There are many different contracts that exist within an agency/client relationship. [refer: Agency/client contracts: signing on the dotted line]. A retainer agreement is the contract valued the most, yet it is also the most complex and difficult to hammer out.
One of the hardest parts of running an agency is the lack of regular cash flow, primarily due to agencies invoicing on completion of a project or campaign. There are several challenges inherent in the project process that can restrict cash flow:
- The project sales cycle can take months - from initial discussions through to completion and invoicing.
- Unless an agency invoices by milestone achieved, an invoice is generated once a project is fully completed.
- Payment for the project is usually made around one month after the work is completed.
- Projects can remain dormant for periods of time, waiting for content, feedback, approval, etc.
Because an agency's fixed monthly expenses still need to be paid, a great way to keep the cash flowing is by getting as many clients as possible onto a monthly retainer.
What is a retainer?
A retainer is an amount (usually fixed) that your client agrees to pay to your agency per month.
In return for an ongoing monthly payment, your agency will agree to supply specific services within that month. The retainer could cover services such as design, creative or art direction, account management, strategy, copywriting and research.
What's in it for your agency?
- Guaranteed regular revenue.
- Ability to forecast your P&L more accurately.
- Stronger agency/client relationship.
What's in it for your client?
- Ability to budget accurately for marketing spend.
- Less invoicing surprises.
- Very clear what they are getting for their money.
- Higher level of dedication from your agency.
- The creation of long-term project strategies.
When is a retainer appropriate?
- When your client's dollar spend is high.
- When projects or campaigns are regular or predicatable.
- When you are acknowledged as your client's agency
- When you have built up a trusted relationship.
Think of a "retainer" like a subscription to Netflix - something that gets used regularly that you have easy access to; as opposed to buying the occasional movie online. Like any subscription, the "value" of paying a fixed rate needs to be both proved and used on an ongoing basis.
Why is negotiating a retainer so difficult?
Many agencies struggle with selling retainers because they are (1) afraid to ask their clients for a monthly commitment; (2) they do not fully understand how a retainer can benefit both parties; or (3) they are not able to communicate the value of a retainer to their clients.
Major consideration points - for the client:
- How can you guarantee I will get value for money?
- What happens if in one month we do not use up our allocated hours?
- What happens if we go over our allocated hours?
- What priority will you put on my work over other clients?
- What happens if we got our marketing forecast wrong?
- What happens if there are major changes in our business - are we able to cancel or change the retainer?
Major consideration points - for the agency:
- What happens if the work requests go over the allocated hours?
- What happens if we get requests for work outside of the retainer?
- What if it's difficult to know what is in or out of the retainer?
The way to answer these consideration points is to ensure that they are all covered in the wording of the retainer agreement. Your objective is to avoid any "grey" areas going forward, and your retainer agreement should be the document you refer back to for any questions and concerns.
Right from the start it is important for both parties to acknowledge that some months may favour your agency and some months may favour your client, and that a "swings and roundabouts" principle may need to apply. That is why a review of the retainer should be made after an agreed period of time (e.g. 6 months) to see if the current format (and fee) is working for both parties. There should be wording within the retainer contract that allows for this review and for alteration of the contract if required.
Think 'value' rather than 'hours'
Any agency which charges soley by the hour will find it difficult to make fat wads of cash (true!). There are only 24 hours in the day and x-number of employees, so there is always a maximum amount of hourly revenue that can be charged.
If you set up your retainer based on a fixed number of hours, then you could find yourself facing the following issues:
- Your team may be punished for being efficient (if you need to refund the "unders").
- Your client may be punished for your team being slow (if you charge for "overs").
- Assessment of retainer value will be made based on hours used rather than output achieved.
The better solution is to sell your client on what you will do for them every month, and demonstrate why it will bring value to their business in the long-term. You could add in a section on how the work covered within the retainer will result in a tangible ROI for your client and help achieve their marketing goals.
What should a retainer include?
The retainer agreement should clearly state:
- The time period each retainer payment covers (e.g. one month).
- The cost of the retainer per month.
- The date the retainer is signed and the date it comes up for renewal.
- A review date to determine if the retainer is working satisfactorily.
- What is both included and excluded from the retainer. Stating what is excluded is just as important to cover any assumptions that may be made.
- The exact services that are included (e.g. design, account management, strategy, copywriting, etc) and/or the exact types of projects that are included.
- IF you decide to base your retainer on hours, then you should include the number of hours (per day/week/month) included for each type of service; plus how overs and unders of hours will be managed month to month.
NB: In the absence of an agreement to the contrary, all or a portion of the retainer fee should be refundable if the work is not performed (therefore you'll probably want an "agreement to the contrary"!).
- The seniority level of the person delivering the service (especially if your time capture or invoicing reflects this level of detail).
- Agency policy of how you will prioritise retainer work.
- Cancellation policy.
How do you have a retainer conversation?
If you are sure that a retainer will benefit both your agency and your client; if you are confident that you can talk about the value of your agency; if you have all your information and calculations ready; then just put on your negotiation-hat, take a deep breath, and...ask!
Never venture, never gain, right?
Sarah Ritchie is the founder of AM-Insider - a website bursting with tips, tricks and resources to create account management superstars in the advertising, design, PR, experiential and print industries. Sarah has been involved in account management for 25 years and has a passion for encouraging, mentoring and helping others succeed.
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