Retainer agreements are meant to manage the expectations between clients and their agency partners, especially in the service-based world of marketing and lead generation. It can be difficult to understand the best billing structure for your business situation, but taking the time to choose what’s right for your agency can pay huge dividends.
Retainer agreements have become more common over the past decade, replacing the historically popular hourly billing system. Yet, it’s important to analyze everything because there’s a good possibility that neither hourly nor retainer is right for your agency—and that fixed price or value-based billing may be the way to go. For the purposes of this discussion, though, we’ll focus on the pitfalls of hourly and the prospects of retainers.
Why Hourly Billing Works Against Your Agency
On the surface, hourly billing can seem fair because it should make sense that you’re paid based on how much work you do, right? However, the logic starts to break down when we apply a critical eye. Clients are paying you for a service, and it shouldn’t particularly matter to them how long you’ve worked on it. They just only care about the value of the final result, which is what they’re purchasing. If you can create it in two hours, there shouldn’t be an incentive for you to stretch it out to four hours just to get paid more. Hourly billing penalizes your team for their expertise and efficiency, as a less-talented team could take longer on the project and deliver a lower-quality result for more money.
An Unexpected Consequence: Opposing Goals
In an hourly billing structure, the client and the agency are in competition—not partnership where goal alignment must be the foundation. The client wants the best result possible as quickly as possible, while the agency’s bottom line benefits as they bill more hours in the transaction.
Even if you have a long and trustworthy history with the client, the longer a billable project stretches the more suspicious they tend to get—even if you’re not doing anything nefarious. Although billable hours have been the standard in many industries for decades, it’s been time to move on for a while now.
How to Structure Solid Retainers
The key to effectively structuring a retainer for ongoing services is to emphasize the value provided to the client at every step. Clients can see the “maintenance” and “support” they’re being sold as expenses. It’s difficult for clients to understand how much value you’re actually providing them if the retainer isn’t described optimally. If clients see “maintenance” or “contract” when they look at the name of their plan, they’re going to treat those line items as expenses. When it comes time to cut costs, their agreement with your company will likely be near the top of the list.
An effective retainer should provide a service that clients are excited about and value highly. Instead of calling it “maintenance”, remind the client of the valuable benefits they’re getting by keeping it in place. Renaming the retainer to something that emphasizes its recurring benefits will make it more digestible and understood.
Because client (and economic) needs change over time, it’s important to keep lines of communication open about restructuring the agreement if necessary—and it will become necessary at some point. The three keys to structuring a retainer agreement are:
• Ensure that both sides understand the value the client is receiving;
• Structure the retainer (and its language) so that it’s not on the chopping block when money gets tight;
• Be open to change if necessary.
Retainers as an Option, Not the Holy Grail
The concept of a payment up front in addition to recurring revenue every month can be hard to resist, but it isn’t always the best option. And as agencies we really need to keep this in mind.
Sometimes “effectively structuring a retainer” means choosing a different option entirely. When clients are paying monthly and aren’t always seeing immediate benefit, it can be a sign that a retainer isn’t right for them.
Additionally, it’s frustrating to be contacted by clients looking to find out how many “hours” or “dollars” are left in the month. Business agreements where clients feel they need to check in on you and make sure they’re getting their money’s worth can be beyond frustrating for both parties—and inherently it means that trust has diminished if this is how the client contact is managing the relationship from their end.
In many retainer agreements, clients are paying for your expertise and, in some cases, mentorship or guidance, in addition to deliverables. Because it can be difficult to illustrate to a client exactly what they’re paying for, situations like these aren’t always optimal for retainer agreements.
If you’re interested in learning more about how to move away from hourly billing, how to decide if retainer agreements are right for your creative agency, or more about the many other options that exist, don’t hesitate to drop me a line. With years of experience as an agency owner turned consultant, part of my purpose is in helping guide fellow leaders. I’m confident that we can work together and find out what billing structures are best for your team and your clients.