Calling Time on Billing by the HourFeb 09, 2023
Forget sourcing new clients, or bigger ones, or juggling more projects: improve the way you price your current services if you want to scale or future-proof your agency.
But what does ‘improve’ mean?
It’s simple: STOP HOURLY BILLING, AND STOP IT NOW.
In our experience with hundreds of agencies globally, success and sustainable growth is never achieved with an hourly billing model. Read on for our take on the alternative pricing systems you could choose for your agency, but crucially why you must call time on billing by time.
Let’s run through why we don’t rate hourly rates.
1. The impossibility of scale
“The hardest model to break is one that has worked for you in the past.” -Jack Bergstrand
When you started out, hourly billing made a lot of sense: you, and perhaps one or two colleagues, could readily trade your time for money. At an agreed rate. It was simple. It was a no-brainer.
But as your agency started to grow, you needed more people to fulfil the hours to complete the work: so, you’re still working hard, and now for more clients or on bigger projects, but the net profit stagnates: your growth becomes disproportionate to what you pocket.
2. Excellence is unrewarded
As your agency improves and you deliver the same quality of service in less time, the hours you bill will fall: and you will lose out.
The only one who benefits from your increased efficiency is the client.
Is excellence not only unrewarded, but unhelpful for profitability? If you value the work you do - and we know you wouldn’t be here if you didn’t - this model seemingly undermines your professional and creative integrity.
3. Comparative quotes are killer
Hourly billing commodifies your knowledge and skills into labour-hours.
Although you might set a rate you feel quantifies the experience, creativity, skills and passion which underpin your intellectual capital, your clients might not see it that way.
If they can compare hourly rates with the agency over the road, who are X% cheaper, they’re going to ask you to match that rate, or you’ll have to do a very good job justifying your relative expense.
And then the awkward chat on the day when you need to raise your rates…
Bargaining or being bargained with on an hourly rate is, frankly, beneath a truly healthy and growing agency.
4. Mindset matters
Being productive and ultimately successful in the knowledge economy is more than delivering to a deadline.
Whether a graphic designer, copywriter, UX designer, agency owner, if you’re billing by the hour for X service, your head is in that box of time, focused on completing that task, efficiently.
But do clients want efficiency? No, they want more.
It’s likely they also want your singular perspective, your engagement in their vision, your creativity: your talent.
If your mindset is that your agency copywriters deliver blogs in 2.5 hours, the connection to the product might come at the expense of connection to the client’s overarching value proposition and fundamental purpose and vision.
In other words, you do it to time, to this deadline, without tapping into the true extent of your talent.
Bergstrand again: “Efficiency focuses on doing things right. Effectiveness concentrates on doing the right things. Productivity is about doing them both at the same time.”
So, hourly rates are out: what are your alternatives?
PRICE PER PROJECT
As it implies: you calculate the cost (labour, materials, time) required to deliver an asset for a client and add on a sensible profit margin: which should be AT LEAST twice what it cost you to do it.
This feels neat, it feels controlled. It feels deliverable. And it can be profitable.
But. The risks.
You need a team well-versed in discovery, analysis and communication with the client to align what the client really wants with what you’ve agreed you will deliver.
Particularly over longer periods, or larger projects, underestimation, project creep or unexpected/expensive unknowns can eat into that healthy margin, leaving a hole in your profit and a sour taste on both sides.
Plus, this model still, to a degree, relies on estimation of time and assigning a price to that time.
Depending on your team’s size, you’re also looking at salaried time, and assigning costs to that… and then in comes productivity/utilisation rates. Of the time your employees have, how much is billable?
Industry standards suggest a successful agency’s blended staff utilisation rate should fall between 60-75% of available, billable time. Much more and you risk burning your staff out, less and you lose money on project-based pricing.
This model requires a strong analytical team, quoting keenly, and all over the logistics of the project.
Doable, but definitely demanding.
You agree to a recurring (usually monthly) service for a fixed fee: a rolling and consistent stack of deliverables in return for a contracted amount.
The consistency is helpful here for agency and client - both in terms of output and regular income.
It’s also easy to become more efficient at delivering that service; you deliver the same level of quality product in less time - particularly if you’re operating in a niche positioning.
Honing down your niche and delivering similar assets to a similar set of clients enables you to become experts - thought-leaders even - and become more profitable.
% OF SPEND
Here the agency asks for a % of the client spend with the agency, for example on a media campaign, to manage that account.
This is an incredibly profitable model and around the 11-15% mark is what’s going to get that healthy profit for you (although we have seen agencies taking more like 20%).
- Floor price.
A benchmark figure, no matter what the client’s budget, ensures you’re always making an amount commensurate to your costs: so a % of spend with a minimum fixed fee.
For example, 8% of £200 isn’t a sustainable fee.
- Ceiling price. Theirs!
Your success breeds the client’s - that’s the point - but that can suck for them in the end!
Your 18% cut might have been palatable to the client in the days when they were spending 5K, but when it’s 1M… handing you £180,000 will sting. And the risk is they ask you to reduce your fee.
Value Based Pricing: What the housing market and Hermes have in common…
Value Based Pricing: now things get interesting.
In this model, pricing is based not on what it (your service/product) actually costs to produce… but what someone is willing to pay for it.
The price, or value, being defined by the long-term benefits the client perceives you/it will bring their business. In other words, a 180 pivot on hourly billing.
Forget pricing on the effort that goes into the work you deliver, but instead: on the value it creates.
Take SaaS vending…
Here’s a model where the client is not paying for what you're selling - defined by your costs - but by what they’re BUYING: the value of the thing to outcomes and for impact in their business.
40% of SaaS companies in 2021 charged on a value-based pricing model. The actual service/software product costs/manufacturing are not in play here: more the judgement made by customers of the value of the service offered.
Value-based pricing is incredibly buyer-centric. If you communicate your value proposition (the value to the client) effectively, they will buy into working with you.
But this paradigm shift can be worrying to agency leaders: what is deemed of value and to what degree, will change over time. Check the vagaries of the housing market - or the somewhat gobsmacking ‘value’ of a Hermes Birkin bag - for a sharp lesson on the subjectivity and instability of a thing’s value.
Sustaining the value of your assets’ value is an obvious challenge of this model - living up to the idealistic vision your customers might have is another.
Understanding what they want and value and are willing to pay for (sales, clicks, likes, comments, profit?), and being able to deliver it, is the key.
Price Points: our summary of on-point pricing
Improvements in price typically have three to four times the effect on profitability as proportionate increases in volume.
Pricing matters and it might require a pivot away from hourly rates - or even a paradigm shift in your agency.
One of the key coaching messages in our Mastermind sessions is to reflect on the model you operate in your agency - and ensure you’re getting back the value you create for your clients: you should be leading the life you want to lead, running the agency you want to run.