How to calculate your agency's effective hourly rate

What effective hourly rate actually measures

Your rate card is what you would like to earn per hour. Your effective hourly rate is what you did earn. The difference is every hour that went into an account without appearing on an invoice.

Effective hourly rate = total fee / total hours worked on the account

The formula is trivial. Getting the denominator right is the part everyone skips, because most of those hours were never recorded anywhere.

The four hours nobody counts

When agencies calculate this for the first time, the number usually comes out higher than reality. That is because these four categories get left out.

• Revision rounds beyond the scoped number, which feel like goodwill at the time.
• Account management, status calls and the weekly check-in that nobody logs against the job.
• Rework caused by a brief that changed after the work started.
• Founder time spent unblocking the account, which is the most expensive hour in the building.

Add those back and the denominator often grows by 20 to 40 percent. The same fee then spreads over more hours, which takes 17 to 29 percent off the rate.

A worked example

Run the numbers on a $6,000 monthly retainer where the scoped effort was 40 hours.

These figures describe an invented retainer chosen to show the arithmetic. They are not a client result.

The rate card said $150. The account earned $80. Nothing went wrong on this job, and no one did anything unreasonable. The hours simply were not counted.

What counts as a good effective hourly rate

There is no universal number, because a good rate depends on what an hour costs you to deliver. That cost is the floor. A good rate clears it by the margin you priced for.

Minimum effective hourly rate = delivery cost per hour / (1 - target margin)

Run the numbers on a team whose delivery hour costs $60 once salary, benefits and overhead are counted. At a 20 percent target margin, every account needs to earn at least $75 an hour.

These figures describe an invented team chosen to show the arithmetic. They are not a client result or a benchmark.

The $6,000 retainer above earns $80 an hour, so it clears that line with $5 to spare. One more six-hour revision round takes it to 81 hours and $74, under the line.

How to run this on your own accounts

1. ( 01 )

   Pick your three largest accounts by fee

   Not your favorites. The largest, because that is where a small percentage error costs the most.

2. ( 02 )

   Take one full quarter, not one month

   A single month flatters accounts that had a quiet patch and punishes ones mid-launch.

3. ( 03 )

   Reconstruct the hours honestly

   Ask the team what they actually spent, including calls. Nobody is in trouble, which is worth saying out loud before you ask.

4. ( 04 )

   Divide the fee by the hours

   Do this per account, never averaged across the book, because the average is what hides the problem account.

5. ( 05 )

   Compare against your delivery cost

   If the effective rate is close to your blended salary cost per hour, that account is running at roughly break even.

What to do with the answer

One account will be much worse than the others. That is the point of the exercise. You now have three options and they are all reasonable.

• Reprice at renewal, using the hours as the argument rather than a general increase.
• Reduce scope so the fee and the effort match again.
• Keep it deliberately, knowing what it costs, because it feeds referrals or credibility you actually use.

The wrong option is the fourth one, which is carrying it without knowing. That is the position most agencies are in before they run this.