Harvest, an excellent time-tracking service that SHERPA! Web Studios has used since 2008, recently assembled a helpful pricing guide for web design and web development agencies. Not only is the presentation slick — although not without some glitches — but the content is helpful for any organization struggling with understanding how to bill clients fairly.
At SHERPA! our approach to billing — hourly, fixed-fee, or retainer — matches the specific needs of a client. Therefore, we thought it would be helpful for our own clients to understand how we approach pricing, and the pros and cons to both parties — the client and the agency.
Hourly Fee: Now only $2.50/minute!
Also referred to as “times and materials”, hourly is the most common approach to pricing by agencies in Harvest’s customer survey of 1,200 respondents. It’s the same type of billing that professional services firms like law and accounting firms employ.
The hourly rate is calculated by adding together the cost of labor and overhead. This is the minimum cost of doing business — anything less and the firm is *paying* their client to complete the work, which isn’t a very sustainable approach to business and therefore not in anyone’s best interests! Therefore, a sustainable hourly fee also includes a profit margin, plus or minus any modifications necessary.
A low hourly is not rarely a good sign for either party. A low hourly is a strong signal that the labor — the talent — lacks experience. Or it might indicate that the operations are developed enough to be sustainable. Ultimately, you get what you pay for!
Also, comparing hourly rates is a poor predictor of your project’s success. Take this example: AgencyA charges $100/hour, and AgencyB $200/hour. However, AgencyA takes twice as long to complete the project. The end result is the client would pay both agencies just as much, but the cheaper agency takes longer to complete the project, and the quality of the deliverable is at greater risk.
At SHERPA!, we aim for a competitive hourly that includes the costs necessary for an experienced team, streamlined operations, and a fair profit margin to ensure a sustainable business model. For clients that invest in us with a term agreement, we offer a “preferred client discount”.
- Clients that have projects, campaigns that ebb and flow unexpectedly
- Agencies able to track the time & materials meticulously at set intervals.
- Projects with unclear, undefined requirements (no scope or functional requirements document).
- Projects requiring a narrow range of skill-sets or costs.
- Clients with fixed budgets or that need to control costs.
- Agencies ill-equipped to track time and materials at set intervals.
- Projects requiring a broad range of skill-sets or costs.
We recommend hourly billing for projects that require a narrow of skills and have ample discretionary budgets, which allows for highly flexible project scopes when functional requirements are unclear (or nonexistent!).
At SHERPA!, we report and bill our time at intervals mutually agreed upon with our clients, usually either biweekly or monthly.
Fixed-Fee: Fixin’ to get Burned
Also called “fixed-bid”, fixed-fee charges a defined fee for the project or service desired.
The amount is calculated by taking the skill-set hourly rate (see above), and multiplying by the total number of hours estimated as necessary to complete the project.
The problem with fixed-fee projects, and the agencies that provide them, is that they are usually out of business within a few years. Also, clients that repeatedly require fixed-fee projects are giving their “partner” agency a soft signal that they aren’t truly interested in sustaining a longterm relationship with them.
At SHERPA!, fixed-fee projects are marked-up by a highly scientific value called the “uh-oh multiplier”, which aims to cover inevitable project surprises. In addition, we limit the amount of revenue that derives from fixed-fee engagements. This diversified approach to business ensures we will be around for another 14 years.
- Most clients seeking a short-term project — all risk is placed on the agency to estimate correctly.
- Clients that enjoy receiving change-orders. And they will come — over 75% of agencies receive change-orders!
- Agencies seeking to win a new account.
- Agencies that are skill-set specialists and thus very efficient with their time.
- Projects with clear, defined requirements.
- Projects that are value-driven vs. time-based.
- Clients that require a lot of communication (and don’t know it).
- Agencies in general — sorry.
- Projects with a lot of unknowns and variables.
- Projects that an agency has limited experience with, and thus lack ability to estimate accurately.
- Projects requiring flexibility in timeline and scope.
We recommend fixed-fee billing for projects that an agency is very experienced with, or where both parties have very clear, unwavering expectations on deliverables.
At SHERPA!, if here is a new account we are seeking to win we might provide a fix-fee with the expectation of engaging with them on future projects. There is understandably little trust in the first engagement; we will invest in earning it!
Retainer: The Gold Standard in Client/Agency Relationships
The retainer occurs when both the client and agency are willing to mutually invest in each other. The client receives dedicated attention for a specific period of time, and the agency receives a continuous stream of income to support the client’s required efforts.
The retainer amount varies greatly but is usually billed in advanced based on taking the skill-set hourly rate (see above), and multiplying by the total number of hours expected each month for a defined term.
At SHERPA!, our hallmark service offering is our Agile WebTeam. We reserve and dedicate our team for a set number of hours each month to attend to and support a client’s ongoing campaigns and project efforts. In exchange, our clients provide us a fairly-priced retainer each month for a specific term.
- Both the client and agency — risk, and reward, is being shared equally.
- Strong client/agency relationships built on trust.
- Client willing to receive discounted service fees in exchange for term commitments.
- Clients that like to use the word “partner” (and mean it).
- Agencies with an experienced, knowledgable account or project manager.
- Agencies that are careful to avoid becoming lazy or greedy with their retainer.
- Campaigns with clear objectives and goal metrics, but unclear final deliverables.
- Campaigns that need to respond quickly to changes in the their plan — here’s looking at you Start-ups!
- Campaigns that require a broad-range of skill-sets that exceed a client’s internal resource capabilities.
- New relationships — neither party knows enough about each other to accurately predict and commit to needs.
- Brief, short-term projects or campaigns.
- Agencies, projects, or campaigns that are unable to be measured and thus be held accountable for results.
- Clients with small budgets.
- Clients that often change their expectations of vendors and measurements of success
- Agencies unable to explain their value or report on deliverables every month< ./li>
- Agencies that lack effective resource planning management.
Retainers work best when clients and agencies have already collaborated and have a foundational relationship built on trust.
At SHERPA!, our retainer clients rarely cancel services due to dissatisfaction. Rather, they “outgrow” our services because their businesses are ready to hire an entire IT or marketing team. Also, we tell new accounts in advance that we are best suited for campaigns that require long-term strategic thinking, and not for one-off projects.
A newer model is “Iteration”, in which a client buys an agency’s bandwidth for a set period of time. We don’t have any experience with this approach, but if you are a software development shop we highly recommend you check out Harvest’s Iteration Pricing Guide.
What are you experiences with your digital marketing agency’s billing model?