If you are running a digital marketing agency, no doubt your client list has grown, and their needs are expanding exponentially. With demand for digital marketing services at its highest point ever, now is the perfect time to strategically consider how much your services are worth. There are many pricing models for digital marketing consultants, but 95% of the time, hourly rates are the way to go.
Here are some data and tips to help you with setting an hourly rate for a digital marketing consultant. These tips will help you find the sweet spot to springboard your agency into more remarkable growth.
Let’s Start with the Data
Our recent research on how the pandemic reshapes the digital marketing landscape indicates that most firms employ multiple pricing methods. But when asked to select their most commonly used methodology, we found that hourly fees made up nearly half of the agency responses.
Some 73% of respondents priced at least a portion of their services through hourly pricing heading into 2020. The average blended rate during the past 18 months was $150 to $200 an hour, depending on the size of the agency and the expertise of the staff. Larger markets like New York or California reported rates closer to $250 an hour.
The services billed hourly accounted for a 13% average growth rate and a 16% annual profit margin.
Digital marketing agencies are not immune to “The Great Resignation,” the ongoing mass exodus of workers seeking change. According to the U.S. Bureau of Labor Statistics, about 15.5 million Americans have quit their jobs since April 1. The trend shows no sign of slowing down.
Perhaps the most difficult thing for digital marketing agency owners to understand about The Great Resignation is who is leaving. Mid-career, experienced employees — the same ones leading your customers on their digital transformation journey — are leaving their jobs in droves.
Competition for the talent who can sustain and spur future growth impacts our guidance on calculating your hourly rate.
We encourage you to:
- Avoid Profit Burnout. The Great Resignation coupled with Digital Transformation has increased costs to agencies. Rates also must increase to avoid burnout of expected profit margins.
- Raise Your Rates. We last said if your hourly rate is $150 or less, you need to raise your rates. In today’s climate, if you are charging $175 or less, it’s time to reassess the value of your services and adjust upward.
- Reassess Service Mix. If your current service mix doesn’t allow you to raise rates, reevaluate your offerings and select less commoditized services.
Issues with Undercharging
Undercharging can impact your bottom line in profound ways.
Problems with undercharging include:
- Stunted Growth. Lower hourly rates deprive your agency of financial capital to reinvest into your business. Correct hourly pricing gives you resources to prioritize recruitment, hiring, salaries, retention, and culture.
- Hiring Headaches. Turnover at digital shops, specifically for experienced employees, increased significantly this year. Concurrently, increased competition for the right talent to best serve your clients makes hiring more difficult. You need to ensure you can pay for the quality of employees you need.
- Fleeing Customers. If you can’t attract and hire the experienced employees your customers expect, they may jump ship. You might also miss out on complicated (lucrative) projects because of the capability and capacity of your workforce. It is critical to have the revenue to successfully position your shop for current and future work.
How to Calculate an Hourly Rate
One of the most frequent questions we receive is, “How much should I charge?” The answer is not always simple to derive, especially if you are billing a flat fee.
Here is a simplified way to calculate your consultant fees:
- Price for Margins. A healthy gross margin for a digital agency is about 55%. Price your services so that after you account for all of your cost of goods sold, you are left with about 55% margin. As long as you keep your operating expenses in check, prices at these levels allow for healthy growth.
- Follow the Formula. If you charge a flat fee for a project that should take four months, you would use this formula [flat rate]/(number of months * 4 weeks * 5 days * 8 hours) = your hourly rate.
- Make Sure It Works. Is it the correct rate? We knew a shop that doubled their rate until their close rate dropped to 25%. They tested it out until they hit their optimal zone, which was near 35%. Keep adjusting with new clients until you are where you want to be.
Keys to Maximizing Hourly Rates
Perfect rates sometimes need a little help to reach their fullest potential.
Some habits to optimize your operational potential:
- Accurately Track Hours. Often agencies do not have a handle on how long it takes to get work done. Have real numbers on hand to avoid undercharging.
- Know Your Utilization Rate. Simply put, your utilization rate tells you how much time your employees spend doing things that earn you revenue. A higher rate is better for margins, but you must cap this metric to avoid employee burnout and retention and recruiting issues.
- Be Transparent. Work from a mutually agreed upon place as early as possible. Aligning expectations avoids time spent on services customers can’t afford and can boost client satisfaction.
Promethean Research Can Help
Setting an hourly rate for a digital marketing consultant can be tricky. Find out how Promethean Research can ensure you charge what you are worth to maximize your shop’s growth potential.