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November 27, 2016

How PR Agencies Set Budgets And Billing Rates

shutterstock_115685188-1For any brand or business looking to bring on a PR agency, the cost of a quality public relations program is a key factor in the decision. Yet for the uninitiated, the different ways agencies budget and bill can be opaque, to say the least. That makes it difficult to get an apples-to-apples comparison when reviewing firms, and sometimes sets off a circular discussion where the agency asks about available budget and the client holds back, hoping for an affordable rate.

In truth, there shouldn’t be any mystery about how PR agencies plan budgets and bill clients. Here we break down the fundamentals common to most firms.

How agencies bill clients is largely a function of the time spent working on the client’ behalf, plus the degree of experience of each agency team member, no matter which method they choose.

Hourly billing. This is very common among agencies and is a direct reflection of the time spent on client activity. A typical agency’s hourly rates can range from $70 for an administrative staffer to $500 or more for a senior executive, so the trick is to have the proper staff mix for the job. Some clients report sticker shock when they get an invoice at the end of the month where senior staff attended meetings but didn’t appear to work on the account, so a degree of caution is warranted. Many agencies adopt “blended rates” that average the hourly billing rates of core staff as a gentler alternative. For a detailed breakdown of how agencies calculate hourly rates and profitability, see Rick Gould’s Billing Rates Report for 2014.

Flat fee. A flat fee amortizes the total PR personnel budget over the duration of the engagement, usually in a standard monthly amount. It’s the simplest to manage and makes budget forecasting easy. On the flip side, the fee will be the same regardless of the amount of work put in by the agency team. The thinking behind a flat fee is that agency staff may overservice in a given month – for example, during a trade show or a major launch – but it will not request extra billing because it may then underservice during another, less busy month.

Project billing. For clients with short-term needs, like a launch campaign, many agencies offer project fees, typically in a single fee budget, billable in two or more installments, or at a set hourly rate against a cap. Most agencies set a minimum for project fees due to the time investment a team needs to get up to speed on a client or industry.

When might agencies charge more?

A good PR firm is likely to charge more than typical rates for highly specialized expertise, or for a sudden, “drop-everything” engagement like crisis management, where PR counselors will be working around the clock.

What about value pricing?

One interpretation of “value pricing” is where PR agencies act like management consultants, who charge a higher fee when the value of a positive business outcome is far higher than the time required by the agency. (If I can solve your business-threatening community relations problem by brokering a single meeting with an activist group where I have a close relationship, for example, I may charge more than just the three hours I spent at the meeting, because my intervention is worth far more than that.)

Another type of value pricing is what is often called “pay-for-placement.” This is where the client compensates the agency for each earned media placement, or for placements above a given quota. The idea is to incentivize the agency to generate lots of feature articles, items, and other deliverables for companies who may be short on cash, or who feel they require only publicity services, not messaging, media strategy or interview prep. Pay-for-placement is popular among some smaller and start-up companies, yet it’s also controversial. When TechCrunch discovered a PR agency was charging $750 for a post in its publication, it promptly banned the agency on the grounds that it was unethical. For most PR agencies, pay-for-placement is a non-starter because it overlooks the value of strategic PR and rewards a short-term approach to media and client relationships.

How do agencies set rates? What factors influence what it charges?

Seniority of staff. Most agencies are selling time, talent, and experience. The greater the experience, the higher the billing rate.

Size and overhead. See that shiny new video production studio at your agency’s headquarters? You’re paying for it. A larger firm will naturally have a bigger overhead to cover, and a smaller agency will typically have lower overhead and gentler rates. Smaller agencies also offer less depth and a smaller scope of services, so matching a client’s needs to breadth of services is important. You don’t want to pay for lots of services that aren’t needed, yet you also want to avoid outgrowing your agency within a year or two.

Specialist expertise. As noted, specialized experience can come with a higher billing rate, particular during an economic boom where there’s a shortage of professionals with that expertise. Experience in emerging technologies, specialized healthcare treatments or products, or international regulation will often come at a premium, for the simple reason that those professionals can command higher salaries in the PR labor marketplace.

How can clients determine if billing is fair?

Most clients shop around and compare agency proposals and budgets. Once a relationship has begun, they ask for regular activity and results reporting, and some request staff timesheets to ensure that the time is being spent well. Frequent communication – with formal check-ins a minimum of once a week – is highly recommended.

But timesheets and meetings only go so far. The best way for any company to assess its return on investment for a PR expenditure is to agree upon success metrics in advance.

There isn’t a universal formula for measuring PR success. But with a reasonable investment of time and budget in advance of the relationship, most clients can agree on methods that measure what PR does well, as outlined in this post about public relations outcomes measurement.

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