The right setting of hourly rates is one of the most important business topics in agencies. Hourly rates stimulate motivation, and at the same time, it is important for clients to pay a fair work for the added value of the agency. High hourly rates lead to client dissatisfaction; low rates lead to creative agency dissatisfaction. Even seemingly high hourly rates can actually be low; it all depends on the effectiveness of the agency.
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What does an hourly rate include?
Many start-up agencies and freelancers confuse an hourly rate with the price of work. In fact, the hourly rate includes:
- price of work (actual costs)
- overhead (non-work costs, training, technology, premises, etc.)
- downtimes and inefficiency (an agency pays people on a full-time basis, but not every hour is invoiced to the clients; this is very visible in Allfred)
Low hourly rates may help win a tender initially (especially with an inexperienced client), but in the long term, it is important to keep prices balanced.
While the hourly rate is an economic thing, it is also an alchemy; some clients may have a lower hourly rate (non-profit clients, less complicated clients, or historical clients), and others may have a higher hourly rate.
No matter how high your hourly rates are, it’s never a done deal. As the economy, prices, and inflation grow, hourly rates need to be increased regularly. In this article, we will look at how to do that.
Why is it important to raise hourly rates regularly?
There are 2 main reasons for raising the hourly rates of creative agencies:
Every company must grow; the status quo in the economy means decline. Creative agencies can grow in quality, volume of work, and scope of work. If an agency grows, it recruits new and more experienced people. Thus, the price should grow as well.
Inflation is the most important reason for raising prices. When the value of money falls, hourly rates fall as well. In that case, a hygienic increase of at least inflation is important. So it is not a question of actually raising prices.
How to successfully raise hourly rates?
While most creatives prefer idea generation and brainstorming, raising hourly rates is a business job we all need to know how to do.
- A good relationship – with whom
- A good reason – why
- The right timing – when
- The right amount – how much
#1 A good relationship and price increases
Every successful negotiation begins with a relationship. Both businessmen and negotiators know this. Therefore, your hourly rate increase must start long before the actual negotiation. First, you need to have a good relationship. And a relationship is based on trust. Trust is built through humility, active listening, and sincere interest. At the same time, it needs to be built at multiple levels in the organization. It is not enough to have a good relationship with the CMO; the satisfaction of his/her subordinates is important. Setting hourly rates is not just a procurement issue
The first thing that comes to your mind is the purchasing department. They are the ones who are already in charge of the price during the tender. It is good to meet with the purchasing managers on a regular basis to find out what their needs are, but at the same time, it is almost unrealistic since procurement tries to be as least influenced as possible. In fact, the purchasing department obtains satisfaction information from other departments.
Who should deal with the setting of hourly rates?
This is where creatives and account managers often rely on their bosses. They’re the only ones in the best position to build relationships, as they meet regularly at presentations, shoots, or reports. These are all opportunities to build relationships while talking about pricing.
#2 A good reason for raising hourly rates
You need a good reason to raise hourly rates besides the relationship. You need to have the purchasing manager’s “Why do you want to raise prices?” question answered before he/she asks it.
A good argument to raise is to compare yourself with the competition. In many countries, there are tables comparing the hourly rates of agencies. If your agency is below the benchmark, do we have a reason to increase hourly rates? The real reasons to increase hourly rates are more like:
- increasing the price of people’s work,
- leaving and motivating quality people that the client cares about and doesn’t want them to leave,
- invisible value that costs us money and is in overhead,
- added value (we make presentations and other valuable things for you free of charge, a workshop.
Good data as a reason
It is important to have the right arguments to raise prices. The best is the combination of emotions and data. You can get real data on team efficiency and project size from the Allfred tool, where you can see the profitability of each client. This puts you in a much stronger position during the discussion, and you can use your own efficiency benchmarks.
#3 The right timing of price increases
Nothing is as important as the right timing. Thanks to good relationships, you can best determine when it is time to open the discussion about hourly rates. It can be at the time of a new challenge with the client, at the time of success, or when the annual budget is regularly set. If, on the other hand, you miss this time, the change in the hourly rate may be unrealistic for the next year.
In the case of success
If you have had a great campaign that has delivered results, it is a great time to start a discussion about hourly rates. The client has just seen your added value and tends to be open to discussing price.
When setting annual budgets
Every marketing department has its own annual budget that you need to know about. This is prepared a few months before the start of the fiscal year (some companies have fiscal years separate from calendar years). When preparing the budget, it is a perfect time to start a conversation about the scope of work and hourly rates.
Regular price setting
This approach is used by energy companies and insurance companies. Once a year, they send out a new price list for the current year. The advantage is that the price changes regularly (and can therefore be changed inconspicuously), while both parties know that the price is set anew each year.
#4 How much to raise prices?
Good pricing is as important as the quality of the product. Smaller price increases on a regular basis are less painful for each client. But sometimes prices need to be raised significantly, and you can turn that to your advantage as well.
Raising prices under the inflation adjustment clause
The inflation adjustment clause is a tool used, for example, by development companies. The timeframe for the construction of the apartment is several years, and since the purchase, the cost may change. Therefore, developers have a clause in their contracts to automatically increase prices according to inflation growth. Creative agencies may have a similar clause. For example, it aims to automatically adjust prices based on inflation once a year.
This is also a good argument for negotiating with procurement. The inflation adjustment clause does not actually increase hourly rates; it just preserves their value. Inflation adjustment clauses have the advantage that their terms are based on market developments, so it is a system. From the client’s point of view, the prices are not raised by the agency but by the market, which is less painful.
Raising the scope of work: how to raise rates and keep them the same?
One of the other possibilities is to increase the scope of work. If you can source more work for one client, it is worth leaving the hourly rate unincreased. After all, the hourly rate also covers the cost of sourcing new work. If you source more work with the same client, there will be more profit from the hourly rate.
Summary: how to raise hourly rates of creative agencies
Raising prices is not a one-time thing. It is a habit and a skill that every agency must develop on its own. 4 main principles are important: a good relationship, a good reason, the right timing, and the right amount. it is important to have everything based on accurate data. You can get data on your agency’s financial efficiency from Allfred.