In this blog post, we will explore the significance of rate cards and their role in establishing clear and structured billing arrangements. While the popularity of time and materials billing may be decreasing, rate cards continue to hold relevance in different situations. We’ll delve into the components and types of rate cards, offering valuable insights on creating an effective pricing framework that promotes fairness and cultivates robust client-agency relationships.
What is an Advertising Agency Rate Card?
You’d be surprised how many agencies in the digital services space are still billing on Time & Materials. In other words, they’re billing hourly for their services. There is nothing wrong with that, in fact, it’s the most appropriate billing model for a number of services out there.
For those in this boat, a rate card helps their agency communicate to clients how much they’re going to pay for their services, and who would be doing the work in the engagements for them. It can also be useful for agencies that have productized services or standard flat fees for certain deliverables, or even teams who want to use a rate-based system for helping their account managers and salespeople quickly price work for clients. Depending on the context a rate card is being used in, it can contain lots of useful information to help communicate pricing and expectations to both internal and external stakeholders.
Importance of an Advertising Agency Rate Card
While it’s important to acknowledge that the importance of having a rate card is decreasing over time, due to T&M billing becoming less common, there are a few scenarios where having an updated rate card is a must:
- If you’re billing on T&M, you’ll likely need a rate card
- If your agency is selling to large enterprises, a rate card will likely be a requirement for navigating their procurement process
- If you’re not billing on time and materials but have standardized packages and pricing to guide your employees in the estimation and pricing process, you may want to consider keeping an updated rate card so that your sales & account management teams have a reference while pricing work.
Components of an Advertising Agency Rate Card
Rate cards can vary in many ways and are customized to fit specific situations. Factors such as clients, services provided, billing methods, and industries can affect how a rate card is designed. Nevertheless, there are several key components that are typically included in a rate card:
Agency Name and Contact Information
This should include the agency’s name, address, phone number, and email address.
Description of the Services:
This should give clients a general overview of the services that the agency offers.
Hourly Rates or Fees for each Service:
This is the most important component of a rate card, as it provides clients with a clear understanding of how much they will be charged for each service.
In addition to hourly rates or flat fees, some agencies may charge additional expenses for things like travel, materials, or equipment rental. It’s important to clearly outline these in the rate card.
Discounts or special offers (if applicable):
Some agencies may offer discounts or special offers to certain clients, such as non-profit organizations or government agencies. These discounts should be clearly listed in the rate card.
Types of Rates in an Advertising Agency Rate Card
There are plenty of different ways that rates can be outlined in a rate card. Notable ones include the following.
These are the most common type of rate, and they are typically charged for services that are performed on an as-needed basis. Hourly rates can vary depending on the skill level of the individual or team providing the service, as well as the complexity of the work involved.
These are most commonly broken down into one of two categories: By Discipline, or By Title.
This groups rates based on each discipline that they’ll need to do the project at hand. While a copywriting project would only need writers from the Copywriting discipline, a new website design may touch multiple disciplines before a service is complete. For example:
- Design: $150/hr
- Strategy: $195/hr
- Copywriting: $125/hr
- Development: $160/hr
Alternatively, the rates could be simply listed for each title. While more junior roles are less expensive, more senior contributors will cost more:
- Intern: $75/hr
- Jr. Designer: $115/hr
- Sr. Designer: $150/hr
- Creative Director: $250/hr
- Strategist: $200/hr
These are just a few examples of different ways to segment and blend rates, but are the most common we see. Keep in mind that it’s important to factor the cost of the team doing the work when setting hourly rates, and ensure that your rates are able to price in the variability of the team members represented in that segment (more on that below)
These are fixed prices that are charged for a specific service, regardless of how long it takes to complete. Flat rates are often used for services that are relatively straightforward and predictable, such as website design or copywriting.
Typically, flat rates will be presented along with a deliverable or set of deliverables. They can be for one-off projects, or for recurring projects.
- Branding Project:
- Logo – $10,000
- Brand Guidelines Document: $5,000
- Brand Photography: $15,000
- Social Media Retainers:
- 3 Posts per Week: $2,500/mo
- 5 post per week: $4,000/mo
These flat rate items are often accompanied by more detail that helps clearly spell out the limitations of scope, without devolving all the way into becoming an SOW. This ensures that there is adequate clarity on the boundaries of the scope which can be covered by that flat fee, and may also spell out exceptions that may cause the price to change or be negotiated.
Similar to flat rates, these project-based rates are charged for a specific project, and they typically include all of the costs associated with the project, such as labor, materials, and travel. Project-based rates are different though, because they’re often used for larger or more complex projects, such as marketing campaigns or app development.
These are rates that are charged as a relative percentage of an aspect of the project or client. Common examples include fees based on the percentage of advertising spend, or based on the print budget. They’re often used for services that help to generate new revenue for the client, such as search engine optimization or pay-per-click advertising.
This kind of setup is less common on rate cards. They are rates that are only charged if the client achieves a specific outcome, such as winning a lawsuit or closing a deal. Contingency fees are often used for legal services or sales consulting where a measurable outcome or milestone is central to the value of the engagement and can easily be measured.
The Role of Advertising Agency Rate Cards in Client-Agency Relationships
The primary role of the rate card in the agency-client relationship is to try and establish clarity around the cost of working with the agency. It can be a useful tool to redirect attempts to negotiate or drive down the price as it provides an objective reference for pricing that can be agreed upon and/or included in a contract.
It can also be an essential tool for helping agencies that deal with large enterprise clients in navigating procurement departments, filling out RFPs, or getting on approved vendor lists.
Other ways it can help:
- Transparency: A rate card provides clients with a clear understanding of how much they will be charged for each service. This can help to build trust and transparency between the two parties.
- Communication: The rate card can serve as a starting point for discussions between the client and agency about pricing. This can help to ensure that both parties are on the same page regarding expectations and costs.
- Negotiation: The rate card can be used as a basis for negotiation between the client and agency. This can help to ensure that both parties are getting a fair deal.
- Competitive advantage: A rate card that is competitive with the market rates can help the agency to attract and retain clients. Depending on how you position and price your services, you can sway the pricing framework being used to evaluate competitive firms towards one that positions you as a better value.
- Budgeting: The rate card can help clients to budget for their advertising and marketing needs. This can help to ensure that they are not overspending on their advertising campaigns.
How to Create an Effective Advertising Agency Rate Card
To create your rate card, you can start by determining your ideal pricing model based on the service that you’re offering.
Consider a scenario where you are a website design & development company, and you’ll be billing on T&M by discipline. We’ll start by outlining our disciplines:
Next, you’ll need to determine the cost-basis for your service or unit of time.
- If you’re going with flat or project-based rates, you’ll need to figure out your cost for all of the time that goes into completing the project.
- This would include your team’s time, so calculating each team member’s cost-per-hour and multiplying it by how much time it will take them to complete it, and then adding in any other costs that you’ll incur in delivering the project.
- If you’re going with hourly rate, you’ll do a similar calculation but you’ll only need to know each team member’s cost-per-hour.
Now, with your website design and development agency, you’ll need to calculate your cost-per-hour for that team, take an average of that and tally it up per discipline. It could look something like this:
Now, let’s add these ACPH’s to our list of disciplines:
Now that we’ve got our costs in there, we need to figure out what our price floor will be, and we can do that by baking in a certain amount of margin for sustainable profit.
To guarantee your margin, we’ll have to calculate an ideal Delivery Margin for your team’s time. Delivery Margin is the percentage of money you have leftover after you pay your delivery costs (primarily made up of your team’s salaries).
Delivery Margin = AGI* / Delivery Costs
*AGI, by the way, is simply your Revenue minus any Pass-Through Expenses, like print budgets, advertising budgets, white labeled services, etc.
Deciding on your Delivery Margin Target
We generally recommend that our clients target a 60-70% margin on your rate card (more on ideal margins here). You could also calculate your margin by starting with your ideal net profit as a percentage of your AGI. Generally, 20-30% is considered strong.
Let’s call it 25% as a goal, then we’ll need to layer on Overhead Expenses to this. Generally, 20-30% of AGI is healthy. Let’s call that 25% as well.
Delivery Margin Target = 25 + 25 = 50%
Finally, it’s recommended that you add in a contingency there for padding, usually another 10-20%. It will make up for fluctuations in Utilization, time off, etc. Let’s call that 15%.
50 + 15 = 65%
Delivery Margin Target = 65%
Calculating the Rate
Now that you’ve got your Delivery Margin Target, you can calculate your floor price (the lowest price you can charge for one hour of this disciplines time while still hitting your margin):
Delivery Cost / (1 – Delivery Margin Target)
And with our information for the PM team plugged in, at a 65% Delivery Margin:
$47 / (1 – 0.65) = $134
With your Delivery Margin sitting at 0.65, we can do this calculation for each discipline and get your rates for the rate card filled out with the minimum rates for each role:
Did you know?
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Finally, if you’re adding project-based or flat rate pricing to your rate card, you’ll want to ensure your rate card includes a section where Pass-Through Expenses can be accounted for (and any contingency).
For example, if your website design and development agency is selling a website that needs custom animations that you don’t do in-house, and you’re planning on white labeling these, bake that price into your quote so that you’re not taking on that cost after the project is complete.
When quoting the client, first figure out what your Delivery Costs will be by adding estimated hours next to each hourly rate. Here is what that could look like:
|Discipline||Rate||Est. Hours for Project||Total Cost|
You’ve now got your price, but let’s add in the cost of those animations that you’ll be white labeling. Let’s say they are $2500. Now let’s also add on a 10% contingency fee to your white labeled service, for the risk that you’re taking on here.
Then, we can add it all up:
$4580 + ($2500 * 1.1) = $7330
In this case, in order to hit our desired Delivery Margin on that service after factoring in the cost of pass-through expenses, we’ll need to charge at least $7,330.
Note: One question I get asked about a lot is “what about markup on pass-through?” Keep in mind that Markup is a pricing concept, not a scoping object. In this case, we’ve identified that based on the cost of the time required to complete this project and the cost of pass-through expenses, we need an AGI of at least $4,580 and a total price of at least $7,330. There are dozens of ways to tell the client the price is $7,330 – many of which include markup. But the decision to articulate the price using markup (or to articulate it using any other pricing model for that matter) doesn’t change the underlying economics which always come back to price, pass-through, AGI, Delivery Cost, and Delivery Margin regardless of pricing model, or how we chose to articulate a given price.
Common Mistakes in Creating Advertising Agency Rate Cards
Not Considering Margins
You’d be shocked how often we speak to agencies we aren’t considering their margins when pricing. Start with your cost, work into your Delivery Margin and do it on a set cadence as time goes on. It’s essential to make sure your rate card is being set with your target Delivery Margin in mind, no matter what your pricing model looks like.
Not Considering Risk in their Pricing
This all comes down to your level of certainty in the scope of work. When you’re selling a product that is repeatable, templated, and fairly set in stone scope-wise, you can be much more confident and comfortable pricing on fixed fees and taking on risk in the engagement as a way to increase your upside and profitability.
On the other hand, when the scope is partially out of your control and the work you’re doing is complex, with plenty of risks to scope, then pricing on time helps you share that risk with your client.
Ensure you’re thinking about both value and risk when determining what to charge and how to charge for it.
Not Updating Rate Cards Enough
The baseline process should be a quarterly review of rate cards. However, a few events should also trigger a review of rate cards:
- Material changes in team composition or team compensation. These affect the cost basis of the segments in your rate card, and those changes should be reconciled against your rates to ensure they are still setting you up for profitability.
- Material differences in actual time spent relative to estimates, particularly for work that is priced on flat fees, project fees and relative fees.
- Material changes to the scope, size, position, economic climate, or other factors that influence the value or perceived value of your services to your clients.
It’s important to remember that the health and effectiveness of your rate card is predicated on it being based on accurate assumptions about your cost-basis and the value you’re trying to capture in the market. When changes occur that have a material impact on those two inputs, a review of the rate card is likely in order.
Incomplete or Confusing Information
Keeping things simple and high level is a great rule of thumb when it comes to your rate card. Find a balance where you’ll be able to include enough clarity about the scope (especially around flat or project based rates) while also not having a laundry list of optional services and add ons, or extremely discrete and granular people and project categories.
In cases where you’ve added too much detail to your rate card, not only will it be hard for clients to understand what they’re getting, but your internal team will have a headache trying to update them frequently enough.
Not understanding theCompetitive Landscape
Being part of the community of the industry that you’re selling in will give you the context you need to evolve and change with the industry, instead of being left behind. If you’re too out of touch with what is happening in your space, you may over-price, losing you valuable deals. On the other hand, you may under-price, and leave money on the table. You may also not know how to position yourself relative to the other firms you might compete with regularly for business.
Join the community that you compete in, conduct market research, collect data, speak to clients about what they’re seeing to understand where your agency has the edge, and lean into it.
Managing Expectations Over Time
It’s too often that we see clients who have a great, loyal customer who stays with them over the years, only to see their margins drop over time since the price has been locked in for too long. Leave yourself a clause in your contract that allows you to slowly increase your rates. Your margins will thank you.
An agency rate card serves as a valuable tool for both agencies and clients in establishing clarity, communication, and transparency regarding the cost of services. While the importance of rate cards may be decreasing in the industry, especially for some billing models, they remain a common tool used by firms billing on Time & Materials or dealing with large enterprise clients. A well-designed rate card typically includes key components like agency contact information, service descriptions, hourly rates or flat fees, additional expenses, and applicable discounts or special offers. By using different types of rates such as hourly rates, flat rates, project-based rates, revenue-based rates, or contingency fees, agencies can tailor their pricing structures to match the risk and value factor of their service offering.
To create an effective rate card, agencies should consider their delivery margin,and pass-through expenses, while avoiding common mistakes like neglecting margins, failing to account for risk, infrequent updates, incomplete descriptions, overlooking the competitive landscape, and failing to manage client expectations over time. By following these guidelines, agencies can develop comprehensive and strategic rate cards that contribute to their overall success in the industry.