A Guide to Calculating Marketing Agency Fees
There is so much planning that goes into starting your marketing agency and growing your agency business. Your business model and pricing strategy are certainly among the most important decisions you will make. There are several ways to go about charging for your services, not the dollar amount per se, but the way in which you will calculate your agency fee.
Typical agency fees are based on either the project, the time, or a combination of the two. Below, we will go over each one of these options and list the pros and cons to help you decide.
#1. Time-Based Agency Fees
Charging by the hour is extremely common in the service industry because it’s very straightforward and easy to explain. Using a time-based method you would set an hourly rate that lets you earn a profit. If your hourly rate is $150 and you work 10 hours on a project then you make $1500.
The Pros of Hourly Rates:
- Hourly rate pricing is very easy for customers to understand.
- Because it’s easy to figure out, it can help you create your first invoice faster.
- Clients like it because they know exactly how much they will be spending per hour.
- As long as you accurately estimate how many hours a week of work you can count on, you’ll have a way to predict your cashflow.
The Cons of Hourly Rates:
- Your client will not be comfortable with the fact that you have limited incentive to finish work quickly because the faster you complete the work the less you get paid.
- You’ll get paid the same for complex projects as you do for simple tasks. There is no reflection of skill or experience in your pricing.
#2. Fixed Rates / Project Rates
Another simple pricing structure you can use is to charge fixed rates per project. Let’s say you are a digital marketing agency. You would charge a flat rate for all Facebook ad campaigns, and another rate for creating a brand package. You can build out a menu of services for customers to choose from. Under this model, you are charging for your skill level instead of just your time.
The Pros of Fixed Rates:
- This is a simple pricing method once you set it up and it’s easy for clients to understand.
- Clients like fixed rates because there is no mystery and can allow for transparent billing practices.
- It is easy to scale your business by adding new services and charging for them individually.
The Cons of Fixed Rates:
- It sounds so easy in theory but when you’re working on real-life projects, there is no way to tell how long or how complex a specific project might get. You could be undervaluing your service or spending too much time per project to remain profitable.
- Providing an overall project rate could cause sticker shock for some clients. Think of how this plays out in our own lives. It’s much easier for me to stomach Hulu asking for $54.99 per month than it is to receive an invoice for almost $700 for a year of service.
#3. Retainer / Contingent Fees
A retainer fee is where you make yourself available to a client a certain number of hours a month for a set price. Retainer / Contingent fees are when you put together a customized plan for each client. This can give you the most leeway to price plans according to their actual scope of work and have flexible rates so that you do not over or undercharge for services. Under a contingent fee schedule, you will usually get a deposit and then payments at agreed-upon milestones throughout the project.
The Pros of Contingent Fees:
- You can be sure that you are not undervaluing your work or getting shorted if a project takes longer than expected.
- You can be flexible in your pricing to accommodate businesses of different sizes with different budgets.
- The client might see this as performance-based pay which could be appealing to them. They will feel you are incentivized to do quality work by each milestone.
The Cons of Contingent Fees:
- It’s all custom pricing. It’s tough to standardize your pricing using this model.
- You have to customize for all clients regardless of budget amount.
- It can be difficult to correctly estimate the time or involvement of each project before you start actually working on it.
- The final cost could be more than the client was expecting unless you have a cap on overages.
These are the three main types of pricing typically done by marketing or creative agencies. Whether you are launching your marketing agency or pivoting your business, think about how these pricing methods could impact your business.
How can your marketing agency price its services based on its niche?
Does your current pricing leave money on the table? In an upcoming article, I’ll discuss how to price your agency services to maximize revenue while also making clients feel good about working with you. Don’t miss the update — subscribe to my email newsletter for agency leaders, to read it as soon as it’s published.
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