Thought experiment for you, fishies.

We all love to hate on billable hours. What’s a real, feasible alternative???

Small agency owner 🙋🏻‍♂️ I’ve wracked my brain and have 3 biz model options, none great:

Billable hrs: Generally accepted. We all know the downsides.

Pay4performance: Big upside potential, tons of risks.

Project pricing: Cloak for billable hours. You have to estimate project cost with something.

Who’s thought of a better approach??? Genuinely curious if there is one.

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This isn’t straight forward.

Pay4Performance
It would take a v sophisticated business with its econometrics all nailed to be happy that the marketing investment was responsible for the performance vs price, distribution or market forces etc. if that stuff isn’t in place, you’re simply asking the client to pin your growth to theirs regardless of your performance. Based on this I’d guess it’s rare that more than 10-20% of total agency comp be based on the brands performance. Some might attach to performance of specific product campaigns but it’s tiresome to have to agree the metrics each time.

Project pricing
Definitely seems like the way to go if you’re departing the normal billable hours route. Means you might not have to report hours to the client, but it puts more risk on the agency and therefore need to to scope better. Invariably that might mean pricing higher to counter the risk / increase margin. Fine it the client will wear it. You would still probably want everyone to do timesheets though so you have a measure of each client’s profitability.

I recently did some pricing training. Once you’ve scoped, if you’ve done it well you should be in the position to offer options.
- Standard billable hours, no cap, and an estimated cost range. High and low.
- fixed fee, against a fixed scope, typically higher than the range, either as a margin bonus, or risk mitigation
- standard billable hours, but fee capped at a certain level. always the highest figure as the agency is taking all the risk.

Putting options on the table allows the client to choose their level of risk, but pay for it. You’d be surprised how many will pay more for the fixed price, to not have the variability risk of std hours. You just have to be smart at scoping.

helpful

Only if you have a rare unicorn of a client that gets it. Look at most mgmt consultants and lawyers. Even they had found a way to get assay from the billable hour they’d be using it by now.

My only suggestion is some kind of outcome based pay, but an agency really has to back itself with that as it’s high risk.

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I worked at a small agency that would do project based pricing and we would “soft reconcile” on the back end. Quarterly the team would estimate their hours by client and then finance would do a “soft reconciliation”

Employees didn’t mind doing the estimation because it was quarterly and in a spreadsheet, not some cumbersome software system.

Finance could back into costs/revenue and profitably by client.

Like I said, it’s estimated. if you want to pick a fight, go ahead. I was trying to be helpful.

What performance metrics do you suggest for that option?

What I’ve typically seen is % of attributable business impact. Agency gets a chunk of any new revenue they bring in.

You can win big if your work lands the client a whale, but you also run the risk of working for free. You also need an iron-clad, mutually agreed-to attribution model, and the client is incentivized to find ways to work around it.

fixed price man. let's say you have ten employees. so to be profitable you only take on projects that cost 100k/month. no surprises, no timesheets. and add a bonus option in case the project is uber-successful

I’d love it to be that simple. But how do we calculate the value of the project, sell it to the client, predicted margin, etc, without using hours as a metric? What rationalizes 100k/mo if not XYZ hours burned by 10 people every month?

That’s the rock I’d love to break: how to substantiate the cost and value of our work — and then rationalize the bill to clients — without at some point relying on volume of time input.

Thoughts?

I’m personally a fan of deliverables based pricing but that’s still an hours based approach.

If you’re in a small shop, look into value based pricing models. It’s a progressive pricing model that is a step up from project/deliverables based pricing and leans into the client-perceived value of the work in addition to the LOE. The caveat is that you’ll still do a top down staff plan and will want to forecast LOE for staffing purposes, but it’s inherently non-reconcilable so timesheets fall out of the equation.

Part of the shift of companies taking work back in-house is because they saw their creative costs spiraling out of control with not much accountability. P&G pushed back hard and everyone else got in line. At the end of the day you're still going to have to balance the amount of time spent on a project. Project-based billing is great, until you find there aren't enough caveats and disclaimers in the SOW to protect you from the client who wants 30 rounds of revisions with no adjustment in costs. And if the agency culture is off, all the hours and profitability will be eaten by dysfunctional teams, reviews, meetings, etc. with no chance to recover the lost revenue.

Value pricing. You must know your competitors, and be willing to justify an roi or value position to the client. Comes down to how well you know the market and your client expectations.

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