As a marketing manager or a CEO, understanding how marketing agencies charge for their services puts you in a position to get the best advertising deal for your business. There are three primary payment models agencies typically use, and when shopping for a marketing agency, they can help you determine which option matches best with your budget and marketing needs.
Marketing Agency Payment Models
1. Retainer Fees
This model is often the most common payment method for larger agencies. You’ll recognize it if you’ve ever worked with us before! It works by a business paying the agency a fixed regular payment – usually monthly or quarterly. The static sum of money covers all services by the marketer per your contract, irrespective of the amount of work done.
However, the amount need not be static. Sometimes, agencies get paid a percentage of the marketing budget instead. If this method comes into play, then the rate is constant, but not the fees.
The retainer fee model has advantages to both the business/client and the agency. For the business, their marketing costs become predictable. For instance, if you know that you need to spend about $150,000 annually on marketing and you want to manage that spend over a 12-month cycle, then a $12,500 monthly retainer is easy for both parties to manage. This can allow you to plan upfront with the marketing agency for your projected needs for the year and build out a strategy to execute on those plans month by month.
As for the agency, being on a retainer enables them to offer their services without restrictions on working hours. The ability to self-manage time means improved productivity, which also means increased profits at the end of the day.
2. Hourly Rates
The hourly charge is the oldest pricing model in the marketing world. As the name suggests, the business pays the agency according to the hours they work. Many small agencies or marketing solopreneurs and consultants use this method.
This model can work in two ways. One way is that the business agrees on an hourly rate. The agency helps in marketing efforts, keeps a counter of hours worked, and the company pays after the work is complete. Or, the other way, the agency estimates the work hours required to receive payment in advance, then starts working. Agencies often use this way for businesses asking for help on a specific marketing project, such as website development or rebranding.
The advantage of this model to the business is that it’s the most transparent – you pay for what you’re getting. For the agency, the merit is that they turn a profit — every hour rakes in money.
3. Performance-Based Marketing
Performance-based or value-based marketing is a little different from the other pricing models. Here, a business pays the agency once it achieves a pre-set marketing goal. As a marketing director or CEO, you must take time to understand the objective of a marketing effort and how its achievement is measured, especially if the goal is non-quantifiable.
This can be an advantage for your business as you only pay on scale with the agency’s success for you. Marketers, this may be a recognizable model for you if you’ve ever created pay-per-click ads on Facebook, which charges your payment method on file periodically as your campaign reaches metric or length-of-time milestones.
Paying Marketing Agencies
Effective marketing is a collective package of a suitable pricing model, value for money, and the best payment technologies to pay the agency. Ideal means of payment are those that facilitate one-off payments as well as recurring cash outflows. In a digitally transformed agency, they may use payment processing companies, invoicing software, or ACH/electronic check payments.
Make sure you or your accounting department are always up to date on the ever-evolving range of payment software that you may encounter in your marketing endeavors. By understanding both the possible payment models marketing agencies may use and the programs they employ, you’ll always get the most bang for your buck!