One of the most asked questions in the SEO scene pertains to the subject of pricing. How much should we charge as agencies and freelancers to our clients?
My answer: there’s no one-size-fits-all price point. Differences in client needs, target markets and business goals can produce a sizable number of pricing scenarios.
In GDI, we insist on performing free but thorough reviews of prospective client businesses and websites to deliver quotes that offer the best value for money. Having a good grasp of the client’s situation, what it takes to get the job done and what value both sides will get from an engagement are keys to a successful partnership. When we calculate the quotes that we issue prospects, we consider the following factors:
1. Costs
Costs refer to the estimated price of putting together and executing the service plan that a SEO agency and its clients agree on. This includes the work put in, the utilities that it takes to support the processes and the operational resources necessary to deliver the kind of product that the client expects. Most digital marketing firms group costs in three main categories:
Overhead Costs
Overhead costs are the expenses that you have to spend on no matter what. These are vital to basic operations; work would simply stop if these expenses are not paid. An agency’s overhead costs include everything that’s not under direct labor, direct materials and direct expense spending. That means your electric bill, water bill, phone bill, rent, Internet bill, furnishings and other essentials should be counted under overhead costs.
Keeping invoices and receipts is essential to tracking overhead costs and calculating the averages per month. Unless you and the rest of your staff are working from home, you’ll have to deal with most of these costs at the end of each month. Even if you’re a freelancer, you should consider how much more you spend on electricity each month to support your day to day workload.
Manpower Costs
Labor usually represents the biggest expenditure in a SEO agency. SEO is a labor intensive craft that relies on human intelligence, creativity, processes and execution to work. When you charge a client for services, much of the quote should be determined by how much you’re paying people to serve the client’s needs.
Labor costs vary depending on your personnel’s skills, position, experience and potential. It also differs depending on geographic location. It the US, a junior level SEO specialist can be paid between $3,000-$5000 depending on which state and city the agency operates in.
Obviously, Los Angeles and New York rates are higher than what you’d pay someone working in Alabama. If you’re sourcing labor from developing countries like the India, Rumania or the Philippines, the costs go down dramatically. A Philippine-based junior SEO specialist can be paid anywhere between $300-$600 depending on location, skills and work arrangements.
How much of your revenue should go to labor is a matter of principle. Some agencies allot as little as 15% of an account’s revenue to the people who work on it. In GDI, no less than 50% of what a client pays is used to pay the salaries of the people assigned to it. Strictly speaking, there’s no wrong way to go about this as long as what you’re doing is legal. However, there are such things as ethics and social justice — and those are things that responsible business owners take very seriously.
Software Costs
SEOs use a lot of tools to make their processes easier and more scalable. Some tools are free, but most of the advanced ones like Moz, SEMRush and Screaming Frog come with price tags. It’s important to view these software tools as company assets that you invested on. The cost of purchasing licenses or subscriptions should always be counted when you’re computing the quote that you’re putting into your service proposal.
Most tools can be used by several people on multiple client accounts. Therefore, the cost of these tools can be spread out and prorated between all the clients you serve. This helps you lower your pricing and make it more attractive to prospective customers.
2. Taxes
If you’re working on a freelance basis or if you’re running a team that’s off the taxation grid, feel free to skip this section. I worked this way for years and life with no taxes was bliss J. For better or worse, I’ve outgrown that phase and I’ve registered my team as a full-fledged Philippine corporation.
For the rest of you who run registered businesses, pay close attention because paying the piper is a very real thing.
Aside from costs, taxes take a significant chunk out of the gross revenue that a SEO agency earns. Depending on which state or country your business is physically situated in, taxes will vary. In the Philippines, expect around 30% of an agency’s income to go to the government. In the US, it can be as high as 40%. Of course, you should consult your accountant to get a precise figure on how much taxes you’ll be paying. Caveats like sales tax, value added tax as well as tax incentives and exemptions will apply on a case to case basis.
Bottom line: the rates you show a prospect may look good at a glance, but you might discover that you’re not very profitable after the tax man is done with you.
3. Desired Profit
Profit is the amount of money left when you subtract the taxes and costs from your gross revenue. It’s what you get back from the time, effort and finances you put into your business. The more profitable a company is, the more it can invest on its own growth. Profitable companies usually pay bigger dividends, making them more attractive to outside investors.
That said, profitability should be your biggest consideration when evaluating a prospective client and calculating the quote that you’ll show him. Not making sure that the account brings in profits that are worth your company’s trouble is a recipe for disaster.
Smart businessmen consistently track their financial numbers so they can get a feel of how profitable an account can be. When quoting a prospect for a proposed SEO service plan, you have to consider how much profit the engagement will yield over the course the contract.. If it’s looking like the profits are going to be slim or non-existent, you may want to turn the gig down. In some cases, a seemingly smaller engagement could incur less costs, invoke lower taxes and therefore yield more profit than a bigger account that requires a lot of resources and man hours to support.
Ultimately, decisions on client engagement that are based on profitability are matters of strategy and company values. Some SEO business owners believe in taking on every client they can get their hands on to grow their portfolio and deny business from their competitors. For more boutique digital marketing agencies like GDI, we place customer selectivity and client retention at a higher value. Both styles are legitimate ways to do business and this choice depends on the priorities of the agency in question.
4. Brand Strength
Having a strong, recognizable brand means having more leverage in the negotiation process. If your agency has helped well-known businesses in the past, is able to demonstrate its capabilities on its own website and is respected by its peers in the industry, it means you can charge more favorable rates because your prospect knows what caliber of service you’re offering.
Building a strong brand image takes a commitment to excellence that shows in every aspect of your business. Having a presentable office, professional-looking staff, eye-pleasing marketing collaterals, good user experience on your website and thought leadership in your industry all contribute to brand development. When implementing these efforts, view them as investments that will pay off in the form of bigger, better deals later on.
Good examples of digital marketing agencies with powerful brands are Distilled, Bruce Clay Inc. and SEER Interactive. All of them carry a lot of influence, they present themselves very professionally and they’ve been doing successful SEO for very long times.
5. Competitor Price Range
For the most part, it’s good to have a general idea of how much your competitors charge for services that are similar to what you offer. Knowing ballpark prices will allow you to price your rates more competitively en route to a higher lead-to-sale conversion rate.
This doesn’t mean that you should base your rates mainly on what your peers do. Keep in mind that your competitors might have different overhead costs, different salary schemes and target personas that serve as the rationale for their pricing. Above all else, the quality of your services, the costs that you pay and your desired level of profitability should determine the prices that you show your prospects.
As Seth Godin explains in his book Linchpin, competing solely with price is usually suicide in the business world. When most players in an industry try to out-cheap each other, nobody really wins because everyone’s on a race to the bottom.
Personally, I believe going too low with prices cheapens a brand. It attracts equally cheap clients who don’t bring a lot of value to a business. The only scenarios where I’d cut my price to beat a competitor is when doing so wouldn’t significantly impact my profitability or if the prospect is a big brand that would do wonders for my business portfolio. Otherwise, I’d stick to my guns and charge customers commensurate to what my team brings to the table.
6. Difficulty of Project
Not all SEO projects are built equal. Some are a lot tougher than others for a variety of reasons. Ultra-competitive niches, a history of penalties and highly specialized knowledge requirements (think of a client who sells industrial machinery),can make a site harder to handle than usual.
As difficulty increases, you’ll want to consider raising your price just because you’ll be exerting a lot more effort and spending a lot more time on the site. More effort and man hours translates into more stress on your employees. With that in mind, due compensation is necessary and you should why to your prospect.
It’s like brain surgery: it’s a lot harder to remove a tumor than it is to extract a tooth. Therefore, don’t expect a neurosurgeon to ask for the kind of money you’d pay a dentist because there’s a wide gap in the effort and expertise involved. The same is true for SEO: the tougher the project, the bigger the investment required to get the job done.
7. Length of Engagement
In some cases, you can lower your prices if an account is contracted to last for long time periods. If a client stays with you longer, your company makes more money. Therefore, the customer’s lifetime value grows and the relationship’s overall profitability increases. That gives you more wiggle room to give discounts and offer added value to the services you render.
For example, if an agency charges $3,000/month for SEO services on standard 1 year contracts, that means they’ll make $36,000 gross at the end of the engagement. If the margins are at 30%, the agency would profit $10,800 by the time the deal is done.
If a client agrees to a 2-year deal, the profits would double to $21,600. This means that even if the agency lowers its prices to $2,900, they would still take in $19,400 over 2 years. It’s not a big sacrifice, but it’s sure to make the client a lot happier. In cases like this, short term profitability can be sacrificed for bigger rewards in the long haul.
It really is Up to You
Pricing is a very fluid topic where absolute correct answers are rare. The correct price point eventually boils down to what kind of rates you’ll be happy with. As long as your income can sustain growth, pay all the bills and give you the kind of financial rewards that you wanted, it’s all good. Let me know how you set your prices in the comments section.
