Hourly vs. Fixed Rates: Which is Better When Working with an Agency?
Posted on July 5, 2018 by
Hourly vs. fixed rates have been hotly debated since the beginning of creative professions.
They each have their benefits and limitations and what is better for the agency may not be better for the client.
We at Morad Media use fixed rates for the majority of our projects, and I’ll tell you why as we explore the strengths and weaknesses of both.
Hourly rates can be greatly beneficial to a marketing agency because it ensures they are adequately compensated for all of their time spent on a project. If the agency underestimates the amount of time it will take for a project; they can just tack on the additional hours to the bill. If there is an unforeseen complication or the project takes longer than expected, they are covered.
Agencies deal with many different client personalities, some with unclear expectations for a project. By charging an hourly rate, the agency is covered financially if the project takes an unexpected turn.
Hourly rates can be beneficial for the client because they don’t contain cost overestimations which are often built into a fixed rate to allow for margins of error or unforeseen complications.
If the work is extremely variable with largely different scopes, an hourly rate is safer for a marketing agency because it will take away the pressure of assigning an accurate fixed cost.
Hourly rates can work against a marketing agency by capping their earning potential. Unless an agency works around the clock, they will be capped by the number of available working hours in a day. If they want to increase their profit, they will have to increase their hourly rate.
Another downside is that hourly rates cloud a client’s perception of value because they will focus on the cost per hour instead of the overall value. For example; if a client requests a digital ad design and the marketing agency knows it will take them an hour, which sounds better?
- $200 for the digital ad
- $200/hour for one hour of work
The client doesn't know how long it will take to design and might assume it will take 3 hours in which case $200 sounds like a great deal but by telling them the $200 is for an hour’s work, it seems more expensive even though they get the same end result.
When a marketing agency is working with a fixed rate, they are only limited by the speed at which they can complete the work. If they are incredibly skilled and able to complete projects with a quick turnaround, fixed rates may work in their favor.
Clients can benefit from fixed rates because they are able to negotiate a cost upfront instead of having to roll the dice and pay by the hour without a guaranteed amount of hours. Many clients prefer fixed rates because they know exactly how much they will have to pay in the end. With a fixed price, the estimate always matches the bill whereas with hourly rates the bill may be more (or less) than what was quoted.
Fixed rates allow the client to lay out their expectations and leave it up to the agency to appropriately allocate their time and resources to meet them. Most clients aren’t able to accurately estimate the amount of time a project will take, but they do have a good idea of how much they are willing to spend. A fixed rate focuses more on the value of the end result eliminating perception bias associated with hourly rates.
For example, if you go for a haircut with a fixed rate of $50, it may take a little more than an hour or a little less, but at the end, you’ll feel like you got your money’s worth. However, if you go for a haircut that charges hourly and you go over an hour because you wanted a little more attention to your layers, you may come out with a bill for $70. In this case, most people would choose a fixed rate because it takes out the guesswork and there won’t be any surprises at the end.
Fixed rates can be challenging for agencies because they need to accurately estimate the amount of time and work that will go into a project. If they miscalculate and end up spending twice the allotted time on a project, they will take a hit to their profits.
If a marketing agency massively underestimates the amount of time it will take, they will be less excited about multiple revisions if each hour puts them in the negative.
If the agency’s estimate is too high and they are able to finish in a faster turnaround, the client may spend more than if they had gone with an hourly rate. Fixed rates sometimes include a buffer in case the project is more intensive than predicted or if a client requests many revisions.
Morad Media has over thirteen years experience in agency work so we have a good grasp on how long specific projects will take and are comfortable making accurate estimates for a fixed rate. However, we may choose to go with an hourly rate for some of our smaller, one-off projects. This gives us more flexibility when certain variables of the project aren’t clear and we aren’t able to get a clear estimate for a fixed rate. This ensures that our clients aren’t spending more than what is needed.
"Fixed rates have worked well for our agency because we don’t compromise quality for budget."
Fixed rates have worked well for our agency because we don’t compromise quality for budget. Once we have settled on a price, we don’t stop working until our client is happy and we are proud of the end result. Our business relies heavily on referrals, so we want to uphold our reputation by adhering to high-quality standards. Our clients can take comfort in the fact that the final price tag will match the estimate.
We are willing to do whatever it takes to achieve a great final product. If we do go over the allotted time, our client doesn’t pay more just because we decided the project needed some extra time. If a client requests changes that are outside the scope of the project, we will provide an updated estimate, so there are never any surprises on the final bill. Most people love surprises, just not when it comes to an invoice.
Just because we prefer the fixed rate model doesn’t mean it is better for everyone. Hourly rates are useful for agencies that deal with extremely varying project scopes or when dealing with difficult clients. For clients, paying by the hour may work out to be less expensive than a fixed rate, but there is also the risk that it will be more.
As a client, it is beneficial to outline your expectations for a project and assign values to get a better idea of how much you are willing to spend. Then you can evaluate your options and decide which pricing model will give you the better value.
If you are a marketing agency that is just starting out, keep comprehensive records of time and resources spent on projects. This will help you create more accurate estimates for future projects. When deciding whether to go with a fixed or hourly rate, don’t just go with whatever makes you the most profit. Consider what clients prefer and what will help get you more business.