I often talk with other owners of digital agencies about prices. Pricing your services is vital to your business success: if you don’t charge enough, you’ll never grow and be profitable.
Agencies often lower their prices in order to win a new client, they win the pitch, and in the end, they lose money. Let’s all try to be profitable, OK?
When quoting clients, there are a couple of strategies (like value-based pricing or per-success which we don’t do), but in this post, we’ll focus on charging per hour. When billing per hour, the agency needs to accurately determine the number of hours needed to service the client and the price per hour for every person involved in a project. For example, when we send an offer for social media marketing, we determine the number of hours required for several roles:
- Account Manager
- Community Management Creative / Copywriter
- Community Management Support
- Digital Advertising Manager
This can also apply to any other service we offer.
How much should you charge each service?
However, determining the price for each service can be a difficult task. So, let’s try to define it.
- The direct cost of your employee’s salary with all taxes
- Overhead (office, equipment…)
- Internal overhead (this one is rarely considered, but your employees are not 100% billable, right?)
- Profit (can’t work without the profit, right?)
These numbers can vary from agency to agency, but let’s use a rule of thumb: every employee needs to bring 3x their salary each month/year. That way, we can cover his/her salary, all overheads and have a profit. For example, if your designer costs you $3,000 every month, he/she needs to earn $9,000 on average every month. We must not divide that number with 160hrs, because our employees never work 160hrs on average – they have paid holidays, they sometimes get sick, they sometimes work on internal projects, they need to spend some time on education…
I read somewhere that industry benchmark is 60% of all available hours, which means we have to work with around 100 hours. Dividing $9.000 with 100 brings us the price of $90/hr we need to charge our clients. Then we can calculate all prices for all roles in our agency and determine digital marketing agency cost for every service and every client.
There are a couple of things to consider:
- People in marketing agencies sometimes work much more than 160 hours/month. I don’t recommend that and don’t consider it as an option in Kontra. They’re paid to work 160-176hrs/month, and we must not kill them with too much (unpaid) work. An agency that requires its employees to work 200+ hrs every month is not a valid business.
- Maybe you don’t want to have a profit. This can be a logical standpoint if you just started, but not in the long term. If this is the case, maybe you can work with 2,5x.
- Maybe you would like to work with 5x. If you can, and you bring value to your clients – good for you.
Track your working hours
It is really important for employees to track their working hours – not as a way to control them, but as a way to control your clients. When you know how many hours you sold to your clients, you can easily calculate which clients are not profitable. Clients that are not profitable won’t push your agency forward, except in really rare cases. Otherwise, fire them or negotiate higher prices.
At Kontra, we use Productive (referral link) to measure all hours we spend managing our clients and to measure the profitability of every client and every project. You can use anything you like if you charge your clients properly and if you track time. That way, your digital agency can be profitable, your employees have a work-life balance, and you can be a happy owner.
Let’s make all agencies profitable.