In order to provide world-class service, an agency needs to employ world-class talent. World-class talent, as you might imagine, is expensive – and I pride myself on paying our people well. I want the same for them that I want for myself; a comfortable life.
For starters, we prefer to work with clients who are ready to bring on an agency.
But it’s also about the numbers, and yes I’m talking about profit.
The old saying goes;
Revenue is vanity, profit is sanity
Without profit, no business can survive.
Controlling your cost of goods sold (COGS) is one thing, but making sure you’re charging enough to cover both fixed and variable costs, while having enough cash leftover to cover additional operations (and to take care of your team; think things like 100% coverage of healthcare, unlimited PTO, a stocked kitchen, paid meals, and so on) all come from your profit bucket.
FTF (originally founded as IFTF) has humble beginnings. We started out as a tax shelter for some personal consulting work and over the course of 5 years, grew into the talent powerhouse we are today. With this came quite a bit of evolution..
While our early engagements did often include some design, user experience, and web development to implement our strategies.. it wasn’t part of our founding identity.
Today that’s not the case at all.
We have built a team that has dedicated departments for: design, user experience, content strategy, web and application development, and of course, search.
What this means is our blended rate has changed dramatically.
Our average client project team looks something like this:
Where the Strategy Lead, is the Senior staff member on the project based on the focus of the engagement.
Then we have at least one member from all other FTF departments on every engagement to deliver what makes us different; performance informed digital marketing.
I’ve never understood agencies that play their rates close to the chest.
If anything, it means you wind up with more unqualified leads coming through your sales channels and clogging up the time of your business development staff.
So in full transparency, here’s our current rate card:
If you take these rates and apply them to our average retainer client’s project team, you can approach a blended rate.
What’s important to consider is the average weighting of each service item involved in our base retainer clients.
Which for a minimum retainer client, the 20 retainer hours tend to be broken out like this:
Which shakes out to an average blended rate of $223.25.
What doesn’t get included, and is actually the largest cost for the agency, is all the additional time for meetings, both internal and external.
For clients eager to partner with us, and get the time, energy, and attention of myself and my team – we require a minimum monthly retainer of $5,000, in exchange for an average of 20 hours (though we’re pretty quickly moving away from hours as the industries we’re in continue to evolve) for a period of 6 months.
This is where the $30,000 minimum engagement figure comes from.
We’ve found that to really move the needle, in a meaningful enough way to justify further investment – we prefer to have 6 months to design and then execute on our campaigns.
This isn’t to say that we don’t often come in and find glaring technical issues that can be resolved in month 1 (like the time we found a misplaced canonical tag that once removed had the source page shoot to position #5 for a commercial keyword with 130,000 searches/month the very next week), but these are more the exception than the rule.
Here’s where most agency owners get it wrong.
Our COGS is not a straight-line breakdown of labor costs; you need to factor in all of the costs involved in delivering our service.
This means factoring in things like rent, utilities, software, equipment, etc… on top of labor costs.
My goal for any service-based business I am an owner in, is to establish and maintain at least a 30% net margin (net is the operative word there).
This means that with all costs considered, fixed and variable, at the end of the day there is always 30% of that average blended rate left in the bank.
This means with an average blended rate of $223.25 the company needs to retain $66.98 of every hour billed, or that the companies max cost to deliver a client an hour of billable work needs to be $156.27 or less.
|Position||Starting Salary||Hourly Cost||Payroll Tax||Operating Cost||Total Hourly Cost|
|Sr Client Strategist||$60,000||$30.00||$4.50||$21.92||$56.42|
|Sr Content Strategist||$70,000||$35.00||$5.25||$21.92||$62.17|
|Sr SEO Strategist||$80,000||$40.00||$6.00||$21.92||$67.92|
|Sr Visual Strategist||$80,000||$40.00||$6.00||$21.92||$67.92|
|Sr Web Developer||$100,000||$50.00||$7.00||$21.92||$79.42|
Here’s a projected scenario of what the agency COGS could look like for the average client’s project team:
Here’s a plausible breakdown of the annual operating costs for a ~40 person digital agency:
|3rd Party Software||$74,294||$1.06|
As you can see in the above table, what this means is that our average overhead cost for all non-labor expenses is ~$22.00/hour.
So if you do the math, to deliver 20 hours per month at $5,000 in fee’s to a client, it costs us (on average) $133.64 per hour, leaving us with $89.61.
Which means the average profit margin for a minimum retainer client (20 hours @ $5,000/month for 6 months) is $1,792.20, or 35.84%, which gives us a small margin of variability to deal with additional costs should they arise.
I bet you thought we were expensive (maybe even over-priced) when you saw our rate table above.
A very interesting thing to consider is back in 2014, when we were a team of 4 (me + 1 dev contractor + 2 apprentices) we charged $300/hour across the board, without any separate line items for varying services.
Our deal size was smaller back then, as was our client list (I think we had 5 clients that year?), but man were we profitable.
One major lesson I’ve learned watching an agency scale into having 50+ clients and ~40 employees is the profit margin curve is far from linear.
There actually seems to be a pretty massive dip when you hit a certain level of scale that it then takes years (and millions of dollars of operational investment) to recover from and point back up and to the right.
In our case it looked something like this:
Bringing this back to the core concept that profit is sanity, and what enables businesses to actually thrive and grow, our current rates (and minimum engagement) is designed to allow us to:
So with all things considered, we’re not actually expensive – but instead, we’re priced for efficiency at our level of impact and talent.
If not, would you like to be?
I’m launching a private coaching program pretty soon, and if you’re ready to take your small agency or individual consulting business to the next level, you should check it out »
Utilization rates are the key driver to profitability within digital agencies. Yet.. so many agencies don’t put any processes or systems in place to track it (especially those doing less than $5 million in annual revenue).
Anyone with sales experience already understands how valuable strategic partnerships can be to drive growth.
For the rest of us, it may not be as obvious just how much revenue can be generated, consistently (read; predictably) from building an intentional, formalized partner ecosystem.
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Hey Nick, Thanks for posting this. I've been going over this in depth to try to get a better handle on how we are scoping out client projects but I've been having trouble replicating some of your numbers. You mention Client Retainer COGS hours as being 20/mo for the project but then list 30 total hours of work time. Also, your COGS Cost Total is listed as $3,474.73 but when adding the numbers above I get $4,784.70. Using your blended rate for $5000, shouldn't the client be receiving more along the lines of 22.5 hours of work? Last, how do your labor costs translate to your rates? Thanks again.
[…] 5. Our Minimum Engagement is $30k – Here’s Why […]
Nick, very interesting article, and those principles apply well for a software service business. But I can not figure out how did you come up with a total in table "Client Retainer COGS" - I can not come up with a total whatever I add up :). What is "Internal meetings - 6 - $2,386.68"? That's 397.78 an hour? Is it a total duration of meeting involving several people? In that case it would be clearer if you put all man-hours involved. Also why do not you "externalise" your meeting cost for your clients? Does it mean that clients would better digest that your charge out rate is 10x of pay rate, rather then hearing that so many hours are taken by communications? I am very curious.
Hey Vladimir - More than happy to walk you through how I'm getting to the numbers for the meeting costs. So for our average client project team, if you take the hourly cost of every person on that team, and add them together, the total internal cost is $397.78 per hour. This is based on adding in the cost of 1 hour of time for each of the project team members (Director, Client Strategist, Outreach Strategist, Content Strategist, Digital Designer, SEO Strategist, and Web Developer) which you then multiply by 6. Those 6 hours represent an average of 1-2 project meetings per week. When this is discussed with clients during the sales process it actually tends to create more trust and confidence since the clients know they're getting the full attention of their project team on a weekly basis.
Thank you for this transparency. I share the needs for better pricing of most SEO/Content Strategy agency's work as being strategic and high impact, thus commanding premium engagement fees.
[…] John’s Tip: Our Minimum Engagement is $30k: […]
[…] John’s Tip: Our Minimum Engagement is $30k: […]
Thanks for sharing Nick. I'm in the first week of soft-launching a new agency.. it's going great so far.. but this really puts a lot into perspective. Cheers!
My pleasure Dylan - that's the whole point; to help agencies realize that pricing needs to be an "all things considered" activity to support long-term, sustainable growth.
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