The Fees Debate – Time, Value or Performance?
What’s the “best” fee structure system for public relations agencies?
A little while after starting my consulting career at Thornley Fallis Communications, I had an interesting conversation with Terry Fallis about the pros and cons of the different ways agencies charge fees. Several months later, I had a similar conversation with Joe Thornley as I continued to try to get my head around it.
Both conversations ended, after a while, with the same question from each: “do you have a better system?”
I don’t. I’m not an “expert” on this topic. So, while I’ve thought about the ups and downs of several systems, this is one post that I really hope sparks your thoughts and contributions.
The time-based fees model calculates the cost of an activity using an hourly rate and multiplying that by the time needed to conduct an activity.
There are some obvious advantages to this system:
- Accountability is built into the system – the client pays for the time expended. The agency can’t just stick its finger in the air and pick a cost to charge;
- Agencies can generally provide fairly close estimates as to the actual budget needed for an activity;
- There’s less risk to the agency from scope creep – if the client asks for more, they pay more;
- If an activity takes less time than expected, the client pays less;
- When on a retainer, the client is assured that consistent effort is expended on their behalf each month.
However, I can see some disadvantages:
- There’s no reward for efficiency – if you’ve budgeted three hours to draft a news release and it only takes 90 minutes, there’s no incentive to stop working at that point (of course, you would hope that the client would recognize that efficiency and reward the agency with loyalty over time);
- If something unexpected happens and an activity takes longer than expected, the agency may have to have an awkward conversation with the client to increase the budget, or may have to write-down some of their time;
- This mechanism can often understate the value of the services the agency provides;
- Some activities, especially time-consuming ones (and social media, in particular, is time-consuming), can be difficult to justify on a per-hour basis.
The other main alternative is a value-based system. You want your agency to prepare a news release? That’ll be X thousand dollars. You want media training? That’ll be Y thousand.
The advantages to this system:
- Certainty for both sides on the budget, which makes accounting easier on both ends;
- Efficiency is rewarded – if you can produce a high-quality product in a shorter amount of time than expected, the mark-up is greater;
- For the agency, it offers the potential to mark-up work considerably;
- The client pays for the value of what’s produced. Perhaps your media training may only take a morning to conduct, but its value is such that you can charge for more than four hours’ work.
The disadvantages to value-based billing:
- If the work takes longer than expected, the agency is stuck footing the bill;
- From a client perspective, they may pay for a high mark-up on agency work.
Some agencies may charge clients based on a percentage of the “value obtained” over a period. For example, if you achieve media coverage valued at $50,000, you might charge 10 per cent of that value ($5,000).
Advantages of this approach:
- Clients pay for what they receive – if you don’t deliver results, they don’t pay;
- While any good agency encourages best practices, they are perhaps most essential in this system – without well-conducted campaigns, you won’t see results and you won’t get paid;
- The system inherently rewards good results.
- The systems available for calculating the “value” of media coverage (e.g. ad equivalency) are woefully inadequate and arbitrary;
- Both client and agency have zero certainty on the budget;
- The system has no means for measuring the value of social media or digital activities – it is primarily focused on traditional media relations.
As I said earlier, I’m not an expert on these systems. I’ve done some reading around them and I’ve talked to a few experienced practitioners, but I would love to hear your thoughts on this topic, especially if you’ve been in the agency business for a while.
What do you think – is there an optimal way for agencies to charge fees?