Why do marketing agencies charge so much?

By 1st December 2016Advice/Tips, Marketing, Opinion

Why do marketing agencies charge so much?

Hello. Firstly, I’m going to talk about what cost-based pricing is made of and then move onto making sure a client gets best value. So, if you want to know what’s in it for you, I suggest you skip part one and jump straight to part two…. Now!

 

Still here? In which case, welcome to:

What are my options?

Having run and co-owned commercial and social marketing agencies over the past 12 years, I’ve been asked many times by prospective clients and friends how much they should expect for something; how much does a website cost? how much for a video? a logo? a campaign?

In addition to the classic answer “it depends”, the truth is that you can chose to pay whatever you like!

You could choose to pay nothing. With the right know-how, you could, for example, do things in-house, or you could get a video made by a college group or a logo and website made by your mum’s mate’s daughter Sue who likes doing that kind of thing, however it’s likely you are going to need to tone down your expectations about quality, timeframe and how many tweaks and changes you’ll be able to make along the way. Student groups and your mum’s mate’s daughter have their place in the market and are the lifeblood of the sector. They add value by offering fresh ideas and skills, plus the fact that they are willing to work proactively is a good indicator of their character and potential to be great if they aren’t already. Therein lies the risk; potential doesn’t mean the finished project. Often, the unknown and unproven is too risky and therefore an established, professional solution is more appropriate.

So, there is the option of going to a big agency. Here you get prestige, assured quality, posh lunches and international contacts… if you need them and can afford them of course! Pricing structures vary, though you are looking at upwards of £100 per hour, plus add-ons, which itself increases risk. For those running or working in a marketing or communications role within a growing business, charity or public service, this often isn’t best suited to your requirements. Plus, it might also be said, with the greatest respect to those of us on a limited budget, that we wouldn’t be worth their while.

So, leaving freelancers to the side for the moment (a topic I’ll explore in a future feature) in this article I’m going to focus on work done by marketing agencies of all kinds and specialities employing between 2 and 30 people.

 

I worked out that you pay your designer £20 per hour, so how come you charge me three times that?!

Whilst there isn’t a uniform way of charging clients, here are few things to consider:

  • Small and medium-sized agencies using a cost-based pricing model typically charge between £40 and £90 per hour, or £300 to £700 per day.
  • Some agencies offer discounted rates for retainers, i.e. based on an expectation of hours per week or month that are pretty much a guaranteed income and therefore attractive to some.
  • Agencies might have a hybrid approach to pricing, i.e. a basic hourly charge, with a further bonus if pre-agreed results are achieved. This is often a mutually attractive model which can be achieved when a strong relationship is formed and the terms don’t get too complicated.

When evaluating the true value of work, you receive, arguably the cost the supplier incurred to produce this is irrelevant…. still, you might be curious.
By way of example: if someone has a skill, say graphic design or web development that pays them around £35,000 per year the temptation is to do some rough maths that says they should cost around £150 per day or £20 per hour, right?

Of course, this doesn’t tell the full story with other factors including:

  • Fee-earning potential. Agencies can generally aim expect a maximum of 75% return of fee-earning employees. This is realistic when you consider the cost of payment whilst on annual leave, training, team meetings, absence, other commitments and non-charged time spent getting to know a client.
  • Direct overheads. This includes things such as: the cost of any training plus the hardware and software they need to do their job. Often a project comes with an account manager or an account management function which isn’t directly chargeable. I sincerely urge anyone in the sector never to underestimate the value of good account management; I might even argue that getting client good results and keeping them happy is, to a larger degree, done to the capability of the account management than it is creative and technical roles!
  • Company overheads. This is things such as offices, hardware, software, connectivity, furniture, finance and administration, utilities, and sundries. Larger agencies are sometimes criticised for their lavish spend on offices; whilst this can yield a benefit in creative output and retaining talent it will ultimately be paid for by clients.

When considering company overheads, it should be conceded that part of the overhead is the margin that the company wants or needs to make! Making a contribution from services provided is essential for all organisations that need to make a surplus, which is pretty much all of them. Another finger pointed at the marketing agency is that client fees go to pay for the director’s flashy car. This is sometimes the case and whilst I’m personally against the idea of buying or leasing a vehicle as an expression of wealth and vulgarity I do feel that you shouldn’t apologise for making a profit from doing great work. Given the pressures and effort required to keep a small or medium-sized business going it is often a driver that agency owners make what is considered to be a good income, otherwise many might go and work for someone else?!

  • Other stuff. By this I mean costs that aren’t anything to do with you, but that matter nonetheless. These might be harder to attribute direct value for the client, e.g. charitable donations, pro bono work, bad debts, investment in R&D, and maintaining a contingency of working capital (generally advised to be between 3 and 6 months operating costs).

Another cost affecting some, though not all agencies, is the cost of overdelivering on some projects, meaning they run at a loss. It’s great to exceed expectations, but there is a limit to how often you can do this in terms of time spent if you want to stay in business!

So, when all things are considered and we assume for a moment that an agency has enough paid work from its clients the requirement to charge out at skills at 2.5 to 4 times the basic salary cost is necessary to produce quality and sustainable work.

 

Now you might be thinking, so what?! Well, if you chose to read section one, thank you for your interest; here is what all of this means to you, the client!

Here is what all the stuff described in part one should amount to in terms of the benefit and added value for clients. Below is a list of benefits and tips for questions you could ask an agency to get more bang for your buck:

Creative ideas to specific challenges, how to save or make you more money, other things they’ve seen that might help you, even if outside of their scope, and synergies between related projects and clients. You could ask: “Could we get some of my team together with yours to come up and throw around a few ideas about how else you might be able to help us achieve our goals?”

As well having their technical skills an agency should understand what drives you and your business as a strategic supplier. This will take time, but makes implementation smoother when it comes to making this happen.You could ask: “What would you do if you were in my situation?”

Whilst no-one can know everything, it is reasonable to expect that collectively an agency has awareness of trends in marketing and emerging technology. For ongoing projects and campaign, they ought also become semi-experts, or at least express interest in your sector to increase the impact of empathy. You could ask: “Are you working on or have you seen anything new that you think we should be considering?”

Some say that your network is your net worth. Working in multiple sectors means that your agency will have connections that you don’t. They should be willing to share if it helps you and solidifies relationships. You could ask: “Do you know anyone who could help us achieve this?”, or “Do you ever hold events where your clients get to meet each other?”

You should look forward to meeting or working with your agency. They shouldn’t be expected to jump around the room waving their arms around, particularly if that doesn’t come naturally, however they should inspire you. The individuals are working in a creative and diverse sector, so whilst it has its challenging moments, there should be an abundance of fun and energy that rubs off on clients. You could ask: “What do you like about working with us?”

In order to protect their value some agencies choose to keep their processes to themselves as though what they do is magical or a dark art. The best agencies are willing to show their workings out and work with clients to help them learn how things are done to foster a more symbiotic relationship. You could ask: “Could we spend some time understanding how you work so that we better understand what we can do at our side?”

This means going beyond expectation in terms of results, or presenting ideas even when they weren’t requested. It can also mean working the (occasional!) weekend and evenings in a positive manner or simple things like showing up at your events to support you, texting you good luck when you need it or simply just retweeting you when you have something to share! You could ask: “Could you please help me with this?”

Top of many people’s list is ultimately, what you are doing working? If not, why not? Where is the problem? A good agency will present a solution to a problem before you had to ask. You could ask: “What are our contingency plans?”

Whilst you will always have a contract or agreement to pay for work delivered, a capable and ethical agency will not trap you into working with them if it isn’t, well, working! You could ask: “What would happen if our arrangement isn’t working out?”

 

Mutual trust and good results should be at the heart of any valuable working arrangement. If the cost of agency doesn’t sit well with a client; the value needs to be established quickly or else the relationship will fail. The fact is, in a cost-based model you do pay a premium on rate per hour/day, so make sure you make the most of this by pushing to get what you are paying for!

I realise that this is a subjective and inevitably biased article based on personal experience, so please let me know if you agree or disagree with any points! Thanks.

John Gilbert
Managing Director 

Issues and articles relating to this topic that will follow are:

  1. In-house vs. freelance vs. agency.
  2. How to get the most from your marketing agency brief.
  3. How to keep getting the best from your agency.
  4. Why people keep moving around agencies?

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