By Bart Mroz
The fixed retainer vs. hourly rate debate continues. Service providers like agencies and consultants generally offer one of these two ways to charge for their work. But when it comes to hiring them, which approach is right for your business?
Each pricing model has its pros and cons depending on the type and scope of a project. But in general, a flat rate is most often the better option. Here’s why:
Downside of Hourly Billing
Hourly billing is a seemingly straightforward payment structure where you only get what you paid for; nothing less and nothing more. It’s essentially a consultancy billing you for the amount of hours it took to work on your project. An hourly billing model can be fair for both parties if the work put in matches the scope of the project. In an hourly model, the consultant will not be shortchanged when a job turns out to be larger than expected, but you will be billed for every minute they spend working on your project.
A potential downside of hourly billing is that it can create the wrong incentive for providers. Hourly billing can hinder productivity and creativity because both you and the agency will be looking at the clock all the time. You will want the work to be done faster while the consultancy may deliberately work slower to be able to bill for more hours. If there is a cap set on hours, the consultancy will only work the specified number of hours.
When a service provider charges by the hour, it can cloud your perception of the value you receive. Focusing on the time a project can divert your attention from the quality of results you are getting.
The hourly billing pricing model has no built-in motivation for efficiency if the provider is simply being rewarded for clocking hours. Simple and straightforward projects can drag on because the agency doesn’t feel the need to do their best work quickly. The risk of “on the clock” billing is that the work results in higher costs.
One Easy Payment
The benefits of a fixed retainer payment model, on the other hand, greatly outweigh the risks. A flat fee helps set expectations, whether it be a larger project that requires an ongoing monthly retainer or smaller tasks where project-based fees will suffice. Either way, a consultant is charging for the value they produce, not the amount of hours they put in. With a flat fee, the incentive weighs in favor of high-quality work and less about how much time it takes to get the job done. A fixed retainer is a results-driven approach that creates a more productive relationship between you and the consultancy.
With a fixed fee, you’ll know the exact scope of the project and costs, allowing you to better manage your bottom line, which can give you less anxiety than scrutinizing the hourly costs. A flat rate is simplistic, straightforward and helps ease logistics as opposed to trying to estimate and calculate a per-hour pricing model. Choosing a retainer saves time from having to do mundane administrative work like logging hours, and results in more time spent working on the project.
With a fixed rate, you are buying the services, not the time.
The only gamble you make with a fixed rate is the possibility that your project will not be as time consuming as estimated and end up costing more than an hourly rate might have. But from my personal experience, any given billable hour may not be as efficient or productive, costing more in the long run.
Ultimately, the best pricing model to choose comes down to what you value most. Those who like to know exactly the amount of time they are paying for will be attracted to hourly billing. For those who are driven more by overall results, a fixed retainer is the way to go.
Bart Mroz, founder and CEO of SUMO Heavy, a digital commerce consulting and strategy firm, could delve into the things to consider when hiring a consultancy or agency. Bart is a serial entrepreneur with over a decade of business management, having advised and executed on e-commerce strategies for both established retailers like Nicole Miller and younger upstarts like Stadium Goods. I think he could provide some insight for your readers.