No, this isn’t an article about how SEO is dead. In fact, I believe that investing in search optimization is one of the best things a business can spend its marketing dollars on. There are some great articles written on the power of SEO, including this one from Credo. Also, most SEO experts I know (whether freelance or agency) really care about their work and want to make a difference.
This article is about how the standard SEO agency pricing model works against clients and actually incentivizes the agency to spend less time on the client.
Not only that, but when clients need more attention, this kind of pricing scheme negatively impacts the agency. I believe there are better ways, for both the client and the agency. I am not trying to bash anyone currently charging a bundled monthly retainer. For one, the agency I started (and sold in 2017) charged a bundled monthly retainer. I did what my competitors did and it wasn’t until we grew past 50 clients that I started to have doubts about the standard pricing model. Also, this conversation is not just an issue with SEO agencies. PPC providers have the same debate, as well as other digital marketing companies.
According to Ahrefs, around 75% of agencies charge a bundled monthly price. For those that do charge an hourly rate, the most popular hourly rate range charged is $100-$150/hr.
You see, most agencies charge a monthly retainer that bundles both software and labor costs (internal and external). That means, they are trying to cover the costs of software (both fixed and variable costs), as well as the employees and contractors they will use on the account. Some costs an agency might incur would be:
- keyword tracking software
- technical auditing software
- directory citations (through outside service or publishing software)
- content analysis software
- content creation (if outsourced)
The problem I have with the bundled model stems from the fact that an agency is just like any other business. They need to make money for their owners and equity partners. I’m unaware of any businesses that aren’t looking to increase their profits every year. So that leads us to what businesses do to increase their profit. Typically, there are only two ways and neither of them typically result in positive changes for an agency’s current clients.
Decrease costs — Like any other business, when an SEO agency wants to make more money, they could choose to lower their costs. The two major costs for an agency are software and labor. Software is typically used to track progress or help identify opportunities — both important for their clients. Labor costs are the salaries for professionals working on the account to improve the visibility online. An agency could reduce this cost by reducing hours spent or by hiring cheaper labor. Would you want either of these outcomes if you were the client?
Increase volume — Another way to increase profitability is to increase volume (or in the case of agencies, the amount of clients). This is the best outcome for clients, however, does typically come with some negative consequences. Agencies can get too many clients for their employee count and their service can suffer. When client numbers increase too quickly, inexperienced employees or contractors are often brought in. I have seen this across multiple agencies, from my own as well as others I have been associated with.
With a bundled retainer model, an agency’s incentive is to ensure that each campaign or client consumes as few of their resources (costs) as possible so they can keep the delta (margin) as profit.
Okay, so if the bundled retainer model doesn’t align well with client needs, what are some other models?
I’m glad you asked. Here are a few other options agencies and their clients could consider.
Pure Hourly rate
With this model, client work and client benefits are better aligned. When a website needs more time and attention, the agency works more. In return, the agency makes more. Scope creep, a common problem with any digital marketing provider, is less of a problem when client understands that additional requests require additional resources and investment. Clients also know they are receiving the work they are paying for.
My theory is that most agencies run from this model (and the unbundled hourly model) because they are afraid to ask for the hourly rate they want, need and/or deserve. Bundled pricing works to obscure the estimated hourly rate that they are charging.
While similar to the hourly rate model, this pricing scheme pairs an hourly rate along with hard costs associated with the project. For example, an agency could charge the following:
- $250 monthly for software costs + $150/hour for an agreed-upon amount of hours per month. There could also be a potential for “overtime hours” or additional hours that are authorized when additional work is warranted.
The benefit of this model is that an agency can protect their deserved hourly rate, while maintaining margins across every new client. Without charging for additional software or other hard costs, agencies risk making smaller margins on new clients as their expenses increase.
Under this model, agencies get paid based on agreed-upon outcomes. Organic traffic, leads, phone calls, inbound links and citations are all outcomes that could potentially be paid on. While some agencies have done work on percentage-of-sales or per-sale agreements, I am not a fan of clients paying on sales because I do not believe the agency should not be subjected to any sales inefficiencies of their client. E-commerce sites would be one exception to this.
SEO can have a powerful impact on a business and the expertise an agency has can be worth big money to a client. Because of this, agencies should not be afraid to disclose the hourly rate their expertise commands. If an agency believes that their systems and expertise are worth more than what their clients would pay in an hourly scheme, then a performance-based model could also work out very well for both parties. My hope is that agency owners will begin to see the benefits of offering different pricing models to their clients, for the benefit of their clients and themselves.
Wait! Don’t leave just yet!