Simply put, a revenue model is a strategy for earning income from a business or project. After all, making money is the point! Having a sound revenue model is essential for any digital marketing agency that wants to make a consistent, growth-oriented profit over time – and today, we’ll be discussing the different ways to go around it.
There are four main digital marketing agency revenue models to consider: project-based, retainer-based, performance-based, and hybrid.
All these revenue models offer their own unique advantages and disadvantages. Combing through each of them is the key to finding one that fits the needs and mission of your agency.
Project-Based Revenue Model
Project-based revenue models tend to be one the most profitable model types, and for that reason, it also tends to be one of the most popular. In this revenue structure, digital agencies will charge clients based on the specific requirements of one-time projects.
That means determining a unique rate for each project depending on the amount of time, resources, and employees it takes to execute well.
Because project-based revenue models afford the agency more autonomy in terms of the proposed rates, it is one of the most profit-driven models available. However, it can also be volatile.
Project-based revenue models require a succinct knowledge of agency capabilities – any miscalculations on your part about how long a project will take to complete will be at your own cost. This revenue model is best used sporadically or as needed, rather than as a default revenue structure.
Retainer-Based Revenue Model
A retainer-based revenue model is when your agency charges clients an up-front payment in exchange for providing ongoing services for a client.
It is essentially billing clients in advance for future work, regardless of what that work might look like down the line. Retainer pricing models are often used in consultation or freelance settings, but they work very well for smaller-scale agencies such as those within the digital marketing sphere.
For instance, a client may pay your agency a retainer to monitor their social media campaigns or provide SEO support over a six-month period.
The pros to a retainer-based revenue model are that they are easy for clients to understand, provide predictable, consistent revenue for your agency, and allow you to focus on delivering on client expectations without the stress of time constraints or financial limitations.
The cons to this revenue model are that if either side fails to communicate expectations, the risk of over or under-servicing your clients becomes high. Communication is key to a retainer-based revenue model.
Performance-Based Revenue Model
Also known as an outcome-based revenue model, a performance-based revenue model involves a pricing system that depends on the outcome of a project.
In other words, a project that meets or exceeds its performance targets will receive higher payment, while a project that falls short of hitting its performance goals will be liable for a smaller sum. Due to its unpredictable nature, this is one of the riskier revenue models.
However, agencies with a lot of experience and access to high-functioning resources can earn exponentially more profit through a performance-based revenue model than through others.
With a large team, a profound understanding of agency capabilities, and performance forecasting tools, performance-based pricing structures can result in higher profits than any other model – if it’s executed right. This is not a suitable model for new agencies that are still discovering their strengths.
Hybrid Revenue Models
When it comes to choosing the right revenue model for your digital marketing agency, it is possible to have your cake and eat it. Hybrid revenue models are the answer for agencies who deal with a wide demographic of different clients and want the freedom to select a structure from client to client.
The most compatible revenue models to merge are the project-based and retainer-based models. They have overlapping themes, whereas performance-based models are best approached independently.
However, if a hybrid revenue model sounds appealing to you, bear in mind that clear communication, control of scope creep, and a high level of experience working with different clients are essential. Without those things, managing a hybrid model can become messy, disorganised, and unprofitable.
Other Considerations
There are lots of different variables to consider when developing a digital marketing agency revenue model – and you should look into all of them before making a decision. Some of the most significant factors to bear in mind include:
- Industry trends – What revenue models are other digital marketing agencies using? Use your peers as a standard for determining what works and what doesn’t.
- Client preferences – Sometimes, clients come in with a very specific idea of how they want a project (and its payment) to play out. While still prioritising your needs, being open to client preferences can make you a more attractive and flexible agency.
Even the most seasoned and experienced digital marketing agencies need guidance every now and then to reassess or improve their revenue structure. Here are some tips for negotiating contracts with clients:
- Start with a simple draft – You don’t need to sort out all the finer details from the get-go – start off with a basic pricing draft and make adjustments as needed.
- Focus on mutual benefits – Clients will be much more receptive to your proposed revenue structure if they know what’s in it for them. Focus on why your pricing structure will improve their end of the deal as well as your own.
- Use data and research to back up your model – It’s natural for clients to want tangible proof that your revenue model is effective, fair, and symbiotic. Come prepared with data.
Get Your Revenue Model Right
Revenue models are crucial for laying down structure to the way your agency earns money. The right revenue model can mean the difference between a productive, profitable digital agency and one that struggles to make ends meet – all the while exhausting employees to the point of burnout.
Project-based, retainer-based, performance-based, and hybrid revenue models all have their place in the digital marketing industry. But only the right one for your agency will be able to drive sustainable profitability and long-term success.