How Do Creative Agencies Typically Bill Their Work?

Most creative agencies I speak with have multiple ways in which projects are billed to their clients. This seems to be the case regardless of whether they are interactive, brand, advertising, design or even architectural firms.

These agencies tend to have some clients being billed on a retainer basis, some projects are billed based on time and materials, and an offering of fixed fee projects as well. Of course the goal is always to bill an amount that is equivalent to the value of the work done on a project. However, that’s often easier said than done.

With the current economic climate, many companies have a defined budget for each creative project. While it may not be desirable in all cases, many agencies I speak with are billing more and more projects based on a fixed fee structure. A fixed fee structure is great when your agency has an excellent handle on estimating and managing time. It may not be ideal to bill long-term and complicated projects by a fixed fee structure since those projects may require more time than allotted to get the job done. In this case, your agency would be running at a loss!

What are the popular pricing models for agencies?

1. Hourly Rates

Hourly rates are the most common and simplest billing model used by creative agencies. With this method, you set hourly rates for your services and charge clients based on the total number of hours spent on a project. Hourly rates are easy for clients to understand, while allowing you to track time and resources, and manage project schedules. Additionally, it can attract clients with a set budget and can be quite rewarding for long-term projects that require extensive problem-solving and research. However, the hourly rate model also has some disadvantages. It can be difficult to scale for bigger projects, and it prioritizes time spent on a project over the value delivered to the client. 

Depending on each agency’s specific needs and circumstances, the hourly rates can or cannot work out. Start-up agencies may find it useful, while more established agencies may only use this billing approach for limited services. It’s important to determine rates and the calculation rule in your contract, since it lets you accurately track and allocate hours for billing. Finally, remember to charge enough to compensate for your non-billable hours, such as business development or admin work.

2. Fixed Fee

The fixed fee or project-based rate model involves charging clients a lump sum for the project. To decide on a flat fee, you approximate the total hours necessary (including non-billable hours) and multiply it by an hourly rate. This model is ideal for services with well-defined deliverables and endpoints, such as SEO site audits or website development.

Fixed fees reward expertise and speedy turnaround time and are easier to scale for larger projects than hourly rates. Clients can also test out your services before committing to a broader scope. However, this model can be hard to justify to clients on a tight budget, as it doesn’t break down how much they will be paying per hour. Therefore, make sure you address these details upfront in your proposal.

To make this pricing model work, it’s important to be clear on the time spent and the expected and unforeseen expenses. You should only use this model if you have completed a few projects and understand the costs associated with the milestones. 

3. Retainer-based Pricing

Using retainer-based agency pricing, you can charge clients an upfront fee for an agreed-upon duration or a set number of deliverables. The client pre-pays for a certain amount of work based on your hourly rate within a specified duration for delivery. Specifying whether the weekly/monthly hours would expire or roll over to the next period is crucial. Make sure to outline the details of the retainer and its terms in a clear and concise manner in your proposal.

With this pricing strategy, you can incentivize your team to improve service quality to retain clients while clients benefit from easy budgeting. Plus, it gives your agency a predictable, guaranteed source of income every month, making it easy to scale.

However, it can be challenging to charge new clients a retainer, and you must beware of mismanaging hours, as it could severely impact profitability. Overall, retainer-based agency pricing is ideal for agencies that prefer to plan and value long-term client relationships. 

4. Performance-based Pricing

Performance-based agency pricing is where you charge clients based on a clear, specific, and measurable outcome tied to their work, such as lead generation, social media messages, or successful sales converted from a campaign.

To use this pricing model, you need to establish your conversion metrics, how you will monitor conversions and the value of each conversion. Typically, agencies will charge an initial payment upfront and add a performance-based fee on top of it.

This pricing proves the agency’s confidence in its abilities, which helps convince clients to work with them. It’s also scalable and can be a good option for agencies with a track record of delivering measurable results. However, failing to deliver means the agency won’t receive payment, granting clients a significant advantage. This model is also highly work-intensive, making it unsuitable for those lacking fortitude.

5. Value-based Pricing

Value-based agency pricing charges clients based on the value they receive rather than hours or deliverables. This model is scalable and aligns your agency’s goals with the client’s goals. It works best if you can bring unique expertise to the table and can quantify your value to the clients, such as increased revenue or profit.

This model emphasizes high-profit margins and focuses on effectiveness, adaptability, and value. It motivates you to continually improve your services and deliver tangible results that benefit the client. Your agency and client both share in the risk and reward of the project, making the relationship more collaborative.

However, value is a subjective concept and can be challenging to measure. It requires you to be transparent and have a performance record of generating significant value for past clients. 

Takeaways: Which pricing model is right for you?

How to effectively bill clients?

Efficiency is critical when billing fixed fees. It’s crucial to monitor how the work being done compares to the budget. Utilizing a project management software like Function Point to track your work will help you stay on budget and ensure you hit your target net effective multipliers. A system like Function Point can also help your team produce real-time reports, track time spent against jobs and compare actual vs. estimated costs.

As any owner or principal of a creative agency will tell you, it’s impossible to stay under budget for every project. After all, the most important thing is the quality of the work as long as you remain profitable enough to stay in business. If your agency is billing based on a fixed fee and you do go over budget, a postmortem review is very important.

Then, even if your agency is not hitting your target net effective multipliers, at least you’ll know and “knowing is half the battle”. (G.I Joe)

To learn more about agency billing options and fee structure, be sure to check out our blog article on a review of billing services for creative agencies, or check out our free eBook to learn more about how a project management and billing software could improve productivity and profitability at your creative, digital and advertising agency.

This article was contributed by former Function Point team member, Marc Wilson.