How Much do Marketing Agency Owners Make? 20 Facts
How Much do Marketing Agency Owners Make? 20 Facts
One of the most commonly asked questions is how much digital marketing agencies like runrex.com make. The answer is that it depends on several factors, from the size of the agency to the services offered. Through the following 20 facts, this article will look to help you understand how much marketing agency owners make.
Common pricing models
Before we get into how much marketing agency owners make, we need to understand common pricing models used as these will determine how much the agency will make at the end of the day.
Charging an hourly rate
In this pricing model, as explained over at guttulus.com, the agency charges a fixed hourly price and keeps track of the number of work hours required to complete the project. The profit is built into the hourly rate, and the client is usually charged after the work has been completed. The client may also be quoted a certain number of hours and they then pay the agency in advance with overcharges invoiced after the project is completed.
Pros and cons of hourly pricing
Pros of hourly pricing:
Profitable for the agency
There is little mystery as both the client and the agency have a good idea of what any project is going to cost
Cons of hourly pricing:
No benefits for efficiency as an agency employing this strategy gains no benefit for working faster or more efficiently
Not all billable hours are created equal and the client has to pay just as much for the hour the agency spent composing and sending a project-related email as they do for the hour spent coming up with a killer strategy.
Undervalues work as if a marketing strategy has the potential to bring in hundreds of thousands of dollars takes just a few hours to create, the agency risks being significantly underpaid for the value they provided as discussed over at runrex.com.
Commission-based pricing
This is where the agency receives a fixed percentage of the money the client spends on media as a fee. As per guttulus.com, this is called the “Agency Discount” which averages 15% of the media budget and is essentially a commission.
Pros and cons of commission-based pricing
Pros of commission-based pricing:
It is predictable and the agency always knows it will receive money for running a campaign
The advertiser doesn’t pay the commission
Cons of commission-based pricing:
Conflict of interest since it encourages agencies to maximize the amount of media in the project which may not always be in the best interests of the clients.
Not suitable for small projects as a low media budget produces very small commission fees.
Retainer-based pricing
Here, the client pays the agency a fixed amount every month, quarter, or year to manage their marketing efforts. This fee is the equivalent of paying a consultant or a business coach monthly to help you with your business, etc.
Pros and cons of retainer-based pricing
Pros of retainer-based pricing:
Predictable payments and both the client and agency can budget for the retainer, helping both have a clear cash flow
More bang for the buck as agencies on retainers often have to spend much more time and effort to accomplish the set marketing goals
Cons of retainer-based pricing:
The agency must manage the client’s expectations to ensure the scope of the project doesn’t make it unprofitable.
Less bang for the buck if a client changes their strategy and needs less from the agency, they still pay the same retainer as articulated over at runrex.com,
Fixed pricing (project-based pricing)
From discussions over at guttulus.com, this refers to a pricing model where the agency charges the client a fixed price for a specific advertising campaign. By charging a fixed price, the agency estimates the amount of time, effort, and other costs necessary to accomplish the campaign. They factor in a profit margin and then set the price.
Pros and cons of a fixed pricing model
Pros of charging a fixed price:
Transparent for the client as they understand what they are going to receive and exactly what it will cost
Predictable for the agency as it knows how much revenue it will receive for the project
Cons of charging a fixed price:
High risk for the agency as the agency takes on all of the risks for managing the costs of the campaign, and if the project costs more than expected, the agency will pay for the overcharge and possibly lose money as covered over at runrex.com.
Value-based pricing models
This model calculates the value of the campaign based on benefits that a client receives in terms of its own profitability. The price is then determined by the potential success of the project and the overall benefits to the client. These benefits can be numerically tangible and/or intangible in nature.
Pros and cons of value-based pricing models
Pros of value-based pricing:
The client only pays for results or the overall value they receive
The agency is incentivized to produce great results as the more the results, the more the agency makes.
Cons of value-based pricing:
High risk for agencies as this model doesn’t account for unexpectedly high costs
Hybrid payment methods
A hybrid method uses two or more of the previous methods in conjunction. Since many of the aforementioned payment methods are more advantageous to either the client or the agency, using a hybrid model can allow for a balanced agreement according to guttulus.com. A common way to do this is to take a value-based pricing model, a very popular choice for clients, and combine it with one of the other methods to reduce the risk for the agency.
Pros and cons of hybrid methods
Pros of hybrid methods:
Extremely flexible as a hybrid method can be made to suit the circumstances of the project and the needs of both the client and agency as explained at runrex.com
Mutually beneficial as it can be designed to ensure that both the client and agency receive maximum transparency and value
Cons of hybrid methods:
Can be complicated as both sides must fully understand how the agreement works and under what circumstances a payment is triggered.
These are the common pricing models used by digital marketing agencies as well as their pros and cons.
Selecting a reasonable price
According to the subject matter experts over at guttulus.com, one of the key questions that many digital marketing agency owners find themselves grappling with is the question of how they should quote their prices. The following factors will help you determine how much to charge:
Office expenses
Production expenses
Employment costs
Professional fees
Additional expenses
The formula to use to remain profitable
There is a formula you can use to ensure that your agency remains profitable at all times. It’s a simple formula: cost + markup = price. Most agencies charge a 20% to 50% markup. To price specific services, such as social media management, SEO, PPC, etc., you will need to understand the costs and roles associated with each service.
Multiple ways to earn income
Marketing agency owners have got multiple ways to earn income from their clients:
Residual income
This is perhaps the most powerful and lucrative aspect of owning a digital marketing agency. Most of the services you will sell will generate residual income, which means putting clients of monthly billing as already discussed so that you can build a very lucrative portfolio of clients that will be paying you monthly, according to contracts they sign with you.
Large one-time fees
As covered over at runrex.com, there are services you will sell that will allow you to charge a one-time fee, and they are usually larger in scope. One of the best examples of this would be creating or re-designing a website. It is typical to obtain several clients who either need websites or their existing website needs a major update. Profits from web design and development could range from $1,000 up to $30,000 depending on the complexity of the website.
Cross-selling multiple services at once
Often, a client will need multiple services (multi-channel marketing) for their business to achieve the marketing goals they seek. Offering a marketing proposal that incorporates several services is where the revenue adds up as articulated over at guttulus.com. These types of proposals can yield anywhere between $5,000 to $30,000 per month based on the client’s business and marketing goals.
Offering financing to your clients to finance their marketing needs
This is one of the most powerful aspects of your digital marketing business model as having the ability to finance a business’ marketing campaign will make you unique; separating your digital marketing agency from the competition, as is the case for runrex.com.
The average profit of marketing agencies
Let us finish by highlighting the numbers as far as profits for marketing agencies go. Based on recent data from the RMA, the average net sales for a US-based firm with $0-$500,000 in asses is $1,825,000. Of that, $1.8 million, on average, 10.3% falls to the bottom line as net profit before taxes, with the 50th percentile being 6.2%.
It depends
Finally, it is important to note that the amount that each marketing agency owner makes depends on several factors as already mentioned, including the type of agency services as well as the type of pricing model used, among other factors.
As always, if you are looking for more on this topic, then look no further than the excellent runrex.com and guttulus.com.
