Fixed Price Or Hourly Rate: What’s Right For Your Agency?
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Implementing the right pricing model for your business is one of the most important decisions you’ll make. No pressure.
Chances are you’ve already tried to find a quick fix answer to the question of ‘should I charge a fixed price or hourly rate’ on Google’s homepage – that’s OK, it would have been our first choice too.
But instead of being served a nice, palatable, Door A / Door B type of result, you’ve discovered a vast and complicated debate about which model is best…and neither seems to be the clear winner. Eek. Fortunately, it’s not your job to fight out the right answer for everybody. The only one you need to figure it out for is numero uno – your agency. Well, and your clients, but we’ll get to them…
As with most things in business, fixed price vs. hourly is about finding the balance between what’s good for you and what’s good for your clients. How do you make that choice? You weren’t wrong to ask the all-seeing Google what you should do; unfortunately, our search engine overlords can’t give you a completely straightforward answer. But maybe we can…
And so without further ado (or a-don’t?!), let’s dive into the discussion on the benefits (and disadvantages) of charging a fixed price or hourly fee and how to decide what’s right for your agency.
Fixed Price – What is it?
A fixed price (also called a flat price) is the most liberating option – and who doesn’t love liberation?
Here are a few reasons why you should charge a fixed price:
Reduce worry – You (and your employees) won’t have to worry about tracking your time so closely if you agree to a flat rate upfront (although you should definitely still keep an eye on your team’s work hours using a time tracking tool).
Define clear goals – A fixed price allows for a clear understanding between you and the client regarding the project’s targets and goals. In other words, it helps handle any ‘scope creep’ clients who constantly try to add tasks to the job after you’ve agreed to take it on.
Capitalize on profit – If you’re well-versed in the project’s topic or have worked extensively with a client in the past then you can work quickly and maximize profit on your end.
Charging a rate upfront seems as if it’s the best way to go for many agencies but only if you’re aware of its drawbacks, which include:
The ever-evolving project – As any experienced agency knows, projects can change and evolve as you begin working on them. If your billing estimate was off in the beginning then the fixed price system can end up costing you big time.
Overcharging – One solution to the above is to actually charge the client for the extra work that you do, despite it not being in the proposal. However, if you’ve sent one price as an estimate and then end up charging a much higher price, it’s doubtful that this client will a) return for another project b) refer you to other clients c) send you a Christmas card. And you want that Christmas card.
The never-ending project – Let’s say you’ve agreed to a price for a project and will continue to work until that project is complete. However, your client is not only a perfectionist but an indecisive one at that. Agreeing to a fixed price without a designated end date can result in your employees wasting hours tinkering to the whims of your client without ever achieving that elusive final tick of approval. Under the fixed price model, asking for re-edits costs your client nothing but can significantly eat away at your agency’s profit margins (and your personal sanity).
From waiters to lawyers, charging hourly is a model that allows workers to value their time to the nearest cent and second (lawyers, especially). When it comes to your agency, you’ll agree on an hourly rate with the client and then track your hours on the project so you can bill them at completion.
Here’s why you should charge an hourly price:
Accuracy – Hourly billing allows you to offer your client concise reports of time spent on their project.
Safety net – This method of billing allows you to be compensated for any extra hours you may have to invest in the project.
Contingency – It also provides you a bit of wiggle room for the evolution of a project. If you’re not sure what you’re getting into, hourly billing is the safest and (probably) most profitable way to go.
Of course, the hourly rate isn’t all rainbows with buckets of money at the end – it has some distinct disadvantages, such as:
Disincentivizing efficiency – There’s little pressure to get the job done as quickly as possible because, well, you’re not losing money.
Budget myopia – The hourly billing method makes it challenging for your agency to predict cash flow and profits.
Client issues – If your agency far exceeds the projected estimate given at the beginning then that is a difficult reality for a client to swallow. The client may wonder what you’re actually spending all that time doing, what they’re paying for, and questioning the talent of the people you have working for you. That’s never a good place to be.
Which One Should I Choose?
One of the most difficult things about deciding which pricing strategy to use is that there’s no clear-cut winner. It doesn’t matter how many hours you dedicate to your Google degree in attempting to answer this question – you simply have to test out each method to see what’s right for you and your agency.
You may find that the best strategy is to mix it up. Charge an hourly rate for potential jobs with unknown variables but fixed prices on jobs that are far more predictable. Trust yourself and utilize your experience and expertise in your field, as well as a decent time-tracking tool, in order to make the best choice.
Yes, Track Your Hours Anyway
No matter how you bill your clients, tracking hours is important. Why? Because it’s like X-ray vision for your projects. It allows you to decide if you’re making money on the work your agency is doing or if you’re burning your way through the budget. Plus, it helps you to understand if deadlines and budgets are being hit and how productive your team is being along the way.
Programs like Productive’s time tracking feature will come in handy at all stages of an agency’s progression. It’s easy to use, which means your team can track their time as if it’s second nature without, ironically, dedicating a lot of time to it.
No one expects your agency to master the art of the pricing model deal. And let’s face it, no amount of Google searching can give you every answer you need when it comes to using a fixed price or hourly billing in your business. Remember, you are in control of your own fate when it comes to which model is best for your business. Luckily, with products like those found at Productive you can easily track your time to analyze your profitability to find out which method ultimately comes out on top; meaning that making temporal sacrifices to the omniscient Google will soon become a thing of the past.*
* Until you need to double-check how to spell ‘omniscient’, as we just discovered 🙂