How to calculate a retainer fee for your agency

Why a retainer priced from the market loses money

You may have priced your retainers from the client's budget, your last proposal or a figure another agency quoted. None of those knows what the account costs you to run.

That cost turns up three or four months in, as an account that feels busy and earns little. By then the fee is agreed, and changing it means a hard conversation.

The retainer fee formula

Retainer fee = monthly delivery cost / (1 - the margin you need)

Monthly delivery cost is every hour the account takes in a month, multiplied by what an hour costs you. Divide by one minus your margin rather than adding a percentage to cost. Adding falls short of the margin you meant.

An hour costs you each person's salary plus everything paid on top, divided by the hours they spend on client work. Dividing by paid hours instead makes every hour look cheaper than it is.

One retainer, priced three ways

Run the numbers on a retainer scoped at 36 hours a month. Count the calls, revisions and reporting as well, and it takes 50 hours. An hour costs you $70, and you need a 40% margin.

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

The first fee covers its cost and almost nothing else. The gap between the first and last rows is $2,305 a month, or $27,660 a year on one account.

Where the margin you need comes from

Do not borrow the 40%. Work it out from what your overheads, your salary and the profit you want add up to.

Margin you need = (overheads + your salary + target profit) / agency gross income

Agency gross income is your fees after pass-through costs such as media spend. Take an invented agency earning $900,000 of it. Overheads are $150,000, your salary is $120,000 and you want $90,000 of profit. That is $360,000, or 40%.

How to price your next retainer

1. ( 01 )

   Count every hour for one month

   Pick a live account and log scoped work, calls, revisions and reporting. One month of real hours beats any estimate.

2. ( 02 )

   Work out what an hour costs you

   Add up salaries and everything paid on top of them. Divide by the hours your team spends on client work.

3. ( 03 )

   Work out the margin you need

   Add overheads, your salary and the profit you want. Divide the total by agency gross income.

4. ( 04 )

   Divide, never add

   Divide the monthly delivery cost by one minus that margin. The answer is the lowest fee that carries its share of the agency.

5. ( 05 )

   Set it against the current fee

   If the client pays less, you now know the gap in dollars a month, and what the account costs you to keep.

What to do with the answer

If the formula lands above what the client pays, take the hours into the renewal. A gap you can show in hours is an easier conversation than a general price rise.

If the client will not pay the floor, cut the scope until the hours fit the fee. A smaller retainer that pays its way is worth more than a large one that does not.

Then check it each month by dividing the fee by the hours logged. If the answer stays above your cost per hour divided by 0.6, $117 on these numbers, the retainer is holding its margin.