If I had a dollar for every time I talked to a business looking for a by-the-hour engagement with a top-level consultant or agency, I’d be a wealthy man.
In this article, I am going to unpack the common ways that agencies charge and that businesses pay their service providers.
Those are, in reverse order of (my) preference:
Hourly billing is very simple (on its face) and how a lot of freelancers and people just beginning their freelance journey bill. It is also usually the way that businesses who are used to working with solo freelancers (often overseas) or haven’t worked with an outside provider before expect to pay.
I should be upfront that I do not like hourly billing, and I believe that there are very few instances in which an agency should agree to bill by the hour. Quite simply, in my view hourly billing does not align incentives between providers and clients.
My main issues with hourly billing are around:
- Providers are incentivized to bill as much as possible, clients are incentivized to have them do as much as possible within the shortest amount of time possible, effectiveness be damned.
- Lack of incentive to get things done faster and thus see results if you only pay for the time used.
- Hourly billing doesn’t take into account strategy work, which often can’t be tied to certain number of hours and if it is, suffers in quality.
- Hard for freelancers/agencies/consultants to predict revenue and thus they end up signing to many clients, working too much, and burning out and thus doing subpar work.
Incentives are misaligned
My main issue with hourly billing is that incentives are misaligned and both parties suffer. As the hiring party, this should concern you since you should be looking to get the most from your spend. Hourly billing seems like it does that, but the reality is that is doesn’t.
Providers are incentivized to bill as many hours as possible in order to make as much as possible. I don’t see instances of providers padding their hours or being less effective with their work, but it is why lawyers will bill you for an hour if you use just 6 minutes of their time (true story).
Clients like you, on the other side, are incentivized to get as much done in as little time as possible so they keep their costs down. If the person is a simple task-taker and doer, this can work ok. But if there is any strategy required, which takes a lot more time to get right than simply doing, hourly billing is frustrating to clients because “you’re not getting anything done” and it’s hard to show clients that in fact the provider is doing things, just not tangible output yet.
Switching costs and burnout by freelancers on hourly billing
One challenge for clients on hourly billing is that their freelancers will often be overworked (and underpaid!) which leads to subpar work, delays, and often the freelancer burning themselves out and ceasing to offer any services at all.
This is actually why a lot of companies graduate to hiring agencies, because they know the entity will still be there even if a specific person leaves.
Burnout is a big problem with freelancers. They too often don’t take into account switching costs between clients, ad-hoc requests and thus issues with managing time, and the ups and downs of revenue based on what specific asks each client might have that month.
This is, essentially, unpaid work. And if a freelancer/consultant/agency isn’t smart about it by “raising their hourly rate” to account for it (which makes them less hire-able because they’re no longer the cheapest), they’ll lose a lot of time that is not paid for and will end up working too much, which leads to all the bad things listed above:
- Subpar work
Things get done more slowly
The other thing hourly billing doesn’t do for clients is incentivize getting work done quickly.
Project or retainer billing does this because there is real money on the table upfront, but with hourly billing you can take the perspective of “Oh, do we really want to spend $XXX for YYY” in the moment, instead of having taken your time ahead of time to determine what you have budget for and then putting timelines against that.
Hourly billing eats up a lot of potential productive time on both sides because of the request/scope/agree/get started cycle that just doesn’t happen when you agree to a specific scope and cost ahead of time. And more than that, often
If you want to move faster, don’t do hourly billing.
Hourly rate as a quality measure
There’s a cardinal rule about hourly rates, and that cardinal rule is that the lower the rate the less professional the provider will be. I don’t mean less professional in the “will curse you out” kind of way, but rather in terms of how solid their processes are, how good their communication is, and probably the quality of their work as well.
I don’t intend this as a hit against awesome providers who charge lower hourly rates, or to make them seem any “less than”. But my personal experience selling consulting work, teaching others to sell work, and seeing a lot of marketing projects signed (north of $10,000,000 so far) has shown me that this rule of “lower hourly = less professional” holds true the vast majority of the time.
Hourly rates can scare clients looking to hire, because the number looks big. In fact, I’ve even heard the hiring side do the math out loud on how much THEY make per hour at their job and then try to use that as a negotiation tactic with a consultant/freelancer/agency. They can’t even fathom that a consultant would charge that much.
But the old adage of “you get what you pay for” holds true. If I tell you that I charge $500 an hour, you might call that crazy and tell me that your uncle’s friend’s daughter who is a sophomore in college “studying IT” will do it for $50 an hour.
And you’re right – she will. But she also doesn’t have the experience that I do and you’ll be paying her to learn instead of getting it done by an expert who can do it very well and quickly.
If someone is willing to quote an hourly rate that you think is crazy, you should at least ask yourself how they’re willing to do that.
Likely, they’re very good.
That doesn’t mean that you can afford them necessarily, but you start to see the ranges and understand what you can afford to pay.
You get what you pay for.
When hourly billing can work
The only time I will do hourly billing is to sell a chunk of hours for a project if the client is not exactly sure what they need. I will also give them a timeline within which to use the hours, at which point any leftover hours are forfeited.
This gives me consistent income, timeboxes the engagement, and puts a end time on it which gets the client to get things done more quickly which helps them see results faster.
That, after all, is why businesses hire consultants/agencies – to see results.
Of course, if you’re agreeing to this as a client you might as well just do a project as outlined below.
Project and Retainer billing is better
I fully believe, after my 10 years in digital marketing and 5 years consulting and running Credo (which has enabled me to see a lot of proposals and projects that were both successful and unsuccessful), that project and retainer billing are the best way to both pay for and sell digital marketing services.
Often, companies graduate to hiring outside providers on project or retainer bases after outgrowing hourly billing from freelancers.
I’ll expand on each of the two below and when to use each.
The next most popular way to bill is for a project. This is usually an audit or a specific deliverable like a website or a logo or something like that.
Project-based payment is popular for clients because it’s like buying a product – you pay $X,XXX and you get YY as a deliverable. It’s simple to understand and simple to get sign-off on.
Project billing can be awesome for a strategy or a specific deliverable, though the challenge when buying (or selling) a project with one billing or multiple milestones is how to pay/charge for it.
How pricing works
Many hiring companies start off conversations by asking about hourly rates, then once they have that information they reverse engineer a project cost to hours.
The challenge here is that this isn’t necessarily how the provider put the pricing together. They may have done cost+plus pricing or value-based pricing (basically a percentage of the value they expect you to get from it if it is implemented correctly).
As the hiring party, you should ask the provider what you’ll get for what they are quoting. One of the best ways to do this is to ask if you can see a report that they put together for a client in the past so you understand how professional it is, how it’s structured, and the depth at which you will gain insights.
From there you can determine if what they are quoting you is worth it to you, or if you want to find something cheaper/different.
Remember, you get what you pay for.
The final way that billing/payment can be done when it makes sense is via a retainer.
Now, I’ve heard a lot of times from hiring parties that they “don’t want to get roped into a long term contract that I can’t get out of when I don’t see results”.
My answer to that is “So don’t”. No one is making you sign a 12 month contract – you have every right to walk away and not sign the contract.
To define retainer billing quickly, it’s when the hiring party (you, the business) agrees to pay the outside provider a set amount per month ($X,XXX) for an agreed upon scope.
The scope varies based on your needs usually, and many agencies don’t really offer “packages” of various services, though they will have base pricing and pricing guidance based on what you need and what their marginal costs are.
Retainer is a great option when you need certain services every month on end. Whether that’s content being created, ads being managed, links being built, or design work, a retainer can make a ton of sense because you know what you’re getting each month.
The downside is that it’s usually a set scope, and so if you need to layer other things on this usually means getting a fresh scope and then adding that on, and maybe doing that for a couple months and then dropping back down to a lower level. The best agencies can handle this sort of intricacy.
One other pro tip when hiring is to understand what you’ll get it each month. Some agencies try to do a flat retainer where there is more work upfront with onboarding, but the price is spread out through all the months of the contract. Others will charge a higher amount up front because more hours and strategy are required at the start, and then less in the future as campaigns are ongoing and there’s less setting of strategy.
Remember, when you hire an agency on a retainer you’re often able to get a full marketing team for the price of just one or two full time hires. You’ll never, and probably shouldn’t, hire a full time experienced PPC manager for the $2,000 or so you’ll pay an agency for the same services.
Questions? Comments? Leave them in the comments.