I used to price web design and digital marketing based on hours and effort. Then I realized that was stupid – both for my agency and for our clients.
Warning: This gets a little math-heavy at the end but it's worth it to see how to value-price a five-figure digital marketing project based on the metrics of an optimized funnel.
Agencies Need Better Profit Margins
Pricing web design and marketing based on time and effort virtually guaranteed that we'd have crappy margins on our work because the entire pricing model is based on ensuring thin margins.
We basically tried to figure out what the raw cost would be to us then we add a little bit more on top. This model literally guarantees thin margins, low profit, and eventual burnout. That's why hourly billing is bad for agencies.
Clients Value Results Not Time and Effort
To prove the point, suppose you hire me to do lead generation for you. I offer you three options.
A) I snap my fingers and double your revenue right now.
B) I work really hard for you and after a year you double your revenue.
C) I work really hard for you but even after a year your revenue remains the same.
If you're like me, you pick option A every time because doubling your revenue now is better than doubling your revenue a year from now.
I put option C in there just to prove the point that nobody cares about time and effort. The package that only includes time and effort is clearly the worst option.
The hierarchy stacks up like this.
Results now is better than results later.
Results later is better than no results at all.
How Do You Price Results?
Most people who are new to thinking about value pricing feel confused and even uncomfortable talking about results because what if you try really hard but the results just aren't forthcoming?
The truth is you're not going to hit a hole in one on every shot. Some stuff will work right off the bat, some stuff takes time before it's dialed in, and some stuff just doesn't work at all.
The value is in the system, not the individual trials.
Once I realized that everything changed. Here's how it works.
Target Metrics For Sales Funnels
I'm using the term “sales funnels” fairly loosely here. I just mean developing a sequence of steps that leads to your client landing a paying customer. This usually involves three high-level concepts:
How (and where) do we get people's attention?
How do we pull contact information from the anonymous traffic?
How do we nurture and convert the leads into paying clients?
Conversion Rate For Leads
I feel like things are going pretty well when you've got about 20% of your traffic converting into leads. This is usually from some sort of a lead magnet like an email opt-in for something, taking a quick quiz, a webinar, etc.
Basically, you give people something cool in exchange for an email address. It doesn't have to be an email-driven thing. It could be getting people to join a Facebook group, to subscribe to a YouTube channel, etc. Most of the time I start with building an email list.
Conversion Rate For Clients
I want my lead nurturing sequence to convert leads to paying customers at about a 10% conversion rate over a 30-day (1-month) period. So, if 100 people sign up for my email list, I expect at least 10 of those people to become paying customers within 30-days.
Doing The Math For Funnel Performance
Suppose you drive 1,000 people into a sales funnel that's reasonably well optimized. The targets I aim for stack up like this:
- Traffic: 1,000 visitors
- Leads: 200 leads (20% of 1,000 visitors)
- Clients: 20 paying clients (10% of 200 leads)
That means if I can increase traffic by 1,000 visitors per month that should result in about 20 new paying clients per month – or roughly a client per day (not including weekends).
These are baseline numbers to get us in the ballpark. Of course, it is even more accurate if you start with numbers based on what the client is currently doing in their business. If the client already has a lead magnet and nurturing sequence, start with those numbers.
My Experience Working With Clients
Most of the time when I start working with a client they don't have lead magnets or funnels set up at all. When that's the case I fall back to the “gold standard” metrics above as the target we aim for once everything is dailed in.
If the client does have a lead magnet in place it is usually performing very badly (which is why they are asking me for help.)
For example, it's normal to see:
- Lead magnet conversion rate: 0% – 5%
- Client conversion rate: 3% – 5%
Using those poorly converting numbers that means the best-case scenario looks like this:
- Traffic: 1,000 visitors
- Leads: 50 leads (5% of 1,000 visitors)
- Clients: 2.5 paying clients (5% of 50 leads)
That means sometimes you can almost 10X the number of clients they're getting simply by improving the lead magnets and nurturing sequences without needing any additional traffic.
Other times the client's website is barely getting any traffic at all. Or, the traffic they are getting is unqualified and therefore unlikely to convert.
So, let's talk about how to get traffic to the website.
Three Ways To Get Leads
In my experience, there are basically three ways to get leads.
Buy Leads Directly
There are some services where you just buy leads (usually in the form of phone calls) like Google Local Service Ads or some business directories like Angi and HomeAdvisor will email you (or text you) leads expecting you to promptly call the leads they send.
Facebook, Instagram, Google, TikTok, etc. all sell ads that enable you to buy traffic. Once you get your ads dialed in, we've found that we can get the cost per lead down lower (sometimes significantly lower) than just buying the leads directly. This is my preferred tactic most of the time.
I view organic traffic strategies like content marketing, backlinking, and SEO all to be ways to influence traffic. It's not as fast or direct as just buying the traffic with ads but you're actively doing things to increase your website's visibility and that drives more traffic. It just takes longer and is more unpredictable than the other two methods. Organic traffic is worth thinking about though because once you get it working, you're getting “free” leads for a long time.
It's harder to tune the knobs with organic traffic, but whether you're using paid or organic traffic calculating the ROI basically works the same. Once you know the metrics behind how the steps of your funnel convert, you can figure out how much traffic you need in order to bring in the number of new customers you want.
Your Client Conversion Factor
Multiply your lead conversion rate and your client conversion rate together and that's your Client Conversion Factor. Here's an example using our dialed-in funnel example.
- Lead magnet converts at 20%
- Nurturing sequence converts at 10%
0.20 x 0.10 = 0.02
Now just multiply the traffic by 0.02 and you've got an estimate for how many clients you'll get based on a given amount of traffic.
Client Conversion Factor Formula
Clients = Visitors * ConversionFactor
Divide both sides by the ConversionFactor and you've got:
Clients/ConversionFactor = Visitors
Want 10 clients per month? You need 500 visitors.
10/0.02 = 500 visitors
Want 25 clients per month? You need 1,250 visitors.
25/0.02 = 1,250 visitors
Want 60 clients per month? You need 3,000 visitors.
60/0.02 = 3,000 visitors
Now you know exactly what you're aiming at and what to expect when that happens. Pretty cool.
Value Pricing Guide For Digital Marketing
Now we just need to know what the average lifetime value (LTV) of a customer is for your client. Suppose you're doing digital marketing lead generation for a personal trainer with pricing numbers like this:
- Price: $300/month
- Average client relationship: 6 months
- Profit margin: 70%
$300 x 6 months = $1,800 revenue (average client value)
$1,800 x 0.70 = $1260 profit (average profit per client)
That means on average it costs roughly $540 to acquire and provide services for a personal training client that pays $1,800 leaving $1,260 profit per client.
Let's say over the course of the year, you bring in 60 new clients for the personal trainer (5 clients per month). Those 60 new clients represent $108k in revenue and $75,600 in profit.
How much traffic (visitors) per month do you need to drive to create 5 new clients each month?
Remember: Clients/ConversionFactor = Visitors
5/0.02 = 250 visitors
How do you want to get the 250 visitors? Let's say you run a PPC campaign. Even if you're paying $1.00 per click, that's only $250 per month in ad spend or roughly $3,000 per year.
On average, I like our price to be about 20% of the profit we create for the client.
$75,600 x 0.20 = $15,120
Subtract out the ad spend and that leaves you with $12,120.
I'd set the price for this marketing project like this:
- $3,000 setup (website, funnel, etc.)
- $100/month (hosting, maintenance, tech support)
- $900/month (marketing)
Annual value $15,000.
Setting Client Expectations
Remember when I said the value is in the system, not the individual trials?
The funnel is probably not going to be operating at peak performance on day one. It will probably take a couple of months to get everything optimized. That means your first ad campaign will probably not hit all the “gold standard” metrics. The important part to remember is that you aren't guaranteeing a hole-in-one on every hole. You'll be optimizing things along the way.
I've personally spent almost a decade and hundreds of thousands of dollars on ad campaigns, copywriting, and funnel optimization. So, if you want someone to guide you through the process saving you a ton of time, stress, and money we can hop on a call together and I'll show you some examples of how I can help.
Once you get this new pricing model working in your business you'll notice three big changes:
- Your profit margins will skyrocket
– because you free yourself from trading hours for dollars.
- Your revenue will become very consistent
– because all of your clients will be on a monthly plan.
- Landing clients becomes much easier
– because you're giving them what they actually want – RESULTS!