If the questions you get asked by your team during an agency selection process were a pie chart, “How much will we pay for this agency’s support?” is probably the largest slice.
I wish I could write a simple formula for you or offer a simple Excel sheet for you to download and fill in to come up with the right answer. As much as I hate to write these two words, but the amount you should be paying is, well, “it depends.”
Bear with me while I set the context for “how” you should be paying and I promise I will answer the question “how much” should I be paying.
- How should we FEEL about the price of agency work?
I’ve seen no fewer than three-hundred different pricing and payment models for agency services. To be honest, there are only a few combinations that truly make any sense for you and your agency. When I say “make any sense,” I specifically mean that they may result in the following:
Value: The overarching feeling that – at the highest level – you are getting good results for the money you’re spending. It’s a binary feeling. Either you feel like you’re getting good value or you don’t. If you find yourself saying, “sort of” then you’re not getting good value.
Performance: You are achieving or exceeding the established goals and objectives. This aspect is “objective” in the sense that no one can argue with the numbers agreed upon between you and your agency. Those are unarguable benchmarks.
Trust: The confidence you have in your agency’s ability to provide honest assistance when you need help. And, similarly, your agency feels like you’re making requests that can be realistically achieved. When there is mutual trust, your agency can comfortably say “no” without fearing any negative consequences from your boss’ boss.
Transparency: Can you easily see the dollars you spend with your agency from contract approval to allocation to results? I can’t stress enough how much transparency lays the groundwork for all these other dimensions.When everyone is aware of how the allocated funds are being utilized and the status of expenditures, it facilitates better understanding of where the budget is being allocated and potential deviations.
Shared Accountability: Both teams feel a sense of shared responsibility in managing the budget in a manner that is responsible to the organization.
By considering these dimensions, you can establish a comprehensive perspective on the price of agency work, ensuring that it aligns with your expectations and fosters a productive partnership. - How do agencies make money?
I’m probably going to catch heat from some of my friends in the industry for laying it out like this. But, before you review a single pricing proposal for agency services, you should know how agencies make money.Agencies operate as specialized commercial firms within a capitalist framework that earn revenue in just a handful of ways.
Labor: The vast majority of professional service agencies create revenue from the surplus value generated by their staff’s labor. That’s a fancy way of saying that agencies pay their employees a certain amount, charge clients a higher amount, and keep the difference as profit.
For instance, if your agency charges $200 per hour for your Account Director, Helen, they likely pay her an annual base salary of around $150,000 or about$72 per hour ($90 with benefits). In this example, the agency keeps the $110 difference. A portion of this profit goes towards operational expenses like office space, client meetings, and supporting roles such as accounting and human resources.
The remaining value constitutes the company’s profit, with most reputable agencies aiming for a minimum profit margin of 40%. Therefore, when the agency charges $200 per hour for Helen’s time, they are likely keeping around $80 per hour in profit.
In agency business there are also people working behind the scenes to oversee the projects success. This might include senior level staff who bill at very high rates, but are the people who keep the wheels turning on the business. Even if you don’t interact with them face-to-face, they can still be major players in the projects success.
Now that that cat’s out of the bag, here are a few other ways agencies make money.
Markups: If an agency procures certain resources to support your project (i.e., advertising inventory, stock images, or direct mail printing), they may apply markups when reselling these items to you. Of course, there’s value in this for you, since the agency has hopefully invested their time in finding reliable suppliers who deliver high-quality products and services for your program. Additionally, the agency may provide financial assistance by covering the upfront costs of these items and only requiring reimbursement later.
You shouldn’t hesitate to inquire about the specific markup rates for these services and conduct research to ensure they align with industry standards. While most agencies do this, it’s still a good idea to get those markup rates in writing.
Other Tools: Some modern agencies have developed their own software tools to enhance campaign outcomes. These tools could include ad placement software, analytics dashboards, or data co-ops. Sometimes, the costs associated with these tools are already incorporated into the agency’s overall fees. However, if these tools are part of the arrangement, it’s worth checking and getting the terms and costs for those tools explicitly outlined in the contract, even if they are not immediately billed separately.
I’ve seen a number of contracts where an agency introduced charges for these tools later. Believe me, it’s not a pretty scene when the client finds out something they were shown in the sales process was never included in the initially agreed-upon pricing.
By understanding these various revenue streams, you can approach pricing discussions with agencies more effectively and ensure transparency and clarity throughout the contract negotiations. - The Most Reliable & Productive Payment Arrangements
No matter how much you pay an agency, the WAY you pay is just as important. The best arrangement should be determined by the scope of work for which you need help, the amount of money in your budget, and your organization’s policies.
Let’s dive into several common pricing structures, each with its own advantages and considerations for both clients and agencies:
- Retainer: With a retainer arrangement, you and your agency outline the tasks you want done in a given time period (say, one year). The agency proposes a fixed fee for the entire year, “great, based on all the staff and tools we need to achieve that, we’re going to charge you $120,000 for the whole year (for example). This way, we will bill a consistent rate of $30,000 per month for a year.”
In most cases, reputable agencies often accommodate slight variations in workload without additional charges. Similarly, if you enjoy great communication with your agency, it’s not uncommon for them to say “that request you just made will put us way over the retainer this month. Can we push it to next month or reorganize our priorities so we don’t get destroyed?” It’s up to you to say yes or no, but if you push them over the retainer amount of work all the time, they will eventually try to renegotiate the terms of the retainer.
Pros: The retainer amount remains predictable and stable for you as the client. The agency can allocate the appropriate resources and staff to serve your account consistently. Agencies won’t nickel and dime you. As long as the retainer amount is determined by an honest and accurate understanding about the amount of work required and committed, everyone will be happy.
Cons: If the agreed-upon retainer amount significantly exceeds the actual amount of work required, you’re going to turn sour on your agency pretty quickly if they are unwilling to adjust the retainer amount down. An agency makes more money when they provide less service for the amount you’ve agreed to. - Time & Materials: A time and materials contract involves the agency charging you based on the actual time spent and resources utilized to complete specific deliverables. Unlike a retainer, transparency is paramount and costs never get swept under the rug. Your agency will charge you down to the quarter-hour for the services you ask for.
You’ll either pay a specific rate per role on the team (i.e. project manager, strategist, bottle washer) or you’ll pay a blended rate for all roles. Usually, you and your agency can agree to a “not to exceed” amount that will keep the costs in line with the deliverables (and prevent them from sending you an outrageously unexpected bill).
For a pure time and materials arrangement to work well, you’ll need to rely on constant and clear communication with your agency, which, will have many other benefits. You’ll avoid unnecessary expenses, complete the objectives in an efficient and timely manner, and ultimately have a positive partnership with your agency.
Pros: The scope of work is well-defined, ensuring you receive precisely what you want in the most efficient manner. And, with a high degree of flexibility your agency should feel like they’re able to do their best work.
Cons: Poorly defined scopes can result in increased costs, as the agency charges for the time spent in meetings and discussions caused by ambiguous requirements. Imagine discussing the color of the button on the homepage… for hours. At that point, they’re just running the meter and charging you for every second they have to listen to your boss arguing with themselves that the button should be blue.
- Rate Card: This pricing approach is like ordering from a menu at a fancy restaurant. While the agency may charge a relatively low fixed fee for ongoing management, individual services are priced separately on the rate card. For example, a new campaign, landing page, or direct mail piece would each have a set price.
Pros: Costs are predictable, and you have a clear understanding of the pricing for specific services. With the scope outlined early and clearly defined, you can choose what is most important to you based on the price.
Cons: If you require additional assistance beyond the predefined services, the agency may insist on charging for an entirely new campaign rather than providing a few more hours of support. This pricing structure may not be suitable if your campaign volumes vary significantly. - Fixed Price: This model is similar to a rate card, but is often applied to customized, bespoke projects or campaigns. After agreeing on the project’s broad outline, timeline, and required effort, the agency offers a comprehensive price for the entire project.
Pros: Costs are fixed, providing clarity and certainty from the outset. Timelines are agreed upon and there is very little up to interpretation (as long as the scope is clearly understood).
Cons: There is more risk for the agency, as they must eat any extra time that’s required to deliver the project if the project takes longer, conditions go sideways, or requirements are not fully understood. Clear project understanding and effective communication are crucial to minimize risks.
Now that we’ve established a whole lot of context, here’s the part you’ve been waiting for.
- How much work are you asking them to do? You need to have a good idea of what you’re trying to accomplish and how many people (in particular roles) it will take to deliver all of this work. If you or someone on your team doesn’t have this experience, it’s cool, but STOP. You shouldn’t make decisions like this. Find someone else in your organization or hire a consultant to help you make these decisions.
- What kind of work are you asking them to do? A scope of work should guide conversations between your team and your agency. If you can both agree on a specific set of outputs (i.e. X campaigns, Y meetings, etc.) and that the work will require three or 10 people to do the work, then you’re 90% done.
- What’s it worth? You’re hiring an agency to create some kind of business level results. At the end of the day, the agency can’t charge more than the value they create. So, if you’re asking them to help you raise $1 million, they can’t possibly charge you $1.5 million.
The only exception to this would be a situation where you’re getting into a line of business your organization has never been in. In this case, you need to make some assumptions about the amount of value the program will create. An agency can help you develop a testing framework for new lines of business. After x months or years, results can be evaluated against industry benchmarks to see if the new business is worth continuing for the organization. - What are other organization’s paying for similar work? Consider asking friends and colleagues what they’re paying for similar services and scopes of work.
If you’re in the business of nonprofit fundraising, you’re in luck because it’s possible to review many contracts between agencies and other fundraising organizations. The state of North Carolina makes it simple to search for contracts related to charitable organizations and their vendors, here.
Like I said at the beginning of this article, the amount you will pay an agency “depends.” Hopefully, now armed with this information, you’re in a good position to get the best price and value while building a strong relationship with your new agency.
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