How do Creative Agencies Charge?
Pricing is often the bone of contention before finalising an agency. Even after checking all the boxes covering aesthetics, timelines, and experience (in no particular order), clients often agree to disagree on agency pricing.
To understand why this happens, we need to dig a little deeper and understand how agencies quote a price for the services they offer. Although there are multiple pricing models that one would come across, for the sake of simplicity, we present three of the most popular variants.
A. Cost-based Pricing:
As per this approach, the consideration of agencies is to calculate all the internal costs, add a margin on it and then quote a price.
Agencies group internal costs into direct labor cost (fixed salaries, benefits, taxes, etc) and overheads (rent, consultant fees, stationeries, researches, all other non-direct labor costs, etc). The total of these two components when divided by total billable hours for the desired time-period (which in most cases, considered annually), would produce the billable rate per hour (Learn more here).
This billable rate - also known as the shop rate - is hence a function of all cost components at the agency’s end. Higher cost equates to a higher billable rate. With a mix of senior and junior creatives and project managers in a team, the billable rate sky-rockets proportionately. Once this basic billable rate is determined, the agency is now free to add its profit margin and quote an hourly rate to the client.
The client proceeds to engage with the agency based on an hourly consideration (more hours, more billing for the agency) or on a project-based consideration (fixed timeline and hours).
B. FTE-based Pricing:
AAAA (www.aaaa.org) defines FTE or Full-Time Equivalent as:
“...a term used to express a unit of Client Direct Labor. One FTE is equal to one full-time employee working on the client’s business. Full-time equivalents will normally be comprised of both dedicated staff and non-dedicated or shared staff, therefore aggregate full-time equivalents represent the equivalent number of full-time staff, calculated on an agreed-upon basis.”
The basis for FTE hours varies from agency to agency. The most commonly used formula being:
(a) - Calculate total billable hours (dedicated + non-dedicated staff hours) for a time period
(b) - Calculate total working hours for a full-time dedicated staff for the same time period
FTE = ratio of (a) / (b)
To explain it better, let’s consider a simple example.
There are 3 employees on a project. These employees dedicate 50, 40 and 10 hours per week - totalling 100 hours. Assuming a full-time employee would have put in 40 hours per week, the FTE comes to (50 + 40 + 10)/40 = 2.5
With the FTE in place, how the pricing works out?
Let’s assume an agency thinks that they will need to engage 5 FTEs for a one-year client project. Assuming that the agency’s billable rate is $ 50/hr, the agency fee calculation is as follows:
Agency billable rate = $ 50/hr
Agency billable hours = 1800 (annual hours per FTE)
Fee for 1 FTE = $ 90,000.
Fee for 5 FTEs = $ 450,000 (annual fee)
or about $ 37,500 a month
C. Value-based Pricing:
This is a more modern approach that both agencies and clients take caution before agreeing upon - although, if executed well, could lead to a win-win situation for both the parties. Here, the context is set by the KPIs achieved at the end of the project. Clients no longer need to be concerned with the agency’s costs, and the agency can focus on the end product and its effectiveness rather than the productivity of its team members and the pre-agreed upon project timelines.
Pre-sales estimation for such projects is highly data-dependent. Agencies need a track record of producing high-value outcomes so they can build trust during the sales process as some clients will be hesitant about this more customised pricing model. Once clients are convinced that they are paying a premium to achieve the end-results or desired RoI, they are more bound to opt for this model.
As there is no fixed model in practice or benchmarked in the industry, every agency tends to play around with one or the other pricing strategies that suit their needs. With a growing involvement of data scientists and artificial intelligence in pricing decision making, newer models would soon evolve in the coming times.