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The Ultimate Guide to Agency Fees: How to Set, Change, and Optimize Your Agency Fee Structure

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Updated on:
February 18, 2024
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Let’s not sugarcoat it – turning a profit is every agency’s primary goal. However, doing so was seemingly much easier in the past. There was less competition, more value attached to the skills agencies bring to the table, and a stronger client-agency relationship.

In such an environment, agencies didn’t suffer from inadequate budgets or constant (annoying) pressures to justify their fees. Instead, they were paid well, usually based on healthy commission rates or favorable agency rate cards.

Today, the agency fee landscape is vastly different.

But don’t worry; you can still make your agency profitable, even under these circumstances. You just have to choose the right agency fee structure, know when to adjust it, and implement those changes adequately. This guide is here to help you with each of these critical steps.

Agency Fee Structures 101

Before diving into the complexities of agency fee structures, let’s introduce some basic principles.

What is an agency fee?

An agency fee is a charge for the services an agency provides to clients. View this fee as compensation for the expertise, time, and resources the agency has invested.

However, these fees can take various forms. That’s where the discussion about agency fee structures comes into play.

Agency fee structures dictate how agencies charge clients for the rendered services. For instance, they can charge them a fixed rate upfront or adopt a variable approach based on factors like time, project scope, and performance.

Either way, the agency fee structure is typically clearly outlined in the agency-client agreement. This ensures both parties are on the same page regarding the payment amount, frequency schedule, and other essential details.

But how do agencies calculate these fees?

It all depends. Agency fees can be influenced by the nature of the services provided, industry standards, and the agency’s business model. However, these fees can also vary based on client-specific factors, such as the complexity of the task, the size of the client’s company, and its niche industry.

Of course, neither agency fees nor agency fee structures are set in stone.

Has your business evolved? Consider a new fee structure. Has the initial fee structure turned out to be non-profitable for your agency? It’s time for a new one!

Use Bonsai to accurately track your billable hours

When you’re tracking the time you spend on tasks, it’s always best to know if it’s billable or non-billable so that you can accurately bill your clients. 

Billable hours are those that can be directly invoiced to clients, contributing to a project's billable and unbilled amounts. These hours are essential for accurately calculating project costs and client billing. While non-billable hours cannot be invoiced to clients and do not impact a project's billable amount. Instead, they serve internal purposes, which helps in comprehensive time tracking and cost analysis for better project management.

Sign up to Bonsai to help you maximize your agency's profits

Bonsai's time-tracking feature simplifies managing your team's time effectively. Here's a guide to accurately tracking your team's billable hours:

  • Review your timesheets - Easily visualize where time is spent with Bonsai's new time sheets. This helps provide insights for better team productivity.
  • Set the capacity of your team members - You can set weekly capacity for each team member to ensure workload balance. Monitor if they're overworking or underworking and distribute work evenly across projects and clients.
  • Analyze the utilization reports -  Dive into utilization reports to understand the total capacity and billable utilization per team member. Not all tracked time is billable, so mark entries accordingly for accurate billing.
  • Explore the Insights tab - Gain a clear view of billable and non-billable hours in the insights tab. Analyze tracked time to maximize productivity and billable hours across your team.

To even maximize your agency’s earning potential, we recommend using Retainer Agreements with your clients. This helps bring stability and peace of mind to your business. You just have to secure a written contract that clearly outlines the duration, number of hours included, base fee, and hourly rate for extra work where applicable.

Check out Bonsai’s retainer agreement templates that are fully editable according to your needs.

Agency Fee Structures: The Most Popular Types

Setting the right fee structure for your agency is no easy task. Remember – this decision alone can determine whether your agency is profitable or not. And that’s not to mention all the factors involved in this decision, including the often overbearing agency costs and the ever-evolving industry trends.

But first things first – you must understand your options. Of course, gaining a thorough understanding of the agency fee structures will also allow you to break the chosen structure down for your clients later on.

Before delving into the specific agency fee structures, let’s list (and explain) the broader categories of these pricing models:

  • Input-based. These agency fee structures primarily depend on how much effort (or input) your agency puts into delivering services to clients. These structures rely on software like Bonsai to track hours, tasks, and resources invested in completing a project.
  • Output-based. Output-based agency fee structures focus on the number of deliverables (e.g., website pages, design concepts, marketing campaigns) produced for the client.
  • Outcome-based. With outcome-based pricing, the agency focuses on the quality of its output rather than quantity. In other words, pricing is determined based on the measurable results achieved for the client’s business (e.g., leads, conversions, sales).
  • Value-based. Value-based fee structures are similar to their outcome-based counterparts, but the pricing is determined based on the perceived value of the services rather than measurable results. This is the most vague pricing model, which only agencies with a stellar reputation can pull off.

With the basics out of the way, let’s discuss the most popular agency fee structures you can choose from.

1. Fixed Fee Structure

The fixed fee structure has a pretty self-explanatory name. It involves charging clients a predetermined (or fixed) amount for the services provided. In this structure, the time, resources, or outcomes involved in delivering those services don’t matter.

This output-based agency fee structure is also often referred to as “project-based” since it ties the fee directly to the completion of a project or another deliverable.

Who Is the Fixed Fee Structure Best For?

The fixed fee structure is best for agencies whose projects have clearly defined scopes, allowing them to correctly estimate the amount of work necessary to complete the project.

An excellent example is a graphic design agency offering a fixed package for designing a logo, which includes a specific number of initial concepts, revisions, and final deliverables. The same goes for content writing agencies delivering a particular number of articles with a predetermined word count (regardless of the complexity and time spent writing each piece).

The Advantages of the Fixed Fee Structure

As many as 80% of clients see transparency as one of the top priorities in their relationship with agencies. Transparency is precisely what clients get with this fee structure, as the total cost of a project is agreed upon upfront and remains unchanged. This eliminates potential confrontations or disagreements about the final pricing.

But clients aren’t the only ones fond of this structure. So are agencies with a limited budget that must plan (and allocate) their resources efficiently.

The Disadvantages of the Fixed Fee Structure

Since the fixed fee structure is typically project-based, the personnel from your agency working for a specific client will probably vary from project to project. This can be off-putting for clients who value consistency and prefer to work with familiar team members.

Also, regardless of your (and your team members’) experience, you can misjudge the amount of time and effort needed to complete a project. Underestimate these two factors, and your agency will likely lose revenue.

2. Hourly Rate Structure

The hourly rate structure is an input-based model where pricing is determined by the number of hours spent on a project. Each hour is billed using a predetermined hourly rate, which can vary based on the role and level of expertise involved.

For this fee structure to work, your agency must use a reliable business management tool like Bonsai, equipped with robust time-tracking capabilities. After all, the last thing you’d want is for the client to question the accuracy of the billed hours.

Who Is the Hourly Fee Structure Best For?

If your agency is working on projects whose scopes can’t be well-defined, this fee structure might be the right choice. For instance, consulting agencies typically use hourly fee structures as these agencies offer specialized advice, analysis, and expertise services that can vary in duration.

The hourly fee structure also works wonders for startups yet to learn how much labor and time is involved in each project type.

The Advantages of the Hourly Fee Structure

The hourly fee structure is significantly more flexible than the fixed fee model as it allows agencies the luxury of misjudging a project’s scope. If the project turns out to be more complex and time-intensive than initially planned, the agency can charge for more hours. This model ensures the agency’s employees get paid fairly for all the effort and time put into a project.

The Disadvantages of the Hourly Fee Structure

The hourly fee structure can be a slippery slope for some agencies. Some employees might start “padding” their hours or working inefficiently to increase their billable time. This can lead to an unfavorable company culture and erode the trust between the agency and its clients.

But let’s say all billed hours are accurately tracked and accounted for. Even then, clients can have issues with the final invoice, especially if it exceeds their initial expectations by a margin.

3. Retainer Fee Structure

The retainer fee structure differs from the other structures on this list in several regards. First of all, this fee is almost always paid upfront in its entirety. The goal? Securing the agency’s services over a specified period. In most cases, this period is a month, quarter, or year. Also, this fee isn’t based on specific projects but rather on the agency’s commitment to provide expertise, resources, and support during the retainer period.

Think of the retainer fee as a down payment on future services rendered by the agency. Of course, “down payment” is the keyword here, as the retainer fee doesn’t cover the total cost of the provided services. It often only secures those services for clients, while hourly wages are calculated and paid separately.

Who Is the Retainer Fee Structure Best For?

The retainer fee structure is ideal for companies hired to represent clients in specific areas on an ongoing basis. This, of course, includes legal services but can also refer to PR agencies and IT support companies.

The Advantages of the Retainer Fee Structure

Retainer agreements provide agencies with predictable and stable revenue streams. This allows them to plan better and allocate resources, boosting their overall financial stability. Plus, provided that the hours are accurately tracked, the agency will always be paid fairly against its effort.

The Disadvantages of the Retainer Fee Structure

If an agency gets too reliant on retainer agreements, it might struggle with revenue diversification. Of course, becoming dependent on a small number of clients is a recipe for disaster as it makes the agency vulnerable to fluctuations in client demand.

Also, some clients might feel like they aren’t fully taking advantage of the agency’s services, leading to constantly having to demonstrate value and justify fees (aka the worst-case scenario for many agencies!).

4. Commission-Based Fee Structure

The commission-based fee structure is an outcome-based pricing model where the agency is paid based on the results its deliverables generate for the client. This fee typically takes the form of a percentage of the revenue generated as a direct result of the agency’s efforts.

So, for instance, what does a 20% agency fee mean for a marketing company? It means that if its campaigns help the client generate $50,000 in revenue, the agency will receive $10,000 for its services. This is why commission-based fee structures are often referred to as “performance-based” models, as they directly tie the agency’s compensation to the performance or results achieved for the client.

Who Is the Commission-Based Fee Structure Best For?

The commission-based fee structure is best suited for affiliate marketing and sales agencies and any other organizations that can directly influence the financial performance of their client’s business.

This fee structure can also benefit startups that want to prove their worth and attract new clients. These new agencies can use Bonsai’s Customer Relationship Management (CRM) capabilities to attract new clients and gradually build credibility in the industry.

The Advantages of the Commission-Based Fee Structure

When it comes to aligning the client’s and the agency’s interests, it doesn’t get better than the commission-based fee structure. On the one hand, clients will only pay for services if they yield results. And even when they invest significant resources, they’ll know exactly what they’re paying for. On the other hand, agencies will be incentivized to work hard as more effort usually means more money.

The Disadvantages of the Commission-Based Fee Structure

Arguably, the most significant disadvantage of the commission-based fee structure is its unpredictability. Sure, the agency will immensely benefit from a successful project. But it also bears the risk of earning much less (or even nothing) if the project fails to meet expectations. Worst of all? External factors beyond the agency’s control are often the culprits behind the project’s failure. This means that no matter the effort the agency puts in, it can still fail.

How to Choose the Right Agency Fee Structure

No two agencies are the same. The right choice for your agency will immensely depend on its specific circumstances. Still, some general tips can help you make the right choice for your agency. And let’s not forget – even if you make a mistake, you can always change your agency fee structure. Pulling off a successful change will be discussed later in this guide.

For now, it’s back to the tips on choosing the right agency fee structure.

1. Understand Your Agency’s Strengths

Your chosen fee structure should leverage your strengths and position your agency for success in your niche. For instance, if your writing agency boasts highly skilled and speedy writers, the fixed fee structure is probably the way to go.

2. Know Your Clients

Understanding what your clients want, how they think, and what their financial capabilities are will help you determine the most profitable pricing model for your agency. Let’s say you primarily work with small businesses. You can’t really expect them to give you free rein on the pricing, can you?

3. Evaluate Project Types

The complexity, duration, and scope of your agency’s projects should help determine the most appropriate pricing structure. If these vary wildly from project to project, bid farewell to input-based fee structures.

4. Assess Financial Goals

Are you of the “high risk, high reward” mindset? If so, you can probably thrive with a performance-based agency fee structure. If, however, you value stability and predictable revenue, consider the retainer fee structure.

5. Consider Scalability

If you stick to a single fee structure, it must be a model that can work for all your clients (whether you have 10 or 10,000 of them).

How to Successfully Change the Agency Fee Structure

Ideally, you’ll quickly find a pricing model that works for all your projects (and clients) and stick to it as you grow your business. But unfortunately, the ideal scenario doesn’t always coincide with the reality. So, what should you do if you realize a fee structure isn’t working out?

Let’s start with what you shouldn’t do, which is sit idly by. The same goes for realizing that the price of your services is no longer sustainable. After all, even a 1% price improvement can result in an 11.1% increase in your profits.

In these situations, the only solution is change.

But how do you successfully change your agency’s fee structure without alienating your existing customer base? Here are some tips.

There’s a Time and Place for Everything

The last thing you should do is blindside your client with unexpected changes to your fee structure (or fees, for that matter). If there’s an existing agreement, you should respect it as long as it’s in effect. Try to force a change, and you’ll likely damage the trust you’ve built with your client and potentially end your relationship.

Of course, this doesn’t mean you can’t start a conversation about a potential change at any point in your collaboration. The best times to do this are:

  • During a new project pitch. Pitches are generally used to gauge the client’s interest and set expectations for the collaboration. This also makes them an opportune time to discuss pricing and fee structures.
  • During a performance review. In most cases, a fee structure change is necessary due to the poor performance of the existing one. So, what better time to bring this change up than during a performance review? Explain to your client (in detail) why a new structure is needed and how this change will affect your future collaboration.
  • During a contract renewal. Once your contract with the client expires, you’re free to negotiate a new one. It goes without saying – this is an ideal opportunity for change. Still, it would be best to give your client a heads-up before the renewal to prevent them from feeling backed into a corner.

Laying the Groundwork Is Vital

As mentioned, the choice of a fee structure can make or break an agency’s profitability. So, it’s critical not to make any decisions regarding this structure too hastily. Here’s an overview of the steps you should take (and questions you should ask) before deciding on a change:

  • Assess the current situation. (Is your agency turning a profit?)
  • Establish clear goals. (What does success look like for your agency? Can you achieve it by changing your agency fee structure?)
  • Survey all team members. (Are most team members on board with the change? Will it make their job easier?)
  • Open dialogue with the C-Suite. (Do most of the leaders [particularly those in finance and sales] find the change justified?)
  • Gather robust analytics. (Is there enough data to back up the need for a fee structure change?)

The last step can also be used to explain the change to your clients. Remember – data speaks louder than words. Even better, you can also use this data to improve your agency in other areas, such as resource management.

Sparing No Details Is the Way to Go

If you plan on changing something that the client has gotten used to (be it the price of service or the fee structure), transparency is key. Providing your clients with all the necessary information will help you reduce the risk of losing them.

Here are some points you can touch on during this explanation:

  • The effects of the change in fee structure on your client-agency relationship (if any)
  • The benefits of the change for the agency’s talent, creativity, and service levels
  • The “evidence” that the change is necessary (e.g., using reports from Bonsai)

But what if the client reacts poorly to the proposed change?

The answer is simple – stick to it.

If you’re certain that the change in question will make your agency more profitable in the long run, losing a few clients is a small price to pay. Don’t forget – new ones will always come as long as you stay true to your values and deliver results.

Protect Your Bottom Line

A well-designed (and chosen) agency fee structure will do wonders for your company. It will ensure every team member feels appreciated, foster strong client relationships, and maximize overall profitability. This single factor can mean the difference between thriving and barely breaking even.

So, pay special attention to this decision when planning your agency’s financial strategy.

Make an effort to understand your agency’s true expenses, establish a clear scope of work, and gauge your client’s price elasticity, and your final decision should be a winner.

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