Retainer vs. Hourly Billing: How Do You Devise a Pricing Model That Works for Both Agency and Client?Author: SEMPO | 3 Comments
Part 2 of a series
This is part two of a two-part series about pricing models. Part one discussed how to determine consulting rates.
There was a time when most search marketing agencies used the traditional advertising agency model and charged a percentage of their client’s advertising spend. Over time, many realized this form of payment actually dissuades your client from administering their budget effectively or efficiently and incentivizes quantity rather than quality of work or results.
Today, the prevailing pricing methods for search agencies are monthly retainers or hourly bills. Which one is right for your agency? How do you determine the best pricing model for both your agency and your client?
To answer this, ask yourself some questions about your client and the work you’ll perform on their behalf. Does your client have a set budget for your work? If so, they’ll insist on staying within that budget and will also likely want to spread that cost over months. If so, a retainer will work best.
Retainers, when staffed correctly, allow agencies to commit resources to the client, enabling them to work on client projects and tasks at any moment in time. They enable brand managers to have a focused, knowledgeable team that in essence becomes an extension of themselves. Retainers, thus, permit energy and focus to be on critical thinking, rather than on hours billed or time and resource constraints.
The retainer price will be based on several factors, including services performed, anticipated number of dedicated hours per resource, and overall budget. It’s essential that the agency price the retainer effectively. Thorough and transparent collaboration between the agency and brand will result in a properly staffed, timed, and billed retainer agreement that will benefit both agency and client.
The hourly rate pricing model has certain advantages as well. It’s simple to calculate and understand and provides both agency and client an opportunity to test each other out. Neither side may be willing to commit to a long-term relationship without first knowing that their work styles are compatible.
The hourly rate pricing model works best when clients require semi-regular task-oriented work. It’s not optimal for clients who require full-time agency support. Likewise, if the client doesn’t have the wherewithal to support working with the agency on a full-time basis, which requires a significant time commitment, both parties will be served best by an hourly rate price model.
If clients choose an hourly rate price model, they need to understand upfront that the agency will not allocate resources to projects until an agreement is in place. This agreement should come with an understanding as to when the work will be performed and when it will be completed. Agencies are not expected to “drop everything” as they typically would with larger retainer clients.
Another consideration is that agency hourly rates tend to be priced higher for short-term projects. Retainers give agencies more flexibility to offer blended or reduced hourly rates in return for the longer term commitment.
Most typically, a combination of retainer and hourly rate will meet the needs of clients and agencies. Any work deemed above and beyond the retainer agreement will be billed hourly. Dedicated resources still will be allocated, but those resources will bill any hours above the agreed-upon retainer allocation at an hourly rate.
Which model do you prefer? Share your experiences in the comments below.