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Profit & Growth Tips for Digital Agencies

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7 Reasons Your Digital Agency Needs to Stop Charging by the Hour

Posted by Laura Hernalsteen on May 2, 2016

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The billable hour pricing model is popular with agencies and freelancers alike: it’s easy to calculate and keep track of. However, charging by the hour could be harming your agency’s growth and limiting your profits.

Today I’m looking at seven reasons why your digital agency should consider changing its pricing model.

1) Not Aligned with Customer Needs

Hourly billing incentivises inefficiency. Your team are financially motivated to take longer on a project, rather than completing it as efficiently as possible, so that you can bill more for it.

With an hourly billing model, the value is placed on the amount of time you spend on a project, rather than the results you deliver. Sometimes, this can mean your agency’s goals are misaligned with your customer’s, which risks damaging your relationship in the long run.

2) Limits Agency Growth

On the billable hour pricing model, you have created an upper limit on the amount your agency can charge for in any given month. While you can increase your hourly rate, that only works up to a point, and you can’t create more time to bill for without hiring new team members, which eats into the increase in profits that it would bring.

3) Easy to Compare Against Competitors

Your hourly rate can easily and directly be compared against competitors – including other agencies and freelancers – in isolation, with no consideration for the unique experience or skillset that they would benefit from in working with your agency team.

4) It’s All the Customer Will Remember

Once you’ve pitched for a project, no matter how impressive your portfolio or proposal, the customer will come away from the meeting with one thing at the forefront of their mind: your hourly rate.

5) It Limits Your Customer Relationship

When you’re billing by the hour, the customer sees your time as a commodity. It keeps your relationship as strictly transactional, where your agency provides a service that the customer pays for. In comparison, billing for whole projects shifts the relationship to more of a partnership - a type of investment, rather than a service rendered.

6) It Increases the Likelihood of Challenged Invoices

If a customer knows exactly how much you are charging per hour to work on their project, when you send them an invoice they are likely to want a detailed breakdown to account for every single hour you spent working on it. This means your team will need to be meticulous in their time-tracking, but even then it may not be enough to prevent customers from challenging your invoices.

If you don’t bill by the hour, you still need to track your time at a high level, but this will be to help you measure the profitability of your agency profits, rather than to calculate how much to charge your customers.

Learn more: 5 Ways to Improve Your Digital Agency’s Time Tracking

7) Doesn’t Reflect Employee Expertise

With a fixed hourly rate, it’s difficult to reflect your employees’ skills and expertise in the cost. For example, even if you have a senior employee who works 5x more efficiently and produces work that is 5x better than your junior employee, you wouldn’t be able to charge 5x more for their services.

This means you aren’t incentivised to help your employees develop and expand their skillset, as this isn’t something that would be reflected in your agency’s rates.

how to make your digital agency profitable

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