Let’s not sugarcoat it – turning a profit is every agency’s primary goal. However, doing so was seemingly much easier in the past. There was less competition, more value attached to the skills agencies bring to the table, and a stronger client-agency relationship.
In such an environment, agencies didn’t suffer from inadequate budgets or constant (annoying) pressures to justify their fees. Instead, they were paid well, usually based on healthy commission rates or favorable agency rate cards.
Today, the agency fee landscape is vastly different.
But don’t worry; you can still make your agency profitable, even under these circumstances. You just have to choose the right agency fee structure, know when to adjust it, and implement those changes adequately. This guide is here to help you with each of these critical steps.
Before diving into the complexities of agency fee structures, let’s introduce some basic principles.
What is an agency fee?
An agency fee is a charge for the services an agency provides to clients. View this fee as compensation for the expertise, time, and resources the agency has invested.
However, these fees can take various forms. That’s where the discussion about agency fee structures comes into play.
Agency fee structures dictate how agencies charge clients for the rendered services. For instance, they can charge them a fixed rate upfront or adopt a variable approach based on factors like time, project scope, and performance.
Either way, the agency fee structure is typically clearly outlined in the agency-client agreement. This ensures both parties are on the same page regarding the payment amount, frequency schedule, and other essential details.
But how do agencies calculate these fees?
It all depends. Agency fees can be influenced by the nature of the services provided, industry standards, and the agency’s business model. However, these fees can also vary based on client-specific factors, such as the complexity of the task, the size of the client’s company, and its niche industry.
Of course, neither agency fees nor agency fee structures are set in stone.
Has your business evolved? Consider a new fee structure. Has the initial fee structure turned out to be non-profitable for your agency? It’s time for a new one!
Setting the right fee structure for your agency is no easy task. Remember – this decision alone can determine whether your agency is profitable or not. And that’s not to mention all the factors involved in this decision, including the often overbearing agency costs and the ever-evolving industry trends.
But first things first – you must understand your options. Of course, gaining a thorough understanding of the agency fee structures will also allow you to break the chosen structure down for your clients later on.
Before delving into the specific agency fee structures, let’s list (and explain) the broader categories of these pricing models:
With the basics out of the way, let’s discuss the most popular agency fee structures you can choose from.
The fixed fee structure has a pretty self-explanatory name. It involves charging clients a predetermined (or fixed) amount for the services provided. In this structure, the time, resources, or outcomes involved in delivering those services don’t matter.
This output-based agency fee structure is also often referred to as “project-based” since it ties the fee directly to the completion of a project or another deliverable.
The fixed fee structure is best for agencies whose projects have clearly defined scopes, allowing them to correctly estimate the amount of work necessary to complete the project.
An excellent example is a graphic design agency offering a fixed package for designing a logo, which includes a specific number of initial concepts, revisions, and final deliverables. The same goes for content writing agencies delivering a particular number of articles with a predetermined word count (regardless of the complexity and time spent writing each piece).
As many as 80% of clients see transparency as one of the top priorities in their relationship with agencies. Transparency is precisely what clients get with this fee structure, as the total cost of a project is agreed upon upfront and remains unchanged. This eliminates potential confrontations or disagreements about the final pricing.
But clients aren’t the only ones fond of this structure. So are agencies with a limited budget that must plan (and allocate) their resources efficiently.
Since the fixed fee structure is typically project-based, the personnel from your agency working for a specific client will probably vary from project to project. This can be off-putting for clients who value consistency and prefer to work with familiar team members.
Also, regardless of your (and your team members’) experience, you can misjudge the amount of time and effort needed to complete a project. Underestimate these two factors, and your agency will likely lose revenue.
The hourly rate structure is an input-based model where pricing is determined by the number of hours spent on a project. Each hour is billed using a predetermined hourly rate, which can vary based on the role and level of expertise involved.
For this fee structure to work, your agency must use a reliable business management tool like Bonsai, equipped with robust time-tracking capabilities. After all, the last thing you’d want is for the client to question the accuracy of the billed hours.
If your agency is working on projects whose scopes can’t be well-defined, this fee structure might be the right choice. For instance, consulting agencies typically use hourly fee structures as these agencies offer specialized advice, analysis, and expertise services that can vary in duration.
The hourly fee structure also works wonders for startups yet to learn how much labor and time is involved in each project type.
The hourly fee structure is significantly more flexible than the fixed fee model as it allows agencies the luxury of misjudging a project’s scope. If the project turns out to be more complex and time-intensive than initially planned, the agency can charge for more hours. This model ensures the agency’s employees get paid fairly for all the effort and time put into a project.
The hourly fee structure can be a slippery slope for some agencies. Some employees might start “padding” their hours or working inefficiently to increase their billable time. This can lead to an unfavorable company culture and erode the trust between the agency and its clients.
But let’s say all billed hours are accurately tracked and accounted for. Even then, clients can have issues with the final invoice, especially if it exceeds their initial expectations by a margin.
When billing your hours, you must make sure that your time is properly tracked to avoid underbilling your clients. The most accurate solution is to use a time-tracking tool such as Bonsai.
With Bonsai, you can track your team's hours and generate accurate timesheets. You'll get instant reports on time spent on tasks and for each project.
Bonsai's time-tracking feature simplifies managing your team's time effectively. Here's a guide to accurately track your team's billable hours:
The retainer fee structure differs from the other structures on this list in several regards. First of all, this fee is almost always paid upfront in its entirety. The goal? Securing the agency’s services over a specified period. In most cases, this period is a month, quarter, or year. Also, this fee isn’t based on specific projects but rather on the agency’s commitment to provide expertise, resources, and support during the retainer period.
Think of the retainer fee as a down payment on future services rendered by the agency. Of course, “down payment” is the keyword here, as the retainer fee doesn’t cover the total cost of the provided services. It often only secures those services for clients, while hourly wages are calculated and paid separately.
The retainer fee structure is ideal for companies hired to represent clients in specific areas on an ongoing basis. This, of course, includes legal services but can also refer to PR agencies and IT support companies.
Check out Bonsai’s retainer agreement templates that are fully editable according to your needs.
To maximize your agency’s earning potential, we recommend using Retainer Agreements with your clients. This helps bring stability and peace of mind to your business. You just have to secure a written contract that clearly outlines the duration, number of hours included, base fee, and hourly rate for extra work where applicable.
Create a retainer agreement in Bonsai just takes a few minutes! First choose your contract template, and select the client and project it is associated to.
Then, set up your payment details and enter your retainer amount.
Finally, you'll be able to review the agreement and schedule your invoices to be sent automatically.
That's it! Sign up for your free trial of Bonsai to create your first retainer agreement.
Retainer agreements provide agencies with predictable and stable revenue streams. This allows them to plan better and allocate resources, boosting their overall financial stability. Plus, provided that the hours are accurately tracked, the agency will always be paid fairly against its effort.
If an agency gets too reliant on retainer agreements, it might struggle with revenue diversification. Of course, becoming dependent on a small number of clients is a recipe for disaster as it makes the agency vulnerable to fluctuations in client demand.
Also, some clients might feel like they aren’t fully taking advantage of the agency’s services, leading to constantly having to demonstrate value and justify fees (aka the worst-case scenario for many agencies!).
The commission-based fee structure is an outcome-based pricing model where the agency is paid based on the results its deliverables generate for the client. This fee typically takes the form of a percentage of the revenue generated as a direct result of the agency’s efforts.
So, for instance, what does a 20% agency fee mean for a marketing company? It means that if its campaigns help the client generate $50,000 in revenue, the agency will receive $10,000 for its services. This is why commission-based fee structures are often referred to as “performance-based” models, as they directly tie the agency’s compensation to the performance or results achieved for the client.
The commission-based fee structure is best suited for affiliate marketing and sales agencies and any other organizations that can directly influence the financial performance of their client’s business.
This fee structure can also benefit startups that want to prove their worth and attract new clients. These new agencies can use Bonsai’s Customer Relationship Management (CRM) capabilities to attract new clients and gradually build credibility in the industry.
When it comes to aligning the client’s and the agency’s interests, it doesn’t get better than the commission-based fee structure. On the one hand, clients will only pay for services if they yield results. And even when they invest significant resources, they’ll know exactly what they’re paying for. On the other hand, agencies will be incentivized to work hard as more effort usually means more money.
Arguably, the most significant disadvantage of the commission-based fee structure is its unpredictability. Sure, the agency will immensely benefit from a successful project. But it also bears the risk of earning much less (or even nothing) if the project fails to meet expectations. Worst of all? External factors beyond the agency’s control are often the culprits behind the project’s failure. This means that no matter the effort the agency puts in, it can still fail.
No two agencies are the same. The right choice for your agency will immensely depend on its specific circumstances. Still, some general tips can help you make the right choice for your agency. And let’s not forget – even if you make a mistake, you can always change your agency fee structure. Pulling off a successful change will be discussed later in this guide.
For now, it’s back to the tips on choosing the right agency fee structure.
Your chosen fee structure should leverage your strengths and position your agency for success in your niche. For instance, if your writing agency boasts highly skilled and speedy writers, the fixed fee structure is probably the way to go.
Understanding what your clients want, how they think, and what their financial capabilities are will help you determine the most profitable pricing model for your agency. Let’s say you primarily work with small businesses. You can’t really expect them to give you free rein on the pricing, can you?
The complexity, duration, and scope of your agency’s projects should help determine the most appropriate pricing structure. If these vary wildly from project to project, bid farewell to input-based fee structures.
Are you of the “high risk, high reward” mindset? If so, you can probably thrive with a performance-based agency fee structure. If, however, you value stability and predictable revenue, consider the retainer fee structure.
If you stick to a single fee structure, it must be a model that can work for all your clients (whether you have 10 or 10,000 of them).
Ideally, you’ll quickly find a pricing model that works for all your projects (and clients) and stick to it as you grow your business. But unfortunately, the ideal scenario doesn’t always coincide with the reality. So, what should you do if you realize a fee structure isn’t working out?
Let’s start with what you shouldn’t do, which is sit idly by. The same goes for realizing that the price of your services is no longer sustainable. After all, even a 1% price improvement can result in an 11.1% increase in your profits.
In these situations, the only solution is change.
But how do you successfully change your agency’s fee structure without alienating your existing customer base? Here are some tips.
The last thing you should do is blindside your client with unexpected changes to your fee structure (or fees, for that matter). If there’s an existing agreement, you should respect it as long as it’s in effect. Try to force a change, and you’ll likely damage the trust you’ve built with your client and potentially end your relationship.
Of course, this doesn’t mean you can’t start a conversation about a potential change at any point in your collaboration. The best times to do this are:
As mentioned, the choice of a fee structure can make or break an agency’s profitability. So, it’s critical not to make any decisions regarding this structure too hastily. Here’s an overview of the steps you should take (and questions you should ask) before deciding on a change:
The last step can also be used to explain the change to your clients. Remember – data speaks louder than words. Even better, you can also use this data to improve your agency in other areas, such as resource management.
If you plan on changing something that the client has gotten used to (be it the price of service or the fee structure), transparency is key. Providing your clients with all the necessary information will help you reduce the risk of losing them.
Here are some points you can touch on during this explanation:
But what if the client reacts poorly to the proposed change?
The answer is simple – stick to it.
If you’re certain that the change in question will make your agency more profitable in the long run, losing a few clients is a small price to pay. Don’t forget – new ones will always come as long as you stay true to your values and deliver results.
A well-designed (and chosen) agency fee structure will do wonders for your company. It will ensure every team member feels appreciated, foster strong client relationships, and maximize overall profitability. This single factor can mean the difference between thriving and barely breaking even.
So, pay special attention to this decision when planning your agency’s financial strategy.
Make an effort to understand your agency’s true expenses, establish a clear scope of work, and gauge your client’s price elasticity, and your final decision should be a winner.
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