Marketing agency costing and budgeting models

5 Options for charging fees and paying for agency resource

There are a wide range of agency costing and budgeting options for marketers to consider when outsourcing their marketing activities. The fees model used will vary by both type of agency and client engagement as you seek to agree what is a practical, mutually beneficial remuneration mix. Whichever model(s) you use, an agency or consultancy should ensure that all elements of activity are captured and you minimise working ‘for free’ e.g ‘giving away thinking’ in order to secure production work. I say costing model(s) since it’s common practice for an agency to have a preferred approach, but to vary it on a case-­by-­case basis depending on clients requirements and expectations.

How much you should charge clients for specific elements of work that you undertake will be based on a range of factors e.g. your fixed overheads (office rent, management salaries etc), variable overheads (e.g use of freelancers), estimated utilisation (billable time) rates for each role, the level of margin that you want to apply etc.

The agency costing and budgeting spreadsheets I have developed for Smart Insights are built on a time + skill cost model, but agencies can and do have different remuneration agreements in place with clients. To my mind and working with a range of agencies, ‘time’ is still the most common currency used between agency and client though. But charging for labour / effort using a calculated hourly or day rate multiplied by how long that task will take is just one way to look at remuneration.

Whichever model you adopt, it’s essential you monitor the real amount of effort required to create the solution by recording time accurately – I cover the options for this in a separate post on Estimating and Job Management platforms for marketing agencies.

Here are the costing options I see used most often by agencies:

Option 1. Blended rate with time estimates model

A blended rate covers all the specialists in the agency, regardless of role or seniority and will be one rate (e.g £650 per day). Useful if you are trying to keep things simple whilst estimating. And some clients will prefer this approach. Clients may ask you to give specific individual rates though if they are trying to compare ‘apples with apples’ in a pitch situation.

Option 2. Specialist rate with time estimates model

Here, as per the spreadsheet templates, the rates for individuals vary dependent on both their contribution to profitability (taking on board their overhead etc) and also the level of seniority and / or experience they have in the industry. You will be paying more for experienced people yourself and will seek to pass that on to a client who needs that experienced input into a creative or technical solution etc.

Clients sometimes baulk at the significantly higher rate a senior practitioner brings to their project but that experience will mean they ‘nail the solution’ or reach an effective insight much quicker that a less experienced colleague will.

This can be a conundrum for agencies since in reality, the ‘value’ provided by a senior practitioner (e.g Creative or Planning Director) may not reflect the recompense for their time (even at a ‘premium’ day rate) e.g. three days of billable Planning Director time may determine the architecture for what is ultimately a very successful campaign for a client, generating revenue that is multiples higher than that initial catalyst fee (the three days of Planner time). On that basis, the agency may have been better (if possible) applying a value fee rather than time fee (see Option 4).

Where do retainers fit?

For both Option 1 and 2, you may apply the calculations to either a one­-off project or an ongoing retainer fee. I think retainer fees are less common nowadays (certainly the whole­ account type of fees that covered all planning, creative and account handling for a brand , which typically ran for a year at a time). Retainers are still useful for budgeting for both client and agency though, where repeating tasks take place on a monthly basis e.g. SEO services or generating X number of updates per month for a social media account. Client and agency will typically monitor any agreed KPIs on a monthly and quarterly basis along with the time taken to undertake those tasks and adjust the fee accordingly (depending on what contract you have in place).

Option 3. Fixed fee model

Sometimes a client fixes the budget as a ‘fait accompli’ and in this case the agency has to calculate (with its own charge­out rates) how much time can realistically be spent at each stage of the process to arrive at a solution that will meet any KPIs or campaign objectives set. Fixed fees should ideally only be set in consultation: agencies and clients should work in partnership to transparently work out what is truly involved in delivering a solution. Trying to ‘massage’ time to make it artificially fit into a ­fixed budget can lead to problems further down the line.

Even if the client has a fixed budget you should still go through a robust estimating process yourself to determine how much budget would really be required for the brief that has been set. You can the make a decision: agree to invest time (out of goodwill and for considered commercial reasons) that makes up the budget shortfall, negotiate a more realistic budget (with your robust estimate as evidence) or walk away.

Option 4. Value-based model:

This is charging for the value of the strategy or creative thinking rather than the time taken to do that thinking itself. Value-­based remuneration is based on the assumption the client will gain a high Return On Investment against the fee you charge. This is a perennial point of debate in the industry. By debate, I mean that I know of a lot of agencies who would like to use this model but the market paradigm is still that of time not value!

Option 5. Payment by results model:

Still a rare model in my experience, but one you should consider for differentiation. But you need to be confident your marketing strategy or creative for the client in the sector you’re working for can have a demonstrable, measurable impact on the KPIs you have agreed with the client. That’s where it gets difficult I think: since integration of channels is core to most campaigns, how your specific input / thinking / media planning / creative etc is isolated and attributed to those agreed measures (e.g increase in brand awareness, website traffic, online sales etc) against other external factors such as a wider campaign that may have run recently, the efficacy (or not) of the client sales team to convert leads, the UX of the website etc.

Whether you use spreadsheets or an automated / integrated project agency fees management platform, the important thing is to get your estimating discipline right from the start. A lack of accurate estimating will lead to an impact on your agency profitability. By ‘accurate’ I mean estimates that factor in all the resources / roles and time that will be required to meet the project objectives and at rates that the business has set to achieve a desired profit.