How Does an Ad Agency Make Money?

by Dec 20, 2021Strategy & Planning

Isn’t it amazing when you’re thinking about buying a product, and it pops up on your Instagram feed? It’s like a sign that you’re supposed to have that L.U.C. watch or take that vacation or upgrade to a new Cayenne. Algorithms make modern advertising seem like mind reading. But if you own or manage a digital advertising agency, you know it’s not that simple. 

Digital ad agencies create growth and success for their clients through data analysis, skill, and strategy. Their services are invaluable to clients in this digital age. But exactly how does an ad agency make money? This post outlines some ways and gives advice for long-term agency success.

Create a Pricing Model that Works for Your Business

The COVID-19 pandemic meant more people are doing everything online. This last year created a unique opportunity for your ad agency to make money and attract clients by offering needed services. In addition to gaining in new clients, it is an excellent time to set your agency up for long-term success. One of the most important factors to consider at this juncture is how you will price your services. 

Three of the most widely-known pricing models are:

  • Hourly Rate / Time & Materials. This method is our go-to pricing model due to its simplicity and the steady growth rates it provides. Hourly pricing is the number of carefully tracked hours your team spends on a client’s project times your rate. Hourly pricing offers you a great deal of versatility. For example, you can charge more per hour for projects that require higher levels of employee expertise and less for more basic services.
  • Fixed Bid / Project-based. This pricing model guarantees a package of services for a fixed amount. Engagements are typically structured with a set percentage for a deposit, followed by a few set progress billings. You calculate a fixed fee by taking forecasted project hours times your hourly rate. If you project your team’s hours correctly, this approach provides you with predictable income to reinvest into strategic growth.  
  • Retainer pricing. Retainer agreements are long-term contracts that guarantee a certain amont of ongoing work each month. Prices are often based on a time & materials calculation that’s then packaged into an ongoing service agreement, often with a slight discount. 

What about Value-Based pricing?

While Value-based pricing is probably the holy grail of pricing models, it takes a lot to get it right. Our research shows it’s only used by about 1/3rd of digital agencies. There are entire books written on this subject, but to summarize, value-based pricing is setting a price for your services based on the amount of value it delivers to your client. If you build them a new website that is expected to generate $10M in profit for your client over the next 5 years, then a project fee of 10% of that should be a relatively easy sell. 

Sounds amazing! So why is only ⅓ of the market using this pricing method? 

First, it takes some serious positioning to get this right. Your client needs to believe you’re the best shop to tackle the project. Secondly, you are operating within a huge marketplace. Clients tend to get multiple bids on a project which, strangely enough, gives them better insight into the market’s pricing dynamics than most agency owners. So two shops that are bidding on a project could easily come up with the same value, but all it takes is one to need the work more and offer a discount to throw off the whole equation. With around 35k digital agencies in North America, it’s easy to see this happening regularly. Finally, it’s difficult for clients to accurately value a future project internally, let alone for you to do it. Because of these issues, value-based pricing hasn’t been widely adopted.

Offer Profitable, In-Demand Services

To make money, you need to have a good handle on what your current and potential clients need. Offering profitable, in-demand services can make repeatable revenue generation significantly easier.

The most popular services to offer this year include:

  • Web Development and Design. The vast majority (if not all) of your clients will want and need a functional and engaging website. Your web development services can ensure the backend of their sites work correctly while your design team creates on-brand, visually appealing graphics. 
  • UX Design and Development. Your agency could help clients map out, plan, design, and implement an entire user experience. UX design and development considers the entire user journey with a product or service. This design includes branding, functionality, and user interface.
  • Digital Strategy. This service allows your clients to make intelligent decisions about strategic technology hardware and software upgrades, as well as social media messaging and digital ad placement and deployment. Well-developed, fully deployed digital strategies should scale to maximize growth.
  • Mobile Design and Development. Most people spend more time on their phones than they would like to admit. Your agency can make sure your clients show up in the right places, at the right time, and look good to attract new customers.
  • App Development and Design. Site mapping might be the essential part of this service. Often clients need help thinking through what public-facing information and services they want to include on their app. What makes sense for a better user experience? What will help grow the business? What do your clients want easy access to? These are all questions that help inform app development and design. Your team could help clients roll out a terrific user experience for their customers.

Focus on Long-Term Success

You can build an enviable client list, hire the best talent, and offer world-class services, but all of that takes a financially healthy organization to support it. You also want to ensure that your organization is sustainable and can continue to thrive in the future. 

To set your organization up for future success:

  • Understand Your Profit Mix. Take a look at the services you offer. Understand which ones your clients most frequently select and which ones make you money. If they don’t align, it might be wise to create a marketing plan to promote profitable offerings. 
  • Make a Business Plan. You need more than guesses about the best way for your ad agency to make money. Make a year-long business plan with possibly multi-year projections. What goals (financial and otherwise) do you want to accomplish, and how will you make them happen? Create a budget that factors in your fixed expenses and the profit you need to make.
  • Be Flexible with Pricing Models. Pricing models are not one size fits all. Frequent, meaningful conversations with your clients can guide you to a pricing model that meets both of your needs. An appropriate pricing model and well-established goals can lead to satisfied clients and a culture your team enjoys being a part of.
  • Stay on Top of Costs. This point sounds like an easy task, but scope creep and inefficient time tracking can surprise you. Underreported costs can quickly add up. Regular reports that compare actual expenditures to your budget are a good way to stay informed.

Promethean Research Can Help You Answer, “How Does an Ad Agency Make Money?”  

Every successful journey requires a road map. Promethean Research can point you in the right direction. Contact us today to learn more about how we can help you increase your profit margins.

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