How do you calculate hourly rates, remain profitable, and maintain happy clients?

How much money should an agency charge for its services? As a CEO, one of your most important tasks is to ensure your agency is profitable, meaning your revenue doesn’t cover just your expenses but also brings enough profit, often calculated as profit margin.

On one side of the equation, you have your clients who want the best possible service for the lowest price possible.
On the other side, you have your employees who want to be paid fairly and as much as possible 😁.
You are in the middle of trying to satisfy both sides but also to have a profitable agency because profit is a reward for your risk. Juggling between those two sides is not an easy task, but let me show you how to set hourly rates for your services.

Hourly rate vs. annual salary goal

The hourly rate you charge to your clients should directly be connected with the salaries of your employees who do the work for the client. If they are paid more than the industry average, you should charge your clients accordingly.

There are many ways you can calculate how much to charge your clients and that applies to all service-based companies like agencies, but also accounting firms, lawyers… One of them is value-based pricing, often praised by people like Chris Do.

In this post, we won’t get much into that; we will focus on hourly pricing.

How much your employee needs to earn: Times Three Model

We use the Times Three Model at Kontra to determine how much to charge for different marketing services we offer to our clients. It starts with the fact your employee needs to earn his/her salary X3. Why X3?

• X1 is his/her salary. No further explanation is needed.
• X2 is the overhead of your agency. Your billable employee needs to make enough money to cover the expenses of all overhead costs your agency has, like an office, equipment, and licenses, as well as all non-billable working hours and employees like the sales department and office managers… This is very tricky to calculate, but let me assure you, there’s no agency in the world that is 100% billable and doesn’t have any overhead costs 😁.
• X3 is the profit for your company.

Utilization rate, i.e. billable hours

All employees have their annual salary – you know that. But you also know that employees don’t have 160 hours every month or 1.920 hours every year as billable. They have:

• vacations
• daily breaks
• sick leave
• training and education
• …

A 75% utilization rate is considered really good, but in most cases, it is 60% overall. That means, out of all working hours in an agency, only 60% are often billable. But let’s stick with 75%, which would bring us to 1.440 billable working hours.

An example

For our example, let’s assume you have an employee who makes 36.000€ per year brutto. That employee needs to bring X3, which would be 108.000€ and if he works 1.440 hours, that would mean you need to charge your client 75€/hr.

If you charge more – good for you, it will add to your profit.
If you charge less – you will have less profit.
If you charge a lot less – you will lose money.

To calculate everything faster, divide your employee’s monthly salary by 40. 

Another example: your employee makes 4.000€/month – you need to charge 100€/hr to your clients.

Some exceptions

Sometimes you don’t need to charge X3. For example, you don’t invest a lot in sales and marketing because you have stable clients and/or you don’t want to grow. You don’t have huge overhead like offices, sales team…
Your total utilization rate is more than 75%.

In that case, your total overhead cost is much lower, so you probably don’t need to charge X3 but X2,5 to remain profitable. I really wouldn’t go below X2,5, which we sometimes charge only if we:

• really want to work with some client
• have a low utilization rate at the moment and want to bring as much work as possible

Market rates, your value, demand…

In an ideal world (for an agency owner), you would be able to charge as much as possible. But we don’t live in an ideal world. There are other marketing agencies who compete with you with their prices and quality. If you hire really expensive employees who will bring more value (more seniors), you need to raise your prices accordingly. Hourly rates you charge your clients will be one of the deciding factors whether your agency is going to be profitable or not.

Why don’t agency employees have bigger salaries?

I would like to raise salaries in Kontra by 50% as I would like our employees to be more than happy with their salaries. But if I raise their salaries by 50% percent, I need to charge all our clients 50% more. I am sure not many of them would agree with that (if anyone). By looking at the marketing value of what we do, demand, and competition, we do this fine dance with our employees’ wishes, clients’ budgets, and our desired profit margin.

We raise all our salaries every year, and we try to raise our prices for clients. It is not an easy task, and it requires a lot of negotiation from both sides. With the ongoing inflation in the last two years, this was not an easy task.

I spoke with my employees and even made a video for all future employees on how we determine their salaries and how much we charge our clients. If we can’t sell their working hours for, let’s say, 75€/hr, then we can’t give them a 3.000€/month salary. So, their salary is directly correlated with their value in the market.