Are You Charging Enough at Your Creative Agency?

The creative agency world is more competitive than ever. With competition comes ever improving the quality of work. However, we’re also seeing agencies having to lower their fees to compete with the pricing being offered by other agencies. It’s easy to drop your price to win a pitch and worry about the profitability later, but this is a slippery slope. You’ve got to keep an eye on your profitability and make sure that you’re charging enough. Sometimes a new job simply may not be worth it if you have to lower your price too much to win it.

An agency should evaluate their pricing structure at least once a year. First things first:

How to Determine Your Blended Rate

Total base payroll for all billable employees (in this case, 10): $550,000

Divided by the number of ideal billable hours on the account for the year (1,600/employee): 550,000 ÷ 16,000 = 34.375

Multiply times 3 (for overhead) equals the agency blended rate:

3 x 34.375 = $103.125 (we’ll round it down to $100)

Even if you’re not charging based on hours worked, tracking your time allows you to determine your profitability. You may also want to consider having different hourly rates for each staff person depending on their role in the agency. This will give you better insight into the profitability of the different types of work you do. Having a solid agency management system in place will make it easy to report on the different values of employee time. Doing this manually is not recommended.

If you have lots of jobs that are being billed based on time & materials, pat yourself on the back because you’re already ahead of the curve. This is the easiest way to make sure that you’re charging enough. Especially if you have rates that differ based on the role of the staff person who is doing the work. Your creative director’s time should be worth more than a junior designer. However, we understand that charging hourly is not always possible and many clients are demanding flat fees.

Charging a flat flee for jobs is becoming more and more common. Competing with the pricing of other agencies makes it difficult to stay profitable with these flat fees. I recently spoke with the creative director at a small agency who described what it’s like to agree to a flat fee that he knew was less than the value of the work they would be providing. It did not sound fun. Especially since his client then constantly requested changes outside of the initial scope of work. These changes were accommodated, included in the flat fee and helped to erase the slim profit margin that their flat fee allowed for. I told him that he wasn’t charging enough. “How am I supposed to charge anymore when my competition is constantly trying to out bid me?”, he asked. The answer is to find a way to bill for the extra time you’re spending.

If you’re charging a flat fee for your work, you’ve got to make sure that doesn’t allow the client to take advantage of you. If you have a clear agreement with the client that any changes outside of the initial scope of work will be charged hourly, you’ll be able to maintain a grip on your profitability. Furthermore, you could even lower your flat fee to be more competitive, knowing that if the job gets out of control, you’ll be able to charge for the extra time.

In the case of a retainer, maintaining profitability is also about managing the client and their expectations. Too many agencies allow their clients to assume that their monthly retainer includes nearly unlimited work. Or that if the agency spends less time, the client should be credited for the time not spent. This is not how a retainer should be managed. For more info on common mistakes made with retainers, check out this blog: 3 Mistakes Creative Agencies Make When Managing Retainers 

The key to making sure that you’re charging enough is to evaluate the profitability of completed work, make sure that your hourly rates are appropriate and maintain control over the scope creep that plagues every agency. Keep an eye on things and your profitability will match the high quality of your work.

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