About 7 years ago, we wrote a post to help people better understand what to expect when contacting a Marketing agency and inquiring about costs and fees [you can read it here]. The reality then, and now is the same. Agencies most often charge for the time it takes them to prepare and execute the projects they’re working on with you. In fact, when we evaluate RFP’s (Request for Proposals) from buyers seeking marketing agency services, it’s inevitably a required element to include. What is your hourly rate and the hourly rates of your team members? How do the hours break down for each task? People it seems, are more obsessed with time than they are with value. 

The blunt reality is that this may be a broken way of evaluating an agency at all. Most agencies tend to cover a similar range of fees for their services, somewhere between $120 to $200 per ‘hour’ or billable unit, while freelancers will charge between $50 per hour to over $100.

Some are faster at what they do than others. Some produce better quality for lower rates but take longer. Others have project controls and processes built into projects that inflate the perception of the fees, even though they make the work more effective. 

In most cases, you’re comparing oranges to grapefruits when it comes to ‘time for dollars’. 

Why is the system broken?

Let’s step back for a minute and contemplate the bigger picture. First, a quick brief on how the ‘business’ of professional service agencies work. 

1. People

Agencies have talented people, and those talented people need to earn a living. So they get paid like talented people, often earning a salary of anywhere between $25 to $80 per hour depending on their level of seniority and experience. $25/hr for the well-educated junior folks, to over $80/hr for the seasoned pro’s (those who have been at it for decades), or those who have a particular, high demand skillset or natural gift. The same is true of any company when it comes to compensation; experience and talent pays. 

For illustrative purposes, let’s say an average agency employee earns $32/hour or about $65,000 per year on a salary. This will be for an experienced individual in the early to mid-stage of their career, likely 5 to 7 years of experience. So is the cost of this employee $32/hour? No, not really. To better understand the actual cost per hour, there are 2 more factors, efficiency and overhead. 

2. Efficiency

If you run a business or are a manager in any business, you’ll be pretty familiar with efficiency and productivity measurement. How much output do you get out of the average full-time employee? The numbers vary, but a recent study of employee productivity has the number somewhere between 45% and 60%. And there are plenty of reasons why this number might vary from company to company; internal meetings, training, holiday time, distractions, travel, the list goes on. For the purpose of this exercise, let’s say that the average employee (in an agency) is productive on client assignments 55% of the time. 

There are about 2080 hours in a standard working year (52 weeks X 40 hours).This means the average employee will be productive 1144 hours based on the 55% example. So if we take our cost of $65K per year (or $32/hour), it ends up being an actual cost of $57/productive hour ($65,000 / 1,144hrs). 

3. Overhead 

Aside from people, there is overhead. Administrative costs, rent, technology, licensing, education and of course their own sales and marketing overhead. These are fixed costs for the most part, but do tend to balloon for larger agencies who have swanky central offices, top tier talent and heavy client support teams.  

For illustrative purposes, let’s say a 20 person agency has an overhead of $40,000 per month (in addition to salaries), their cost per employee, per month is about $2000. Per year, it’s $24,000 (per employee). So based on our productivity analysis above, the cost per productive hour, per employee is $22. It turns out that the actual productive cost per hour of (this particular) employee is $79/hour. 

There are different ways to interpret this info, but it leads us to a place of better understand the real costs of agency effort. 

But let’s shift the conversation. Who really cares? 

When you hire an agency, if your sole purpose is to procure ‘hours’, then the model above will give you a path the discover how to find the cheapest cost. Find an agency with low overhead (no office, minimal central management, no education investments, cheap tech) and the cheapest cost per hour employees (inexperienced or offshore talent) and you’ll find a bountiful amount of hours for your budget. Huzzah! 

Is that what you were looking for? 

I think not. In fact, I sure hope not. What you were looking for was a solution to your problem or opportunity. You did have a problem right? Let’s dig into that a bit further. 

You’re looking to find an agency for a number of possible reasons. You want to correct flattening business growth, attract a bigger audience, build a better lead generation pipeline, reimagine your brand, inspire your sales team to close more deals, or simply delight your customers. And all of these reasons are meaningful and have sincere value to your business. That’s the heart of what a good agency exists to do. Solve your problem, help you capitalize on your opportunities and create value in your business. So why are we obsessed with the almighty hour? 

I once witnessed a business partner of mine solve a difficult problem in less than an hour with an ingenious idea. The idea itself was the result of over 20 years of experience and a natural tendency to be innovative and think outside of the constraints imposed upon most. His solution would result in the client seeing a lift in revenue of 20% in the first year alone (over $1 million of actual revenue). And there are other examples of putting teams of people together for hours or days at a time to solve tricky problems or land on true inspiration. Bottom line, time alone doesn’t equal ingenuity and results.  

I propose this. Let’s all have a value discussion first. Let’s really understand what success looks like, and what the value is to the business if success is realized. Let’s collaborate and partner together to make sure that your investment is both responsible and returned in multiples. 

A final note 

Consider talking to your agency partner (or prospective partner) about performance driven compensation. This is a risk/reward model that rewards agencies for meeting / exceeding goals, while asking them to take a risk and put a little skin in the game. Forget about the hours it takes to accomplish a task and focus on the outcomes. It’s amazing what can happen when people are free to solve without inhibition or fear of time constraints or obsessive scrutiny. 

Grow Fearlessly!