There’s been a hot debate about how rates should be charged in creative agencies since the beginning of their lifetime. Hourly and fixed rates have their benefits and limitations and what might be best for your agency may not be the same for your client.
But those are not the only strategies used when pricing clients. In this article, we’ll explain different action plans for you to take notes on and apply the best one for you and your agency.
How do agencies typically bill their clients?
Retainers are the most commonly used agency consulting strategy, particularly for the world’s biggest advertising agencies. Simply put, the client sets a budget and the agency puts its time and resources against the retainer. When the retainer is used up, the agency halts the work until the next retainer is approved. This process will often work within a recurring time frame.
This model is probably the most effective for doing quality work but it has the hardest barrier to entry. Most small businesses marketing clients aren’t willing to dish out large chunks of money without a strong understanding of the ROI of final activities.
People who tend to advise agencies on how to structure their pricing, say that you should sell retainers over projects almost 100% of the time. This is pretty obvious if you think about it. It takes a lot of resources to sell a project, whether it’s a one-time website redesign or an ongoing marketing campaign. so if it takes you ten hours, on average, to pitch and win new businesses of U$3000 per month is way more bang for your buck than a one-time Fee of U$15.000 for s project that ends in 3 months.
Once that project is over you have to take the time to find another customer, onboard them, and learn their industry. Income tends to swing all over the place and it’s tough for the agency to consist on consistent revenue, so staff doesn’t have enough to work on or they have way too much. Retainers tend to solve that for the agency.
For the client, most one-time projects are underwhelming. If you’ve been through a major website redesign, think about the effort and money you put into the project and the results you got after it was finished. Did it live up to your expectations? I’ll answer for you directly – it probably didn’t.
Why? Because marketing, especially Digital marketing is data-driven. That means that we start a campaign by relying on our gut and we refine the campaign by relying on the data. How are people reacting? Can we rewrite the copy to improve conversion rates? Swap out images? If your agency is finished once the project is out the door, you miss out on the opportunity to tweak the opportunity and optimize your campaign for better results.
So, it does make sense to enter into a longer-term engagement with an agency, especially if they’re data-driven and they’re iterating each month to get you more business.
We can all agree that it’s a good idea to look at the data and make adjustments based on what you’re seeing. But that only brings up the real question.
When you enter into a long-term relationship with a marketing agency, is it better for them to bill you hourly or for them to bill you at a flat rate?
Benefits of Retainers
Here’s the big positive with retainers: you know what you’re going to pay upfront and it’s great for budgeting Some months you work more, some months you work less, but you pay the same regardless.
Typically, work on a new client is front-loaded. That means the agency is spending loads of time getting up to speed up your business, doing a lot of technical setups, and so forth. A retainer can spread this upfront cost out over the course of the year, meaning it can be a little less expensive for the first few months.
A retainer relationship is perfect for any company that is on a fixed budget or doesn´t want to deal with price fluctuations.
You can think about retainers the same way you think about a lunch buffet. You pay a flat price to get in, and once you get it, you can take all you want for the same price.
Drawbacks of Retainers
Although it’s nice to know what you’re going to be paying each month, there are some definite drawbacks that you should be aware of when entering into a retainer relationship with your agency.
First of all, it’s not really unlimited. Most agencies have several retainers you can choose from and they’re probably presented as packages. You might see a starter package for U$1500 a month, grow package for U$2500 per month, and an enterprise package for U$4500 per month.
When you take these packages and break them down into actual deliverables – and by that, I mean what they’re doing and what you receive each month – you can see that even these “all you can eat” retainers are loose hourly rate work estimates. Retainer “A” might be half the price of Retainer “B”, but you get half the output from the agency. So whether it’s hourly or not, it’s still roughly hourly.
So why would an agency focus so much on pushing retainers if retainers are a fancy way of billing by the hour?
Agency Hourly Rates
Strengths
Hour allocation is all about the hours your agency’s employees put in. The client will pay for all hours that the agency works based on their behalf. This model includes some measurements of hour-tracking and should meticulously address hard costs associated with marketing activities in order to be successful. There are really two ways you can do it: hour allocations or tracking and as mentioned before, retainers.
It provides buy-in for both the agency and the client in order to move forward. In this model, the agency must set at least one hourly rate. You can set multiple rates for different services or employee levels but generally, we recommend keeping it as simple as possible. The marketing consulting firms can then communicate their rates and work with the client to come up with a monthly allocation of services. The rate can change from month to month depending on activities, but it must be approved before the commencement of new work.
At the end of each month, the agency proposes new work for the client to review and approve, based on either the hour or the services that the client has requested. Once approved, the agency can start the next month’s work. the process continues fluidly month after month. This pushes the client into the decision-making process by having them take ownership of their marketing strategy while allowing their employees to avoid scope creep. You would be amazed by how much clients actually begin to enjoy this model once they get used to it. They tend to behave in one or two ways:
- Either leave you alone and let you do your thing, knowing that they can check on the pan at any time.
- They become more involved and provide you with richer information so you can better spread the company’s message.
Hourly rates can be greatly beneficial to a marketing agency because it ensures they are adequately compensated for all of their time spent on a project. If this agency underestimates the amount of time it will take for a project; they can just tack on the additional hours to the bill. If there is an unforeseen complication or the project takes longer than expected, they are covered.
Agencies deal with many different personalities, some with unclear expectations for a project. By charging an hourly rate, the agency is covered financially if the project takes an unexpected turn.
Hourly rates can be beneficial for the client because they don’t contain cost estimations which are often built into a fixed rate to allow for margins of error or unforeseen complications.
If the work is extremely variable with largely different scopes, an hourly rate is safer for a marketing agency because it takes away the pressure of assigning an accurate fixed cost.
Weaknesses
Hourly rates can work against a marketing agency by capping their earning potential. Unless an agency works around the clock, they will be capped by the number of available working hours in a day. If they want to increase profit, they will have to increase their hourly rate.
Another downside is that hourly rates cloud a client’s perception of value because they will focus on the cost per hour instead of the overall value. For example; if a client requests a digital ad design and the marketing agency knows it will take them an hour, which sounds better?
- $200 for the digital ad.
- $200/hour for one hour of good work.
Potential clients don’t know how long it will take to design and might assume it will take 3 hours in which case $200 sounds like a great deal but by telling them the $200 is for a workday, it seems more expensive even though they get the same end result.
Agencies needing to reduce work overload and pay their creative team better to retain them seems impossible unless you renegotiate better fees for the same scope of quality work with the client’s needs. They are unwilling to pay more unless they see concrete data on who, how, when, where, and what is taking more time than expected. With employee turnover almost reaching 60%, keeping the creative brain at bay is the agency’s number one and number two priority.
It creates a bit more upfront work from the marketing consulting firms to have a tentative plan for next month already in place. If you work this effort into your monthly allocation, it’s a win-win situation for everyone.
Agency Fixed Rates
When a marketing agency is working with a fixed rate, they are only limited by the workflow speed at which team members can complete the work. If the methodology is correct and accompanied by incredible skill, projects may be completed in a quick turnaround, fixed rates may work in their favor.
Clients can benefit from fixed rates because they are able to negotiate a cost upfront instead of having to roll the dice and pay by the hour without a guaranteed amount of hours. Many Clients prefer fixed rates because they know exactly how much they will have to pay in the end. With a fixed price, the estimate always matches the bill whereas, with an hourly rate, billable hours may be more or less than what was quoted.
Fixed rates allow the client to lay out their expectations and leave it up to the agency to appropriately allocate their time and resources to meet them: Most clients aren´t able to accurately estimate the amount of time a project will take, but they have a good idea of how much they are willing to spend. A fixed rate focuses more on the value of the end result eliminating perception bias associated with hourly rates.
For example, if you go for a haircut with a fixed rate, it may take a little more than an hour or a little less, but in the end, you’ll feel like you got your money’s worth. However, if you go for a haircut that charges hourly and you go over an hour because you wanted a little more attention to your layers, you may come out with a bill a little more expensive. In this case, most people would choose a fixed rate because it takes out the guesswork and there won’t be any surprises in the end.
Weaknesses
Fixed rates can be challenging for agencies because they need to accurately estimate the amount of time and work that will go into a project, for both freelancers and stable workers of the agency. If they miscalculate and end up spending twice the allotted time on a project, they will take a hit on their profits.
If a marketing agency massively underestimates the amount of time it will take, they will be less excited about the multiple revisions if each hour puts them in the negative.
If the agency estimate is too high and they are able to finish in a faster turnaround, the client may spend more than they planned if they had gone with an hourly rate. Fixed rates sometimes include a buffer in case the project is more intense than predicted or if a client requests many revisions.
Project-based pricing
A project-based model seems like the most reasonable of all solutions. This is where marketing consulting firms scope a piece of the work, set the cost, and then present the fee to a client before gaining approval.
Downsides
- the first issue that comes when applying this model is, what are you using to scope the project?
- Hours?
- The budget the client said they had?
- Your gut feeling?
At the end of the day, your agency needs some kind of system to back your hours so you can make sure that your projects are profitable. The outcome must be income for you or your doors won’t stay open for too long.
Another issue that comes to surfaces is that your scope is probably not as concrete as you think. Marketing clients generally try to “scope creep” you at every turn. They may ask for more revisions or additional content; ultimately it’s more work from you done for the same budget. Unless you are meticulous with the round of revisions and the scope of each activity, your clients will likely push the project from profitable to something resembling “ pro bono “ work.
Every single one of you that’s worked at a marketing agency can probably name more than a handful of moments that sound achingly familiar.
Value-based Pricing
Within this model the client has nothing to lose: they are paying for the results. These results must be predefined prior to the execution of the contract. The client will then pay for every successful month, usually invoiced monthly.
Downsides
This model has you failing right from the start. Value-based will quickly turn into a subjective fight with clients on the definition of success for their account. Unless you are selling by pure qualified leads, the clients aren’t ever going to want to hear it. Besides, marketing doesn’t work that way. Every good marketing strategy starts with a strong educated guess and leads to analysis, refinement, and execution.
Moreover, you can’t control your client’s internal operations. You could be bringing them great lead after great lead, and they could be screwing them up left and right. Maybe they have a technical glitch in their software, or maybe there’s a confrontational receptionist that has people running. Regardless, you can’t ever have full control of any client’s success.
Conclusion
It might seem that the fixed rate model is the perfect fit for your agency, but it really depends exclusively on each specific case. . Hourly rates are useful for agencies that deal with extremely varying project scopes or when dealing with difficult clients. For clients, paying by the hour may work out to be less expensive than a fixed rate, but there is also the risk that it will be more.
As a client, it is beneficial to outline your expectations for a project and assign values to get a better idea of how much you are willing to spend. Then you can evaluate your options and decide which pricing model will get you a better value.
If you’re a marketing agency that is just starting up, keep comprehensive records of time and resources spent on projects. This will help you create more accurate estimates for future projects. When deciding whether to go with a fixed or hourly rate, don’t just go with whatever makes you the most profit. Consider what clients prefer and what will help you get more business.
