The billable hour has been the preferred agency billing model since the "Mad Men" days.
In this arrangement, the client and agency agree upon an hourly rate for all projects and campaigns. Then, all future work is billed at that hourly rate.
This model — while simple to understand — produces friction in the client-agency relationship. There are inherent flaws in this approach, but there are ways to change your pricing so it aligns with both your clients' goals and your agency's goals.
The Problem With the Billable Hour
One of the inherent issues with the billable hour pricing model is that it’s focused on the agency, not the client. Billable hours aren’t tied to client success in any way, shape, or form. This billing model is only tied to the agency output. This disconnect between client success and agency output is at the forefront of the issues facing the billable hour model.
The second problem with the billable hour approach is misaligned goals. For any given project, the client is looking for the best possible output (website, landing page, video, ebook, customer case study, or PPC campaign) in the shortest number of billable hours.
Simultaneously, the agency is incentivized to generate as many billable hours for any given project as possible. The more time the project takes, the more money the agency can bill for. This misalignment of goals has, and will continue, to cause problems between agencies and clients until the billing model has evolved.
Finally, the billable hour model also suffers from a lack of transparency. Oftentimes, clients become suspect of the time that it takes to complete a project. This lack of transparency leads to suspicion and can often undermine even the strongest of client-agency relationships.
New Approach To Billing
As I have tried to demonstrate in the above paragraph the billable hour approach is antiquated and needs to evolve. Client are looking to align their success metrics with the agency’s. Additionally clients want transparency in the relationship so that they can see potential problems and head them off before they become destructive.
Agencies that are open to evolving their pricing models to a value-based model and or a project-based model are going to be the agencies that win business in the future. By moving to a project-based pricing model you create a win-win environment. Let’s look at how the client, the agency, and the relationship change in this new value based pricing model:
Client Success: Client like a project-based pricing model because it allows them to know their costs before undertaking a project. This eliminates the issue of soaring project costs that clients never budgeted for.
Agency Success: Agency leadership likes a project-based model because they can manage the fees they charge against the resources they have handling the projects.
Long-Term Relational Success: Finally, the project based pricing model helps maintain long-term relational success between the agency and the client. By both groups mutually agreeing to the value of a project, the issues of overbilling, and inefficient time use fade away.
How To Make It Work
As you think about making the transition from billable hours to a project-based pricing model, there are some important issues to keep in mind.
Tracking Time: Tracking employee time is just as important in this new model as it used to be in the old model. However you’re tracking time for different reasons. Now instead of using hours to inform your billing, you’re using time tracking to analyze things such as how productive and efficient your employees are. This ensures campaigns are being completed on-time and within budget.
Articulating Project Size and Scope: Secondly, as agencies move to a project-based pricing model, clearly articulating the size and scope of the project becomes incredibly important. New agency managers must develop the skills to understand client needs and price projects commensurate with the value that is being delivered. While simultaneously maintaining the margin that is necessary for the agency to successfully grow.
Managing To Scope: Finally, agency management needs to learn how to effectively manage project scope. With creative projects like video, web development, and content creation, clients must be managed to stay within the initial project scope. If the scope begins to expand beyond the initial agreed-upon project, agency personnel must learn to re-engage the client with updated pricing terms.
By developing these skills in project pricing, employee time tracking, and managing scope, agencies can more effectively manage client relationships for the long term while simultaneously growing their agency.
Change Your Pricing, Change Your Value
In every agency there is essentially two businesses. There’s the business of client work, and then there is the business of running the agency. By evolving the pricing model away from billable hours to project based models agencies will see a significant uptick in the value that they can deliver to clients.
Analyze your agency's pricing model to see how you can start making changes to build more transparency, good will, and trust with your client base.
Originally published Sep 12, 2014 3:00:31 AM, updated May 13 2020