When I started my first web business in 1998 web design, development and marketing was still considered to be something of a black art – something that most companies knew they needed, but didn’t understand the true cost or benefit to their business.
This often happens when new technologies and opportunities appear – we know what it is, what it can do, but generally don’t understand the full value This lack of understanding about commercial value combined with a relatively small number of suppliers offering those kind of services meant that there was a lot of money to be made in a very short space of time.
Many of the early agencies could charge a 1000% daily markup on their designers and developers – many of whom would often work for free at the company just to gain work experience in what was then a new and exciting industry that many graduates were clamouring to be part of. Some agencies grew so quickly that they exploded into liquidation (the most infamous is perhaps Deepend) while other once-shining-examples-of-brilliance managed to keep going while fading into obscurity (such as the once excellent Matinée).
Over the years, I’ve seen charge-out rate agencies drop from over £1500/day for the best developers and creatives to just a few hundreds pounds today – and it’s still dropping. Every year the web professional community econsultancy publishes an annual rate card review which is certainly interesting reading (http://econsultancy.com/reports/rate-card-survey-2008-how-much-do-uk-digital-agencies-charge) but doesn’t really get to the route of problem that agencies now face.
Fundamentally, web design, development and marketing services have become commoditised to a point where the arcane notion of billing clients by time rather than value is just no longer tolerable.
Over the last 12 months I’ve worked with a number of web design, development, PPC management and SEO agencies – and the vast majority are exceedingly mediocre.
There are some great people working at agencies, but the people running those agencies are generally unable to match the cost they charge their clients to the commercial value they’re providing.
In some cases, they might charge £5k/month for PPC management – however, depending on the budget of the client this could be chronically under-valuing the service they’re providing for the client. Good PPC management combined with intelligent, tested landing page design can improve conversions significantly (in some cases we’ve improved conversion by 50%). So effectively we’re getting 50% more conversions for the same PPC spend. So by spending £5k/month on the agency services we’re generating £150,000 worth of customers for just £100,000 – which to me means the agency in question is seriously under-charging us 
In other cases agencies may charge £20k for a website which over the course of two years could bring in business worth hundreds of thousands of pounds – so again, they’re underselling the value of their services by working on time-based billing rather than value-based billing.
I’ve been preaching this message for the last 6 months to agencies I know but they don’t seem interested in changing their business model – even though by charging clients through a value-based proposition they could make far more money for themselves and their client than charging on a traditional time-based model.
Agencies used to attract the top talent because of the variety of work available and the opportunity to work with new technologies. However, as the web has become mainstream and a core part of most successful businesses marketing teams, the best people are migrating back towards working for in-house teams at clients where they can still enjoy a variety of work with the latest technologies while earning better salaries and enjoying more job security.
That’s why I think 2010 will see the death of many traditional agencies who are still sticking to a decade-old business model, trying to charge clients for time rather than value. The agencies that succeed will be those that embrace the all-measurable nature of the web to offer clients a value-based proposition based on visitors, customers and ultimately profit.
Posted by Marc Duffy on November 2, 2009 at 9:36 am
In principle, I’d agree with you however…
If an agency did change their business model and if they did walk into my office today to quote me for a project and their price was based on how big they thought the project might be or how much revenue the site might make I’d likely choke into my tea at the numbers. They could seriously price themselves out of the job.
There is the danger for the client of paying over the odds for something that doesn’t quite match the original expectations.
Posted by Ross Williams on November 2, 2009 at 4:24 pm
I agree – there is a middle ground though where companies will work on results. So if the purpose of a website is to generate leads then agencies could charge half the build cost, but then earn on a per-lead basis where they could ultimately earn three times more than a standard build cost if the site performs.
I helped someone I know work out a deal with an agency I know on this basis – does need a bit of negotiation but once agencies smarten up and realise there’s more money in it for everyone this way I think it’ll be very successful.
It’s also a great way to separate the wheat from the chaff – both in terms of agencies AND clients.
Posted by 6 Ways to Watch Your Web Design Agency’s Margins and Stay Trim « Ross Williams on December 2, 2009 at 9:16 am
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