I forfeited $760,560 in revenue last year.
Based on some very conservative estimates, I forfeited $760,560 in revenue last year. We still grew our revenue more than 100% of what it was in 2015, but that doesn’t change the fact that we left a lot of money on the table.
My company, AdVenture Media, is a digital advertising agency based in Long Island, NY. We offer our clients PPC management services, conversion rate optimization and landing page design.
I recently came across a blog post by Johnathan Dane of Klientboost, in which he wrote about the important strategic decisions he made that helped his company grow.
One of those decisions was to remove pricing from their website.
At the time of reading that post AdVenture Media had also removed their pricing from their website, but only recently.
A brief and slightly irrelevant background of our pricing:
When I founded AdVenture Media, our lowest price was $89 per month for what we called our “AdWords Lite” management plan. It was essentially an automated service, and the idea was to be able to manage thousands of small accounts with minimal human input.
Well, turned out clients paying $89 / mo. felt they should have direct access to you once in the morning and three times in the evening.
We ditched that plan and increased our minimum monthly management fee to $199. From there, we increased our minimum fee to $399.
We kept it there for a while.
As our business got bigger and as expenses grew, it became important to really delve into the financial structure upon which we were operating. After doing some of my own rather obscure analysis, I figured that it was costing me $50 per hour, per employee to keep our doors open.
Based on the amount of time it took to service a client each month, it became clear that we were losing money on clients paying us $399 / mo.
The company was profitable at the time, but that was only because the margins from our higher paying clients compensated for the losses from the lower-end clients.
So I decided to make our minimum monthly management fee $699 /mo.
At $699 /mo., we’d be profitable as long as we managed our time efficiently. We still put a huge focus on signing better clients, but we were comfortable taking clients for less, especially now that we understood the financial structure well enough to ensure profitability on every client.
But we always had our pricing on our website.
Our site displayed different packages based on a client’s ad spend. For example, if a client was spending between $3,000 and $8,000 per month on their advertising campaigns, our fixed fee would be $699. We’d also have a bullet list of all the included deliverables at that price.
We had fixed prices listed for clients spending up to $30,000 /mo. on their ad campaigns.
In hindsight, displaying our prices online was a very, very costly mistake.
It was not a senseless move from the outset. On the contrary, displaying our pricing online was a conscious, strategic decision.
I saw lots of agencies not posting their prices, and I felt transparency with pricing could be a differentiating factor for us.
After all, website visitors like to know the pricing before submitting a sales form.
And, our pricing page was always the highest trafficked inner page on our website.
But the problem with fixed, visible pricing is that it completely takes away your opportunity to price a client instead of pricing a job.
When an agency has their prices posted online, they are pricing the work that their team is doing. They’re not pricing the value that work is bringing to the client … and that’s an enormous opportunity if you understand how to do it properly.
Now, the argument could be made that by removing your prices, you’re going to receive fewer sales forms. After all, people are more inclined to submit a sales form once they see your pricing.
While that may be true in some cases, it certainly has not been the case with us.
When you put templated pricing on your website, you’re also perforce attracting a certain sort of clientele. Clients who are strapped for cash are looking for a deal. These are usually smaller businesses that know they need the service and just want to pay as little as possible.
Clients with more established businesses with more marketing experience usually understand that it’s about finding the right people more so than finding a cheap deal. Digital advertising relies on more statistical analysis than traditional, offline advertising, but success with digital marketing still lies with the creativity, integrity and intelligence of the agency team working on the account.
Taking your prices off your website will attract clients looking for the right team, not just a cheap price.
Posting your prices on your website sends a message about the type of firm you are, and will more often than not attract smaller clients that will likely turnover regardless of how good a job you’re doing.
Just to be clear, there’s nothing inherently wrong with posting your prices on your website. Depending on the type of agency you are, it’s either an advantage or a disadvantage. Both White Shark Media and Logical Position are respectable agencies with their pricing on their website.
They are targeting their market and all the power to them.
About 6 months ago, I decided to start quoting each client based on the value we were bringing them (and a number of other factors). Aside from transitioning to a more value-based proposal system, I decided our minimum monthly management fee would be upped to $1,600, more than double what our current minimum was.
Would that knock out a lot of our clients spending between $5,000 and $8,000 on their advertising campaigns?
I surely thought so.
But interestingly, that’s not what happened.
We began quoting prospects at $1600 /mo. for the same bracket that used to cost $699, before we even removed our old pricing from our website.
And clients were still signing at the higher rate.
Even at $1,600, we weren’t expensive. And our prospects knew that we were the team that they wanted to work with.
We were the team that would ultimately increase the ROI of their campaigns, which would ultimately result in exponential financial gains.
We did have one client who called us out on the price listed on our site which was for less than half of what we were quoting him. I simply explained that we’re putting more time and resources behind each account (true), and we’re charging for it.
“We’re not a cheap agency”, I said. “But we’re quite good at what we do.”
“When do we start?”, was the gist of his response.
I began here saying that I forfeited $760,560 last year.
So let’s go through the numbers.
In 2016 we signed roughly 60 clients in the $699 /mo. pricing bracket.
The next metric we need is an average lifetime client duration. Now, the best I can do here is make an educated guess, because there’s no reliable way for me to calculate that number.
Many of our currently active clients have been with us for years, and I expect them to remain with us for many more. We’ve also had some clients that were in and out within a month because our teams were not a good fit for one another.
But a conservative estimate would be to assume a 36 month average client tenure in the $699 / mo. pricing tier.
699*36 gives us an average lifetime value of $25,164 for these clients.
The total value of the 60 clients signed in 2016 in the $699 tier would then be $1,509,840 (25,164*60).
Again, the 36 month tenure is an assumption here, but I think it’s a very fair number to use.
Now, say we quoted 100% of those 60 clients at $1,600 / mo. Surely, not every one of those clients would agree to that price, regardless of its subjective measure of fairness.
Let’s assume, conservatively again, that 55% of those 60 clients would have agreed to the more expensive monthly management fee.
So instead of 60 clients, we’d have had only signed 33 clients in 2016 (60*55%).
Because we’re now servicing almost half the amount of clients with the same resources, I’d expect our average client tenure to increase dramatically. More time working with the clients, more collaboration and more brainstorming sessions lead to better client relationships and better campaign results.
But let’s be conservative once more and assume a 20% increase in retention. That would give us an average lifetime tenure of 43 months (36*120%) for a $1,600 /mo. client.
Now, each client would be worth $68,800 (43*1600( over their assumed lifetime.
The total value of all 33 clients combined would be $2,270,400 (33*68,800).
So, as depressing as it is to think about, based on what I think are conservative calculations, we left roughly $760,560 on the table last year.
That’s a lot of money.
Three quarters of a million dollars.
Just think of all the things you could buy with that sort of cash.
We will continue to quote our clients based on the value that we’re adding as a marketing partner.
We’ll look at things like the amount of time we’ll need to put into the project on a recurring basis, the additional resources and tools we’ll need to implement to help each client succeed, and the expected growth rate of each particular account.
So far it’s been working. We have certainly been closing more than 55% of leads at $1,600 or above that we used to close at $699.
And we’ve actually been getting more inbound leads than we’ve ever gotten before.
Although that can be a result of our new website and not necessarily a result of taking our pricing down.
If you’re an agency and you have even a smidgen of doubt whether or not removing your pricing will result in an increase in client revenue, I encourage you to at least test your site without your pricing for three months.
Testing never hurts.
And hey, you never know.