Congratulations. You’re damn close to closing the deal.
Your new client said yes. They freed up some budget for you, you seem like the right man or woman for the job, and they want you to send a proposal. And oh – by the way, can you send over your rates?
This is a situation that a ton of freelancers and agencies find themselves in because hey, we are here to sell our services and get paid, after all. So when you get to this point in negotiating your services, what’s the best way to charge clients?
With an hourly rate?
Do you set up a retainer?
Do you do it as a one-time project?
There are pros and cons to all, so it’s not an obvious decision. A lot of people accidentally fall into one of the models without much thought. Especially freelancers.
So, my goal with this article is to pass along lessons I’ve learned from working with dozens of clients in different billing models. At the moment, I greatly prefer hourly work. It’s what I currently do with all the clients I work with at my company Optimotive.
I’ll explain more below.
In this article I’ll cover the pros and cons of these three billing models:
- Retainer
- Project-based
- Hourly
…including recommendations which you should use based on your business.
Special note: If you are an in-house marketer and want to hire an agency or you are a business looking to hire an agency, this article is a good read for you as well.
I think it’s important that we talk openly about the incentives and trade-offs created by our contracts. In-house marketers can make the best decision on how to work with contractors. And on the flip side, contractors can more clearly outline their preferences to clients. Hopefully then we can avoid most of the downsides that these contracts create.
Okay, all that said, let’s get into it!
Retainer-Based Work
This billing format uses a recurring monthly payment, much like a salary. There is an agreement from you to do work on an ongoing basis, and the client agrees to pay on an ongoing (usually monthly) basis as well.
Pros:
- Predictable revenue
- Supports an ongoing relationship with your client
- Scalable – i.e. if you keep adding retainer clients, you have the cashflow to hire more team members and grow your biz
Cons:
- Incentivizes spending as little time as possible on clients
- Scope creep can eat away your time/happiness/results
- Clients constantly need to re-justify your cost when they cut you a check
Who Should Use This Model
Far and away, the best part of retainer-based work is that it is predictable. It provides stability – to both you and the business. You can always tell how much money is coming in and plan your business around it. It’s like getting a paycheck as a normal employee.
So, there are two cases where the retainer model is best:
- First, this is great for agencies that want to scale. The stability of retainers provides a solid foundation for growth. This is especially key when it comes to hiring new team members. Closing a $5k a month contract means you can now spend an extra $5k a month on subcontractors or salaries.
- Second, this great for freelancers who don’t want to worry about micromanaging invoices. Or tracking billable hours. Or if you just want a steady paycheck. Or freelancers who don’t want to spend a lot of time selling.
It’s nice, easy, and you don’t have to always be upselling new work like you would in a project-based model.
Who Should NOT Use This Model
In my opinion, the worst part of retainer-based work is scope creep. It’s inevitable unless you’re a savant at managing expectations.
Each month your client asks for a little more, and to keep them happy and build the relationship, you bend over backwards to make it happen. Several months later, the scope of work has spiraled out of control and you’re working 80-hour weeks just to keep up.
Sound familiar? Anyone who has worked in client services under a retainer can probably relate. Now, money and growth isn’t everything. And as such, there’s a strong case for a different model if you prioritize lifestyle over scaling.
Which leads us to…
Learn More:
Project-Based Work
This billing format is a one-time deal that has a clear start and end date, and a single lump sum paid for your work.
A good example of project-based work is building a website. Or running an SEO audit. Or designing a new UI for an app. Once the project is done, it’s done.
It’s standard to have a partial payment up front (we usually request 50%) and then the rest of the payment comes after project completion.
Pros:
- You get a big check up front, which is nice for cash flow.
- If you define the scope of the project well, your work is fairly straightforward. You know what you’re doing and will be compensated fairly for it.
- A project is easier to sell than a retainer.
Cons:
- Incentivizes a slower work schedule as you get paid up front, and secondary payment may not be for a while.
- Scope creep can eat away at your time/happiness/results.
- Delays on the client side can push back completion dates, which also pushes back when you get paid for completing the project.
- Projects end and don’t always convert to more work. You’ll need to constantly be selling to close more projects to pay the bills.
Who Should Use This Model
A major benefit of projects is that they are easier to sell than retainers. I suspect this is because there is a clear outcome of the engagement, so potential clients can more easily wrap their head around what they’re getting for the money.
For example, spending $10k on a website pretty clearly gets you a website. Spending $2k/mo for five months to create blog content to drive X traffic resulting in Y leads and potentially closing Z sales raises so many more questions.
For this reason, projects are ideal for newer freelancers and agencies who need to get established. This is a great way to build trust and show that you do good work. Often it can be the start of a longer-term relationship with a client and thus more work for you down the line.
And, of course, projects can lead to referrals. One small project now could lead to your biggest client six or twelve months down the line.
Projects are also good for agencies and freelancers working with large companies with big budgets. In this case, a project has potential to be very profitable without directly costing your time.
A $50k website build, for example, has much more margin than a $5k or $500 build where your time is the margin. Sure, it’s more complex and you will be managing more people, but the trade-off is increased revenue for your time. For a bigger project, it could pay for resources to staff the project as well.
Do note that it’s important to clearly define the scope of work before starting a project. Have clear communication with your client about what’s included and what costs extra. Your time ain’t free, and they need to be okay with that.
Finally, there is a lifestyle factor at play here, too. Projects are popular with some freelancers who like to get on the clock for a huge project…and then stop working completely for a month or two when the project is done. If you prefer this kind of work/play cycle, you may want to consider project work.
Who Should NOT Use This Model
The major downsides of project work are scope creep, delays in payment, and needing to constantly sell more projects. All things that present a drag in cashflow.
For this reason, the clear loss of the project model is in agencies looking to scale. To scale, you need reliable income to hire new team members.
Agencies that don’t want to spend time selling, or that have weak sales talent, should also not use this model. You always need to be selling projects and if it’s not a core strength of the agency, it’s probably better to pursue retainers for the sake of your sanity.
On the freelancer side, you’ll want to avoid this model if you similarly are weak at sales or if you have low overhead (read: bills to pay) and you want more time for non-work things.
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Hourly-Based Work
This is a very straightforward way to charge clients. You have an hourly rate so you get paid for as much time as you work.
Hourly work is what I currently prefer. All my clients are now on an hourly basis. My business partner and I made a conscious decision last year to not prioritize growth. Our goal with the business has always been lifestyle, and hourly work supports this goal.
So we focus on building deep relationships with a smaller set of clients instead of constantly looking for new clients to add to the roster.
Since I travel full time, I love the flexibility it gives me. If clients need extra work, I’ll go heads down and make more money that month. If clients don’t need quite as much, I’ll get out of the coffee shop and explore. More time for adventures.
Pros:
- When you work, you get paid for your time – always.
- You get paid for communication, something that clients take for granted, which is incredibly annoying as an outside resource to a team. Last-minute meetings, random phone calls, texts, emails – all of which may require research or digging into analytics, are now covered.
- Compensation scales with the work.
Cons:
- Incentivizes working as much as possible, whether or not it’s creating results.
- If scope expands, clients may not be happy with a large bill. Good communication solves this, but nevertheless it can cause friction.
- Cashflow can be unpredictable. Not the best for someone with a high cost of living or an agency looking to scale. There are some exceptions.
Who Should Use This Model
It’s true that hourly work can present similar cashflow problems as projects. But the greatest benefit of hourly work is that your time is fairly compensated without worry of scope creep… something that the project-based model struggles with.
This is awesome for freelancers who are willing to trade off on time and money, and okay with sacrificing reliable income. I fall into this category, for example. If clients need more work I go heads-down for a bit. If work is slow I have more time for non-work things.
Also, this model can be great for freelancers who are highly skilled (i.e. command a high hourly rate) and have a big network (i.e. work is easily available). The lucky few in this bucket have their pick of when they want to work, and are guaranteed a high ratio of income per unit time.
On the agency side, agencies that are primarily involved in execution-side work can do well with this. Developers are a prime example of a great business where the hourly model works at small and large scale. Clients have shit that needs to get done and they pay accordingly, and for clients with big, audacious goals there will always be more work.
Further, hourly work is easier to upsell than retainers.
Consider a marketing agency that is managing advertising on retainer: They may realize that an opportunity exists for a client with content marketing. The agency has a kickass team of content marketers in-house, ready to roll… but of course they won’t just add new work to a retainer without first increasing the contract size. Now the whole thing gets delayed for the sales process, negotiations, and inevitable client push-back.
“We’re already paying you so much! Can’t you just do it for $1,000/month instead of another $5,000/month?”
This is pretty typical pushback that a retainer client might give.
I suspect hourly is easier to upsell because:
- Clients on a salary relate to the hours you work, and
- “It’ll just be 10 hours a month at my usual rate” makes the ask appear very small since the client has already agreed to your rate.
Who Should NOT Use This Model
Biggest downside here boils down to unpredictable cashflow, similar to project-based work.
This is challenging for agencies looking to scale and freelancers who need reliable income.
Learn More:
Pro Tip: Hacking the Hourly Model – My Method for Getting the Best of all Three
One final point I’d like to add is that you can get creative by combining aspects of each of these different models.
In my business, I often set up projects defined as a package of hours, or a retainer of a set amount of hours per month. This is one way I’ve found to “hack” the model.
A package of hours effectively deals with scope creep for projects. If the project expands I can go back to the client and request more hours. Similarly, retainers as a package of hours sets a floor of guaranteed income (i.e. reliable cashflow). Yet, it leaves the ceiling open for scaling up with scope of work for that month.
Now, this does come with extra drawbacks, mainly in administrative overhead. My team tracks our time religiously using Harvest (I am not paid by Harvest, I just like their software). And, at the end of every month, my business partner and I have to spend a ton of time reconciling hour tracking, invoices, subcontractor costs, and client expectations.
Honestly, the admin time is a huge pain in the ass.
But in my eyes, it’s a fair trade-off for preventing scope creep and keeps me from working 80-hour weeks.
So…Which Model Is Best for You?
Hopefully you’ve got a pretty good idea at this point. Each model comes with pros and cons and inevitable nuances for different businesses. If you’re not sure, try each model with different clients to see how they work for you.
I wish you the best in closing future deals and creating the business you want to build!