There are a multitude of factors to consider and explore when establishing or expanding your business. Who will you serve? How and when will you scale up or down? What will your branding convey? What will success look like?
During this exciting journey toward reaching greater heights, pricing structure will inevitably come up. “How will we get paid?” is a salient question that informs nearly all growth strategies.
Agencies use the retainer fee price structure frequently. It is well understood in the world of digital agencies. If this is a route your organization is taking, you must know how to calculate a retainer fee correctly.
What is a Retainer Fee?
A retainer fee is an agreed-upon upfront cost for a service set before you provide the service. Essentially, it’s an advance payment to a professional or agency for future or continued service.
Retainers are the most common pricing model for digital marketing agencies. A 2021 survey found that 35% of agencies use the retainer model. For agencies that combine the retainer and per-project pricing models, 44% reported that more than half of their business was retainer-based.
While we typically recommend project-based pricing, there are certain situations where retainers are the way to go.
When is a Retainer Feel Helpful?
Agency owners must deploy varied revenue-generating and pricing approaches to ensure steady cash flow. Retainer contracts for specific services or in certain situations can help with your company’s growth and sustainability.
Some services or instances where retainer contracts make sense are:
- Ongoing Maintenance. This service category casts a wide net. Examples include Search Engine Optimization, social media management, website conversion optimization, digital ad campaign deployment and management, and website content creation and curation.
- Reduce Agency Risk. Since retainer fees are prepaid, agencies can mitigate risks of nonpayment for completed work and reduce collection headaches.
- Create Reliable Revenue. Your retainer-based clients provide a steady, consistent pipeline of work. It can serve as a baseline for projected monthly income. It also can help determine the need to add new clients or projects.
- Build Capital to Reinvest in Business. The guaranteed revenue allows you to make strategic growth decisions with cash on hand.
- Ongoing Value to Customer. Retainers help build long-term, trusting relationships with clients. As a critical partner in your client’s success, you and your team can fully invest in their strategic plan and goals to help establish best practices and contribute to innovative solutions.
Limitations of Retainer Fees
Though most digital agencies use retainer fees, there are some drawbacks to this pay structure.
Limitations of using retainer fees include:
- Simple or Complex Projects. You base retainers on projected time and the employee experience level needed to deliver on projects successfully. That means sometimes you may have to choose which projects to focus on. This choice could mean some goals may go unmet.
- Surpassing Budgeted Hours. Time tracking is still important even though your team is not billing by the hour. To make sure your retainer contract makes sense financially for your agency, you need to produce detailed reports of monthly time allocation.
- Lack of Clarity on Value Added. Occasionally scope creep or unclear expectations happen when clients enter into retainer contracts. They expect you to fulfill their every creative wish. Project managers need to pay close attention to client “asks” and timelines.
How to Calculate a Retainer Fee
If you decide that a retainer fee is right for your business, you’ll need to know how to calculate it. You want to be sure to calculate your retainer fee in such a way that your business doesn’t end up spending way more time than expected on a project and, therefore, get paid much less than deserved.
To calculate a retainer fee:
- Use Hourly Rates. Check our guide on how to set hourly rates.
- Understand Cost. You should understand time commitments, salaries for associated staff, overhead costs, and desired profit margins to build hourly rates that flow into a retainer. This understanding will prevent you from overcommitting or underselling to stay profitable.
- Clarify with a Contract. Retainer contracts should contain a clear scope of work your agency will perform and well-defined revision expectations.
- Build a Buffer. Allow for a few extra hours to answer questions, conduct training, and create a collaborative partnership when calculating your overall costs.
- Establish Payment Methods and Terms. Clearly defined expectations on when and how payment will occur reduces risk for your agency. It also allows you to begin creative work more quickly.
- Incorporate Reports and Re-Evaluation Milestones. Reports establish transparency between you and your clients. They also serve as opportunities for open dialogue about what is working and areas to improve.
- Premiums and Terms. Don’t offer discounts. Have a base profitability target that you use for your longest engagements. For engagements shorter than this, add a premium. This approach protects your profit margins while giving customers a benefit for signing longer-term contracts.
When to Reassess Your Retainer Fees
Review retainer fee agreements at least annually. Quarterly review meetings are even better. This frequent, structured interaction allows you to discuss your client’s ongoing and changing needs and how you can contribute to their overall success. During this time, you can bring up your agency’s new capabilities and offer more value-added services.
Retainer fees are, at their heart, relational. You can tailor them to meet your clients’ needs while providing your agency with a reliable workstream and steady revenue.
How Promethean Research Can Help
Getting your retainer fee pricing right is essential, and Promethean Research can help. The most equitable retainer fees are based on data and insights, not gut instincts or guesstimates. Contact us today for expert advice, access to proprietary research, and world-class service.