• Pricing and marginality of digital products
• Price, pricing, and cost
• Margin and marginality of info products
• Margin VS markup
• Pricing formation of corporate website development. Example
• The agency or the freelance?
• Conclusions

Electronic commerce has made its entry into the main flow of the market economy. It started in the ’80s when most companies started using the Internet as a billboard. They posted general information about themselves, such as office hours, company history, and sales contacts. The rules of a game have changed over time, and the companies began to market their products online.  

Now e-commerce has changed the way products are designed, manufactured, distributed and sold. Recent advances in information technologies have given online stores an ability to analyze customer behavior and interests. The online stores (websites) have an opportunity to scan customers’ preferences and their solvency. 

Using customer browsing behavior, web stores can personalize pricing by applying customized advertising, and all this data can help e-commerce to form prices for buyers. 

But how to form prices for digital products (the websites or apps)? Let’s figure it out.

Pricing and marginality of digital products

What is a digital product?

We can`t touch or taste either digital or info products, but we all use them, from music and videos to ebooks and online courses. You’ll find no dictionary definition of it. But in a broad sense, any product in a digital format can be considered a digital product. And “info product” frequently refers to a product that contains any knowledge and intellectual property that’s useful to others. The info product online (in digital format) is a digital product. The correlation between these terms is clear.

Creating an “info product” is a great way to share your knowledge and produce income. What you need to do is take your expertise, package it into an info product format, and sell it online. 

We can distinguish three categories of such products:

• the products in digital format which are stored in a physical material and transported as a physical product;
• the products that are in digital format and transported to the end-user through communication cables or wireless devices;
• services that are represented in digital format and offered through online or wireless connections. 

Their main benefit is the fact the digital products can be created once and sold repeatedly.

We know the digital product as something that creates specific value for both people and an organization that develops and provides it. Creating value for the business is accomplished by generating revenue directly. Products go through different life cycle stages: they are created and launched; they develop, grow, mature.

This is the value a business can get as a benefit from its websites. To understand how the price of creating a website is formed, we need to understand the basic pricing mechanisms.

Price, pricing, and cost

Finding the right pricing mechanism for digital products and services is an important issue. It has major implications in the development of e-commerce. There are more internet users than ever before, and new business models and practices are coming into online stores.

The price of something is how much you paid for it. Put simply; it is how much the seller will accept for the sale of a product or service. Price is the most important criterion for the products that are sold by a company. The financial stability and the possibility of further developing our company depend on how the pricing will take place. 

As the term is used in economics and finance, pricing is the act of establishing a value for a product or service. In other words, pricing occurs when a business decides how much a customer must pay for its product or service.

There are many different strategies that a business can use when setting prices, but they are all a form of pricing. The price that’s set during the pricing process is what the customer will pay for that product or service. Though the terms are sometimes used interchangeably, pricing is not the same as the cost in terms of meaning. A cost is the value of money that has been used up to produce something. 

Main pricing objectives are:

• covering the cost of manufacturing products and ensuring a profit sufficient for the normal functioning of the business. 

The idea is simple. The more favorable market situation  —> the higher the price for products —> the more profit for the business.

• The interchangeability of products.

This aspect is essential for a consumer. He is not interested in all labyrinths of manufacturer processes and its cost. But the consumer will always choose the product at a lower price. If the same product is offered at different rates, the consumer will naturally prefer the one offered at a lower price. If a higher quality and lower quality product are offered at the same price, the consumer will prefer the product with higher quality.

Margin and marginality of info products

Margin is the percentage of a company’s profit in the total value of a product or service. This is the difference between the customer’s price and the cost as a percentage. In digital agencies, margin refers to the agency’s share of the profit on the check they presented to the client. The margin forms the marginality of the business. This is the business’s ability to bring profit to the invested capital.

How do you find out the margin in a digital agency? This is how profitable each completed project in the agency is. In this case, the margin is calculated for each project separately.

There are several indicators of the margin. They depend on what costs are included in the margin calculation formula.

The net profit margin. This is the money that remains in the company after all bills are paid, including compensation to the CEO.

In Western agencies, a good margin is 20-25%. The margin that is above 10% is also normal. 

The gross margin. This is the money that remains in the agency after deducting direct project costs. It doesn’t include the overheads: rent, utilities, salaries of administrative staff, etc. The standard value of the gross margin for a marketing agency is 50-60%.

Margin and markup

The margin is not equal to the markup. The margin shows how profitable the company is; it is calculated when the service has already been sold, while the markup shows how much has the company added to the cost of its services before issuing an invoice to a client.

The markup and margin values ​​do not match. The markup is added only to the cost price, and the margin is calculated from the sum of the cost price and the markup. Therefore, the margin value is always lower.

The margin is an essential indicator of the profitability of the entire marketing agency and each implemented project separately. Apart from the margin, it is not clear how profitable the business is and where it is headed at all.

With the correct calculation of the margin, it is possible to determine:

• what are the marginality of each project and the business as a whole;
• the dynamics of the company’s profitability;
• who is the most valuable client of yours;
• which projects require the most resources;
• how much money does each service bring.

When the company has this data, it can analyze its work and make some management decisions, for example, to reduce costs, change prices or leave unprofitable projects.

There are four steps to calculate the margin of a project:

• You need to determine the cost of man-hour/person-hour. Calculate annual earnings for each employee.

For a full-time employee, it will include salary, pension contributions, insurance, and bonuses other payments. Then, calculate the number of hours worked per year. Multiply 40 hours worked per week by 52 weeks of the year and subtract the days of paid vacation, sick days, and national holidays. And after this, divide the annual wage by the number of hours worked.

It is much more comfortable to calculate the cost of freelancers because they usually run on an hourly basis.

When you know the cost of a person-hour and the time needed on the project, you can determine the project’s direct costs.

•   You need to calculate the overheads for the year. It helps you to determine the net margin.

The overhead costs include all expected costs that cannot be attributed to a specific project:

working hours that are not project-specific;

remuneration of the administrative staff;

rent;

utilities;

insurance;

transport;

payment for entertainment;

office equipment;

software, hosting, tools, etc.

You need to keep those in mind when you are calculating the project margins.

• You need to calculate the overhead per hour.

Calculate the amount of paid hours of all employees for the year. Just multiply the number of employees by the working hours per year, and after that is done, divide the annual overhead by the paid hours.

• You need to calculate gross and net margin for each client. 

To calculate the gross margin, you have to subtract the hours worked from the completed projects’ total value. To calculate the net margin, you also need to consider overhead costs. 

In practice, the calculation algorithm is much more complicated. The agencies employ specialists with different wages; projects can be long-term or one-off; some of the work can be transferred to a subcontractor. But the counting principle is correct.

What actions can lead to an unprofitable agency?

• Free work. The agency performs client tasks that are not included in the agreed scope of the project. 
• Incorrect counting of worked hours. Always consider all time spent on the project, both paid and unpaid.
• You don’t discuss the result of a project. It is necessary to do. It will help to optimize teamwork.
• You underestimate the cost. You are afraid to lose the client. Always compare your prices with the competitors`. 

After all of this, it is clear that the margin is a reliable indicator of a business’s financial performance. The marginality of the project or agency’s services shows how much the cost of promoting the project and maintaining the office is recouped.

Pricing formation of corporate website development. 

A customer sees the price of a product and/or service and sometimes doesn’t even know what is included in its price. The customer has the idea to have a website. He is sure that it’s extremely easy to create. But behind the finished result are hours of work and a large team of people.

Let’s take a closer look at the issue of pricing for the development of a corporate website. For example, the agency needs to develop a corporate website with 8 pages. It should contain feedback forms and has a clear management system. In addition, the site should integrate with CRM systems.

To understand the payment of which services are included in the price, you have to look closer at the algorithm of the agency’s work. The agency receives an order for the development of a corporate website. The sales manager collects preliminary information about the customer’s wishes (brief), which becomes the basis of the team’s work. What’s next?

1. Pre-production work begins. The existing brief leads itself to detailed analysis, and often another interview with the customer is conducted. After that, the technical task with the product functionality description must be completed. This task is for the project manager.
2. After receiving all the necessary information, the PM (project-manager) analyzes the request and estimates how long it will take to implement it.
3. The next step is to develop a visual concept. It is designed either according to an existing request from the customer or at the very beginning.
4. Frontend part + adaptive. This is the stage of rendering the visual part of the site. It includes the development of corporate identity, selection of colors, fonts, a unique identity for the brand. The specialist tests and debugs the visual representation on different devices, e.g phones, tablets at this stage as well.
5. Backend part, which means the development of the architecture of the site and software.
6. Testing stage. This is the part when the website is checked for any bugs using special programs.

These are the stages of creating a website. The development of a corporate website requires well-chosen resources that can qualitatively fulfill all the functionality of the product. 

How many people are involved in this?

First of all, managers. A sales manager who negotiates and concludes a deal with the customer. Then, a project manager, who controls the quality and timing of the project. Не сonducts communication with the customer 

A designer visualizes the design theme and creates elements. And a front-end developer creates responsive web pages and works on animation.

Then, a backend developer who develops the functional content of the site.

And the last one, but not least a QA engineer, who performs end-to-end testing and debugging.

It is the minimum number of team members required to create a corporate website.

How is the project cost determined?

Let me remind you that we’ve taken an abstract agency as an example. All amounts here are relative; the salaries are taken equal to +/- minimum wage in Ukraine.

So, let’s start with the team that is working on the creation of a corporate website. There are six members of the team: they are a project manager ($ 600), a designer ($ 800), a frontend developer ($ 1000), a backend developer ($ 1200), a QA ($ 600), and a sales manager ($ 500). Total in month:  4700 $

Besides, there are also employees of the agency. They are the director of a web studio/agency ($ 2000), a marketer ($ 500), HR ($ 500). These are people who work for the agency and the enterprise’s success, but they aren’t directly involved in the site’s development. Total: 3000 $

Also, it’s worth remembering the indirect costs. It includes an accountant ($ 400), a lawyer ($ 400), paying taxes ($ 700), rent, and office maintenance ($ 800). Total: 2300 $

There is one more column of expenses — direct and marketing expenses. We include direct costs for soft ($ 400), fonts ($ 100), hosting ($ 50), and domains ($ 50). Total: 600 $

Marketing expenses include advertising ($ 500), submission of sites for awards ($ 200), and subscriptions required to work ($ 300). Total: 1000 $

So, how to calculate the rate of each team member in these conditions?

Let’s count: for example, the salary of a project manager ($ 800) is summed up with all the other expenses divided by the number of team members. We divide the received sum by the number of working hours. We base on 130 hours per month.

What we can see: (600 + (3000 (employees of the agency who do not take part in the development/ not for sale) + 2300 (indirect costs) + 1600 (direct and marketing costs)) / 6) / 130 = (800 + 1358.3) / 130 = $ 13.4.

We received a net rate of a project manager. This is the rate that covers the costs for all items. Roughly speaking, this cost helps the agency break even. It is provided that this team member works out his 130 hours a month.

This formula is used to calculate each team member’s rate.

But what about the profit?

For the customer, the agencies have a different rate. The rate for the customer is summed up by the net rate with the “notional margin” of the agency, percent of sales, and percent of the tax.

For example, the rate of our PM is $ 13.4 per hour. 13.4 * 1.3 (margin from the agency) * 1.15 (percentage to the sales manager) * 1.06 (taxes) = $ 21.3. This rate is for the customer. Let’s make the following calculation (net rate and rate for the customer) for each team member:

Designer — $ 15 / $ 23.7

Frontend developer — $ 16.5 / $ 26.2

Backend developer — $ 18.07 / $ 28.6

QA — $ 13.4 / $ 21.3

Sales manager — $ 12.6 / $ 20.1

The next step is to determine how many hours each team member will spend on completing their parts. The PM should agree with the team the plan of work. Let’s say that each team member spends on developing a website:

Project manager — 40 hours

Designer — 70 hrs

Frontend developer — 110 hrs

Backend developer — 50 hrs

QA — 30 hrs

Sales manager — 5 hrs

Total: 305 hours.

In total, it takes two – two and a half months to create a corporate website. We take into account that not all team members can work at the same time. Without a well-developed and thoughtful design, a front-end developer cannot start creating web pages and animations, and so on. The team is a system, the elements of which are in complete interdependence. 

Now let’s calculate the cost of the work of each of the team. To do this, multiply the client’s rate by the number of hours spent.

Project manager — $ 21.3 * 40 = $ 853

Designer — $ 15 * 70 = $ 1664

Frontend developer — $ 16.5 * 110 = $ 2882

Backend developer — $ 18.07 * 50 = $ 1432

QA — $ 13.4 * 30 = $ 640

Sales manager — $ 12.6 * 5 = $ 101

TOTAL: 7573 $

That is how the pricing works. Don’t forget it was an abstract Web studio and the minimal salaries were taken.

The agency or the freelance?

The primary and significant advantage of freelance workers is the price. Freelancers usually work at home, so they do not need to pay rent for premises, managers, etc., while online agencies need to recoup their costs. 

How much does it cost to develop a website by a freelancer?

It all depends on what level of freelancer you are willing to work with. And this is determined by the goals and budget of the customer himself. I want to warn you that these amounts are rather abstract because every freelancer has its own rates. So, we are talking about hypothetical prices.

Developing a corporate website from a novice freelancer can cost up to $ 500. Someone manages to get a site through barter or even for a nominal fee. Beginners are ready to take on any projects for their experience and portfolio. But it is worth considering that you will receive only the site you described. The beginners won’t help you make your website your primary source of income. They just will give you a nice picture.

If we are talking about a mid-level freelancer, then website development will cost more,    for twice the price of the beginner, let’s say up to $ 1000. But the quality of the work performed will be higher. A mid-level freelancer no longer fills his clients with a hand but fulfills orders that are interesting for him and does it efficiently. He takes into account the needs of the client.

High-level freelancers can charge three times more expensive than the beginner`s work, from $ 1,500. These are experienced guys who know how to make a website that will bring profit to the customer. 

For comparison, I will indicate the team’s prices, that work on the site in the agency, but according to the level of salaries in freelance.

Project manager — $ 8

Designer — $ 10

Frontend developer — $ 11

Backend developer — $ 12 

QA — $ 8

So, you can see the difference in the hourly pay for agency workers and freelancers.

Advantages of work with freelancers:

• Price. The price for website development for freelancers of different levels is different, but it is lower than the average price for agencies.
• Time. Freelancers work much faster than agencies. But, nevertheless, if you order a site for a high-level freelancer, then there is a chance to get into the queue and wait for several months, or even more until the work on your project is started.
• Direct communication with the performer. You always contact the freelancer directly without intermediaries.

Although freelancers often do the job faster and cheaper, freelancing has several pitfalls. Here are the disadvantages of freelancing:

• A large number of projects. A freelancer may have several other parallel tasks and projects.
• One performer. In case of vacation, sick days, or unplanned absences, no one will be able to deal with your project.
• Lack of guarantees. The freelancer may underestimate the complexity of the work or the time he needs on your project.  Or, in the worst case, just leave your project unfinished.
• A freelancer says “goodbye” when his work is done. After your project is handed over to you and you settle accounts with the customer, you may find some flaws and want to make some edits. But in this case you will have to pay extra money for corrections because the freelancer is no longer responsible for the project (as we remember, he may have a lot of other work).
• Getting what you ordered. A freelancer only carries out your order directly. He does not understand what tasks you need a site for; he has no goal of making it as accessible as possible to users. You will rarely receive a detailed brief and terms of reference. He needs to know the technical tasks, and you are responsible for setting tasks. Therefore, if you do not quite understand what you want to have at the end, how the site layout should look, then do not blame the freelancer for not following you.

Let’s talk about the advantages and disadvantages of work with a web studio. The advantages are:

• An individual approach. The agency will develop the structure of the site with you, prompt all the necessary details of the work, and comprehensively approach the site’s creation. The goal of a web studio is to create a nice website, increase the conversion and bring profit to your business.
• Great experience. The team from the web studio are professionals who can and should be responsible for any studio project.
• The web studio guarantees the completion of the work. You discuss the details of the order with the agency, conclude a contract. The agency manager is always in touch; all the work stages are organized and agreed with the customer.

The disadvantages are:

• Price. The price for website development from a web studio is higher than the one done by a freelancer. This is because a whole team is working on the project. Add to this the maintenance and service of the office.
• Period of execution. A team of people is working on the project; each member has his tasks. These tasks are closely related. Solving one issue / making a change entails changes and edits at all stages of work.
• Bureaucracy. The whole communication takes place through the project manager, who transfers everything the team needs. Besides, you conclude an agreement, pre-conduct several calls or meetings to clarify all the details. Although, how can a signed contract be a disadvantage? 😉

Conclusions

Have you ever thought about the cost of the services you use? For example, you pay your barber about $ 15 an hour of his work. Your master does the work in about an hour and you don’t remember this service and its price for several more weeks. Now you know that this price includes not only his work with a blade, but also rent, paying bills and maintaining a barbershop.

And at the same time, you pay about $ 30 for the work of a web studio on your corporate website. And the agency needs a lot more hours to complete your order than your hairdresser.

Yes, the price difference is very big, but let’s remember that different services cost differently. The technical work of your barber and the creation of an individual info product exclusively for you are completely different areas.

Do you need a website and you don’t know where to go? Freelancers are not credible and agency prices seem too high for you?

First of all, you need to lean on the request, not on your financial opportunities. Do you need a website just to be or do you need a tool, that will help your business to grow and develop? The most expensive option is not always the best, just as the more affordable is not the worst. If the site is only needed to put a tick in the “site” column, then it isn’t necessary to bother with expensive and long-term website creation. In this case, a creative freelancer or a small agency is more appropriate. They will approach the task with imagination and quickly complete the website.

I hope that we have managed to explain in an accessible way why the prices for freelancing and in web studios are so different. It is important to understand that the main advantage of a web agency is that the result you get is a ready-made tool for monetizing your business. The agency team always works for the outcome and creates not just a website for you, but fulfills your request in a broader sense. In addition to a user-friendly site with clear navigation, cool and relevant design, you get a ready-made marketing concept and a clear development strategy.