A lot of marketing agencies struggle with pricing strategy.
I get questions all the time about “how much we should charge for this” or “if we charge more, will we lose sales?”.
I’ve certainly fallen prey to the trap of just copying someone else’s pricing because “it was working for them”.
However, I ran across some math that opened my eyes to some new possibilities. I introduced it to a friend of mine and he tested it out in his own business.
He ended up doubling his revenue the next month and went on to become a best seller in his industry that year.
The math was the formula behind the 80/20 principle and it can be applied to much more than people often consider, pricing included.
The 80/20 Principle Applied To Pricing
You’ve no doubt seen companies with 3 tiers of pricing for an offer. You may even have clients with that structure, or use it yourself.
The idea is that if you have a low-tier, mid-tier, and high-tier of pricing, you can help more clients or customers because you have “something for everyone”.
I actually really like this pricing strategy, but it can be taken to the next level by applying the 80/20 principle.
You can try this for yourself or suggest it for your clients.
The formula is simple:
Current Price x 4 = Current Customers / 5
Here’s how that works.
If you have 125 clients paying you $1,000 per month for Google Ads services, the math says that you could get 25 of those clients to pay you $4,000 per month for services that provide value equal to or above the price point.
Because the 80/20 principle is fractal, you can find an 80/20 inside of every 80/20.
20% of the clients will pay 80% of your MRR, but of that 20%, there’s another 20% that will pay 80% of the 80%.
That means that you could not only reasonably get 25 clients to pay you $4k, but another 5 would be willing to pay you $16,000 per month if the value was there.
The clincher, naturally, is that they have to see the value in paying that amount and actually receive the value from it.
Then there’s the potential problem of targeting exclusively low-dollar clients because you’re not confident in closing higher-ticket deals.
The math should still work out that 20% of your total client count should be willing to pay 4x your normal rate and 20% of the “4x-ers” should be willing to pay 16x your normal rate, but I’m willing to admit that there may be exceptions to the rule.
How To Use It
So as a strategic advisor to your clients, an easy win is to look for opportunities to capitalize on the power of math.
If you have a chiropractor client struggling with cash flow and they have 1,500 patients paying for monthly adjustments, at $35 per patient, they could increase their cash flow by offering all of their existing clients (via email and/or text with little to no additional cost) the following monthly package:
2 adjustments – $35 each
2 heat and stem or extension sessions – $50 each
2 60 minute massages – $100 each
2 physical therapy/conditioning classes – $95 each
For $560 per month.
Even if they didn’t sell it as a monthly deal, but only offered it once per quarter or twice a year, the math says they would get roughly 60 takers.
That means they went from $52,500 per month to $68,600 any time they run the promo (or every month, if they went that route).
Maybe they also offer a 30 minute massage, adjustment, and a heat and stem or extension session as another monthly package for $140. The 80/20 principle says they should get 300 takers at this price point, so they now have roughly the following:
1,140 patients at $35/mo ($39,900)
300 patients at $140/mo ($42,000)
60 patients at $560/mo ($33,600)
For a total of $115,500 per month!
You just made them millionaires.
They could go even further with $2,240 and $8,960 packages that have very few takers, but the math says they should be up for it if they receive equal or greater value than the price point!
What About Me?
So how about you?
You’ve got a marketing agency offering Google Ads services. Maybe you’re charging $1,000 and you have 35 clients.
How are you supposed to use the 80/20 principle on your pricing if you don’t have 100-1,000+ clients?
Well, 20% of those 35 clients should be willing to pay you 4 times more than your average rate ($4,000/mo in this case). That takes you from $35,000/mo to $56,000/mo.
Sometimes that increase is from a change in billing (e.g. from flat rate to flat rate plus 10% of ad spend or just 20% of ad spend and no flat rate). Other times the change comes from adding more services like building landing pages, SEO, email marketing, etc.
Want even more revenue without having to acquire new clients? 4% of your clients (20% of 20%) should be willing to pay you $16,000 per month (4x the 4x your average rate) (again, more services plus ad spend or value-based pricing). That would be 1.4 (let’s just say 1 to be conservative) clients paying you $16,000/mo, 7 paying you $4,000/mo, and 27 paying you $1,000/mo.
You just went from $420,000 per year ($35k/mo) to $852,000 per year ($71k/mo). More than double the revenue without acquiring new clients.
Fantasy vs Reality
We just looked at doubling your revenue without acquiring new clients. Let’s come back to real life for a sec.
This is completely hypothetical and based on math principles.
In real life, you have the challenge of finding new services to offer or other ways of increasing the value to exceed the higher price point.
You also can’t reasonably expect to get paid $4,000/mo to manage an account spending $2,000/mo, where you could reasonably charge $1,000/mo. You would have to increase the value, charge based on revenue driven (and then crush it), or provide additional services.
However, if you were able to make the value match or exceed the service(s) provided, you’d find you have much more revenue generating potential with a limited client base than you think.
Summary
Do you already have multiple services? Do you have over 100 clients? Your earning potential is incredible if you apply the 80/20 principle to pricing.
Even with a few dozen clients, you can make close to $1M/yr with mostly $1k/mo clients.
The power is in the possibility and your ability to execute on it.
Look at your current pricing, your number of clients, and consider the possibilities.
To help, here’s a Pricing Potential Calculator to play around with.
Have fun!
If you’re curious about how I work with agencies or if you’re frustrated with your agency’s profitability or retention of clients or employees, feel free to reach out to me and I’ll see how I can help. I never charge for the first consultation and if I can solve it in 30-minutes, there’s no reason to pay for my services and you walk away happy.
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