If you’re pricing your agency services based on costs and time, you’re leaving serious money on the table and ironically, delivering less value to your clients in the process.

Most agencies fall into the same trap: they calculate their costs, add a margin, and present a price. When clients balk, they explain their process in more detail. Sound familiar? Here’s the problem: your costs mean nothing to your clients. They only care about one thing: what’s the solution worth to them?

In this story, you’ll discover why cost-based pricing creates a lose-lose scenario where clients say “no” to solutions they desperately need, whilst agencies struggle to justify their fees. More importantly, you’ll see how value-based pricing, when done right, transforms the entire conversation from “What does this cost?” to “How much can we achieve together?”

Read on to see two agencies compete for the same client, with dramatically different approaches and outcomes. One walks away empty-handed. The other earns £247,500 over four years and the client couldn’t be happier about it.

---

Meet Sarah: A Business Owner with a Lead Generation Problem

Sarah owns a small business that’s struggling to generate leads online. Her current website is outdated and barely converts visitors into customers. If someone could wave a magic wand and give her a website that consistently generates £100,000 worth of leads per year, she’d be willing to pay up to £10,000 for it.

In other words, Sarah thinks she has a £10,000 problem with £100,000 annual potential.

Scenario 1: Bob’s Cost-Based Approach

Sarah first calls Bob at WebBuilders Digital Agency. As it happens, Bob runs a reputable agency and knows his stuff. In fact, he’s been in the business for years and has a strong portfolio of successful projects. He carefully inspects Sarah’s current website and discusses her business goals in detail.

Why Bob’s Quote Shocked Sarah

After his assessment, Bob calculates that to create a high-converting website with ongoing optimisation, his costs in time, expertise, and resources would be around £20,000. Therefore, to make a reasonable profit, Bob quotes Sarah £25,000 for the project.

The price shocks Sarah, and she asks why it’s so high. In response, Bob explains all the components involved: the strategy development, user experience design, custom coding, content creation, SEO optimisation, and ongoing conversion rate optimisation. Furthermore, he walks her through his process, his team’s expertise, and the quality of work she can expect.

The Fatal Flaw in Cost-Based Pricing

However, here’s the crucial point: Bob’s explanation of his costs and processes has no effect on what the solution is worth to Sarah. Ultimately, Bob’s costs are his concern, not hers. Despite his thorough explanation, she still perceives this as a £10,000 problem, so she’s not going to buy a £25,000 solution from Bob, no matter how well he explains his methodology.

Consequently, Sarah thanks Bob for his time but decides not to proceed.

Scenario 2: Tom’s Value-Based Approach

Frustrated but determined to solve her lead generation problem, Sarah continues her search and finds Tom at WebWizards Digital Marketing Agency.

Understanding the Client’s True Potential

Instead of immediately calculating costs, Tom asks Sarah about her business goals and current challenges. Moreover, he digs deeper into her market, her competitors, and her growth ambitions. As a result, Tom sees the potential for much more than £100,000 in annual leads, given enough time and proper execution.

The Three-Tier Pricing Structure

Subsequently, he presents Sarah with three pricing options:

Option 1: Premium Package

• Upfront fee: £50,000 (50% of first year’s expected lead value)
• Performance fees: 3.5% of all lead value
• Monthly retainer: £1,000

Option 2: Balanced Package (Recommended)

• Upfront fee: £22,000
• Performance fees: 10% of all lead value
• Monthly retainer: £1,300

Option 3: Partnership Package

• Upfront fee: £10,000
• Performance fees: 20% (Year 1), 15% (Year 2), 10% (Years 3-4)
• Monthly retainer: £1,600

How Price Anchoring Changes the Conversation

Sarah’s eyes widen at the first option. “£50,000? That’s… that’s a lot more than I was expecting.”

Tom nods. “It is. However, look at it this way: if we deliver the £100,000 in leads we’re targeting in year one, you’d break even within a year or two depending on your margins. From there, it’s pure profit growth for you with minimal ongoing fees. In addition, some clients prefer to pay more upfront and keep more of the gains long-term.”

He pauses, then gestures to the other options. “But I understand that’s a significant investment. That’s why we offer these other two structures. Essentially, they shift more of the risk onto us.”

Addressing Sarah’s Concerns About Other Quotes

At this point, Sarah mentions she’s received another quote that seemed high, though she doesn’t share the exact figure. Tom understands immediately.

“Most agencies quote based on their time estimates. However, if the project takes longer than expected, or if the scope increases, that price will likely go up. You’ve probably experienced that with agencies before, haven’t you?”

Sarah nods. She has.

Fixed Pricing vs. The Hourly Billing Trap

“With our model, whichever option you choose, the upfront price is fixed. No surprises, no scope creep. But here’s the crucial part: look at Options 2 and 3. In particular, we’re removing most of the upfront risk for you.

For instance, with Option 3, you invest just £10,000 upfront, and then we only earn more if we actually deliver results. Yes, our performance fees are higher, but that’s because we’re taking on more of the risk. As Peter Drucker said, ‘All profit is derived from risk.’ Essentially, we’re willing to bet on our ability to deliver, and we’re asking you to share in the upside when we do.”

Why Hourly Billing Incentivises the Wrong Behaviour

Tom continues: “Additionally, the performance fees align us completely with your goals. We succeed when you succeed. In contrast, consider hourly billing, which is fundamentally flawed. Under hourly billing, agencies are rewarded for taking longer. Surprisingly, they charge you more when a junior does the work slowly than when an experienced marketer delivers better results in half the time. Does that make any sense?”

Sarah shakes her head.

“Exactly. Instead, our fixed upfront fee means you get our best people working efficiently. Meanwhile, the performance commission means we’re incentivised to generate as many high-quality leads as possible. Ultimately, we want to smash that £100,000 target because the better you do, the better we do.”

Setting Realistic Expectations with Case Studies

He leans forward. “Look, we’re confident in our ability to deliver results, but we also know that significant online success often takes time. For example, some of our most successful clients didn’t see major traction until 9-12 months in, but by the 48-month mark, they were seeing returns that far exceeded their initial expectations.

In fact, if we only generate £100,000 in leads annually, with Option 3 you’ll pay less initially than you would with a traditional hourly pricing model. However, if we generate £500,000 or more in annual leads by year four, which we believe is entirely possible, we’ll both be thrilled with the results.”

Tom shows Sarah case studies of similar businesses where his agency’s websites started slowly but ramped up to generate £500,000+ in annual leads by year three or four.

The Guarantee That Sealed the Deal

Finally, to address Sarah’s remaining concerns, Tom offers a guarantee: if the website doesn’t generate at least £50,000 in leads in the first year, he’ll waive the monthly retainer for the second year.

Sarah’s Decision

Sarah thinks about it. Obviously, Option 1 is too much upfront risk for her right now. Option 2 seems reasonable, but Option 3 is exactly what she was prepared to spend initially (£10,000) and it’s a fixed price that won’t increase. Furthermore, the performance fees only kick in if Tom delivers results. There’s no risk of scope creep eating into her budget. And if he delivers the kind of results he’s talking about, the higher performance fees will be worth it because her business will be thriving.

Accordingly, she chooses Option 3 and agrees to partner with Tom’s agency.

The Outcome: Four Years of Exponential Growth

The results exceed both their expectations:

• Year 1: £80,000 in leads (Tom earns £26,000)
• Year 2: £250,000 in leads (Tom earns £49,500)
• Year 3: £400,000 in leads (Tom earns £52,000)
• Year 4: £600,000 in leads (Tom earns £72,000)

Over four years, Sarah’s business generates £1,330,000 in leads. Meanwhile, Tom’s agency earns £199,500 plus £48,000 in retainers, totalling £247,500. Ultimately, both parties consider this a tremendous success.

The Moral of the Story

1. Costs are the service provider’s concern, not the client’s. Explaining your costs doesn’t increase the perceived value of your service.
2. Focus on the client’s potential gains, not your potential costs. Instead, frame your service in terms of the value it can create for the client.
3. In digital marketing, the true value of a well-executed strategy often reveals itself over time. Therefore, by aligning your pricing with long-term client success, you can command higher fees whilst delivering exponentially more value.
4. A partnership model that shares both risk and reward can lead to much greater success for both parties than a traditional fixed-price model.

This approach transforms the conversation from haggling over costs to investing in shared success, allowing agencies to command higher fees by demonstrating and delivering real, long-term value.