical price per completed order is approximately $117. This data clearly illustrates that there is no one universal “proper” price to charge for video production services. Instead, every company needs to determine what is considered the proper price point for their position. Companies fail primarily because they price their services too close together in terms of value added relative to other competitors’ pricing – too low priced to feel like a commodity, and not high enough in volume to generate commodity-like economics.
Once established shops have developed solid ROI examples they can leverage to begin moving towards value-priced models (layered above a retainer or project-based pricing structure). Value-pricing is suitable for high-end work that produces measurable results while retaining or project-based pricing provides stable income streams from repeatable work. Documenting proof that shows a client can reference before committing to pay based upon a desired outcome instead of a billable hour is exactly what appears in a robust Case Study Library.
How and when to increase your pricing
Increasing your pricing is when you take your pricing strategy and make it meet your pricing courage. Most agencies wait too long due to fear of losing clients who are more price tolerant than owners believe.
Increase your pricing based on triggers not calendar guesses. There is no better way to justify an increase in your pricing than by saying there has been a change in how you produce content: your costs associated with producing each piece of content increased, your staff increased the overall quality of the content or sped up production or your firm has reached maximum capacity and you are having to turn down work based upon your existing pricing. Having maximum capacity is one of the best reasons to increase prices: it indicates that the amount of people interested in purchasing your products is greater than the amount of product available at the current price — this is about as good of a definition of a monopoly price as exists.
Give current customers notice and explain why. Provide your current customers (retainer customers) with 30 to 60 days’ notice and provide them with a logical explanation regarding why the price will be increasing. This should relate to the value added by your company, not simply the additional costs incurred by your company due to the price increase.
Price all products at the same Rate – do not just average prices. For example, if you charge from $18 to $498 for an order, you may want to consider raising the price for all orders but you may also need to lower some of the higher priced items to maintain the relationship between the price charged and the services provided. In other words, if your cheapest item has thinner margins than your higher priced item, then you may need to raise the price for those cheaper items prior to raising the price for the higher priced item. Furthermore, if you only raise the price for your higher priced item, you may create resentment among your customers who pay less.
If a customer disputes the price increase, do not agree to reduce the price unless you also reduce the amount of services provided to that customer. By doing this you ensure that the price paid per service provided remains consistent regardless of whether or not the price charged was raised. Therefore, if a client negotiates the price down after a price increase has been agreed upon, this is really a reduction in services and not a reduction in price.
Strategic Models for a Modern Marketing Agency: Managing Client Expectations to Drive Agency Growth
In general, most successful video production agencies operating on a larger scale use multiple pricing models – not just one. They are using retainers for steady ongoing work (which creates their core income), project pricing for jobs that cannot fit into an ongoing retainer model, and they are using value pricing for high-profile jobs where results can be quantified and justified. Whether or not an agency successfully uses different pricing models is not determined by which pricing models they chose – it depends on whether or not their decision was intentional and made relative to their actual volume and position in the market versus what a client wanted three years ago and did nothing else with.
The same build-or-partner decision is made when deciding on pricing strategies as is made when deciding on fulfillment strategies. As discussed in marketing agency video production: build, partner, or White-Label, agencies generally decide on both pricing strategies and fulfillment strategies at the same time-not independently.
Before finalizing a pricing model, ask yourself what would happen to your profit margin if your most talented editor were ill for a week, or if a new employee needed a month to reach full productivity. With hourly pricing, that typically translates into lower profit margins because revenue is directly related to hours worked. With either a properly scoped retainer or value-based pricing model, that translates into similar profit margins because the fee was never based on hours in the first place-it was based on either scope or specific outcomes. That one question is often sufficient to determine whether or not a shop has outgrown its present pricing model.
Frequently Asked Questions
What is the most profitable pricing model for a video agency?
The value-based pricing model has the highest margins due to efficiency gains that go directly to the video agency rather than being passed through in lower billings. However not all agencies have access to this pricing method as it requires an established track record and measurable client outcomes. Therefore, most agencies build towards using value-based pricing, rather than starting there.
Do I charge Hourly or per-project?
Hourly pricing is suitable for early stage shops & truly unpredictable one off work where scope can’t be reliably estimated prior to completion. Per project pricing suits those shops with repeatable processes and clearly defined deliverables – when your team can estimate the number of hours required to complete a job, with reasonable confidence, per-project pricing (or retainer pricing for recurring versions of that same job) typically beats Hourly on both margin & client experience.
How do retainers work for a video production agency?
Retainers bundle a recurring scope of video work into one flat monthly fee; specifically a fixed number of cuts, refreshes, or deliverables per month. Retainers convert uncertain project sales into recurring revenue which is why growing shops tend to migrate toward retainers as their client base & order volume mature.
Are agencies able to use more than one pricing method at once?
Yes – most large scale shops will blend retainer pricing for core recurring clients with per project pricing for one off work, and add value based pricing on top for flagship engagements once they have enough case studies to support the higher rate.
When should an agency review its pricing?
Review pricing against triggers, not calendar dates. Capacity constraints, rising costs per order, or demonstrated improvement in output quality or speed are valid reasons to increase rates. Waiting for an arbitrary annual date, or waiting until margins are already below waterline, means the price adjustment will come later – and smaller – than it should.
What’s a reasonable range for per-order video pricing?
As we’ve seen from our own data, the right price depends on your positioning. Our data includes orders between $18-$498 with a median of around $117. These two different business shapes represent high-volume/low-ticket operations running about $88 per finished order at high monthly volumes and premium/low-volume operations running about $498 per finished order at much lower monthly volumes. The failure mode exists anywhere in between those two shapes without either the throughput of one or the positioning of the other.
