What’s Working in Agency Fee Compensation

Clients are beginning to push back on agency commissions and mark-ups.  This leaves agencies with only one form of compensation: fees.  There’s nothing wrong with fees for projects or retainers, but they limit an agency’s capacity for leverage, growth and extra profits.

In the old days agencies made money in three ways: fees, commissions and mark-ups.  These enabled agencies to have pretty good leverage.  In contrast, it’s much more difficult to make a lot of money when you have to work an hour to get paid for an hour.

The newest concept in fee billing is for agencies to offer clients a risk/reward basis for compensation.  The agency offers a discount on its normal full-price billing rate to gain an ascending bonus from the client, based on performance metrics agreed upon by the agency and clients.  In some cases, the agency does not have to offer the discount in order for the client to offer a bonus for performance.

Several tips:

  • If your agency is offering a discount, put only your profit at risk.  No base costs or out of pocket costs should be considered in the discount.

  • Whatever discount you offer, negotiate a bonus of that same amount.  For example, if you offer a 20% discount on your normal rates, ask for a 20% bonus over those rates.

  • Make sure both parties agree to and understand the measurement methodology…and that both parties are able to track this independently.

  • As your performance passes each level of achievement, make sure you can retro-activate your new hourly rate to the beginning of the deal.