Should your agency charge new clients a startup fee?

Agency Leadership Podcast

In this episode, Chip and Gini discuss the complexities of pricing strategies for agency engagements.

They explore whether agencies should charge more upfront for initial work, the importance of consistent revenue, and creative approaches to managing client expectations and financials.

The conversation emphasizes understanding client perceptions and the necessity of knowing one’s financials to ensure profitability.

Key takeaways

• Chip Griffin: “Certainly think about those upfront costs, but I would try to amortize it over the course of the engagement. I think that’s a much better approach for ultimately winning the business.”
• Gini Dietrich: “The first thing you have to do is understand your financials and if you don’t have the mind to be able to do it or you avoid it or you don’t want to do it, hire somebody to help you because if you don’t know those numbers intimately, you will not know how long it’s going to take before you are break even.”
• Chip Griffin: “There are so many creative approaches that you can take to solving this problem of overwork at the front end of an engagement that you’re not able to recoup otherwise.”
• Gini Dietrich: “Put yourself in the prospect’s shoes and say, Okay, if I were being pitched this program, how would it make me feel? Would I be able to do it? Really think about it from their perspective so that you can start to figure out if it makes sense.”

Related

• Using paid discovery to get better clients
• Adapting your agency for risk-averse clients
• 9 ways to price your agency’s services

View Transcript

The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.

Chip Griffin: Hello and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: And Gini, I think, I think we’re gonna need to charge a little bit more for the first few minutes of this show.

Gini Dietrich: Great. Let’s do it.

Chip Griffin: So let’s see. How about we do 50 percent more than what we usually charge people to listen to the, to the show?

Gini Dietrich: So like the first 10 minutes?

Chip Griffin: Sure. So let’s see. So,

Gini Dietrich: so right now we charge 0 per minute.

50 percent more.

Chip Griffin: And if we add 50 percent to that. Let’s see.

I don’t have a calculator here, but I’m pretty sure that’s still zero.

Gini Dietrich: I think you’re right. Yeah. I think it’s still zero.

Chip Griffin: Well, so what? You still get to listen to this for free.

Good news, everybody.

Gini Dietrich: Woohoo!

Chip Griffin: So, no, but we are going to talk about a question that was asked. This is, this came up in the Solo PR Pros Facebook group, of which I am part. And so someone posted recently about whether or not they should charge more for the early stages of an engagement. For all of the work that comes along with starting to work for a client, right? Because when you start working for a client, there, there’s typically a burst of work that takes place that, that tends to most of the time, slow down over time as you get established and you’ve got all the basic tools in place. The question is, whether you’re a solo or an agency or whatever, should you be charging more?

Should you be charging a setup fee or something like that in order to get started with an engagement?

Gini Dietrich: Yeah, I think like anything else, it depends and there are pros and cons to both. It’s an interesting idea. Personally, I prefer to have consistent revenue that I can count on every month. And so I tend to just pace it out over 12 months.

So that I have that, the same amount of revenue in every month. But I can also see the argument being made for doing some upfront or set up fee or something like that to get started. Clients may like that they have, you know, that there’s a burst of activity and then, and then the retainer goes down a little bit.

They may like that and they may not. So I think, but I think there is an argument to be made for it for sure. Just, I would just from my own perspective, I like to have the consistent same amount every month that I can count on.

Chip Griffin: Yeah, I mean, I think the… I would agree with everything you said. And in general, I think over the course of my own agency career, I don’t, I can’t really recall too many instances where I did charge more upfront, unless there was some specific project that was taking place separate and, and distinct from the monthly retainer that would be paid going forward.

And I don’t mean just, you know, work on, on my part or my team’s part, but… you know, that, that was noticeably different to the client. And, and I often talk about, you know, how there is sort of, a bell curve of profitability for engagements with clients for agencies. And so your profitability tends to be very low upfront for this very reason that this question gets to, which is there is work upfront with almost every engagement that you have.

And then over time you become more efficient. And you can produce good results in less time, you start to know the client, so it’s just, it’s so much more efficient, you start to become profitable. And then at some point you start to get afraid of losing that client, and so you start over servicing, and you’ve accumulated a lot of, just, what if we just did a little of this and a little of that, and all of those things stick around, and so your profitability then wanes towards the end of the relationship.

So, so this would, charging up front would be one way to adjust that front end of the bell curve. I think to me, the biggest problem with this is that it makes the decision more difficult for the prospect. And we talk about if you want to try to close more business as an agency, you want to de risk the engagement as much as possible.

Telling them they have to make essentially a balloon payment up front is going to be more challenging in order to close the deal. Because if you’re say, talking about a 2, 500 or 5, 000 a month retainer, And all of a sudden you say, but the first month is going to be 7, 500.

Gini Dietrich: Right.

Chip Griffin: It starts to become more challenging to close the deal because now in their minds, instead of looking at 2, 500 a month, they’re looking at 7, 500

Gini Dietrich: right

Chip Griffin: up front.

And so you’ve now made it a riskier decision. So I would prefer to, to certainly think about those upfront costs, but I would try to amortize it over the course of the engagement. And I think that’s a much better approach for ultimately winning the business.

Gini Dietrich: Yeah, I mean, and that’s what I personally prefer to do as well.

I also think there’s an opportunity when you do that for budget growth, because you, you haven’t used the budget, the client doesn’t feel like they’ve used all their budget up front. Right. So you have the opportunity to say, okay, after the first quarter, here’s everything that we did. Here are the results.

I like to use AI to, to help with the analysis now. So I throw the data into AI and I say, point out strengths, weaknesses, opportunities, and threats. What can we focus on? What should we not be focusing on? Where, what should we do away with? And it’s not perfect, but it gives you some really good ideas and you can go back to the client and say, okay, here’s our quarterly report.

Here are our results. Here’s what we did really well. Here’s some things we think we should change. And, oh, by the way, here’s some things that we think we should add on. And it gives the client the opportunity to say, yeah, actually, that’s a really good idea. I can find some money for that. Or I’m not quite ready for that, or I like that instead of this.

And since this isn’t working, can we replace that work with this new idea? So it gives you the opportunity to sort of have that converse or that partnership conversation with your clients. In a really interesting way versus saying, okay, well, we’ve used all your money up front because we had these upfront costs and now we don’t have anything less.

It gives you the opportunity to sort of make them feel like you’re more of a partner.

Chip Griffin: Absolutely. And I think it also, I think there are other alternatives that you can think of. So if you do have really substantial upfront costs, more so than what one might normally think, then there are two different approaches that I personally like and would urge you to consider.

The first one is something we talk about here a lot, which is paid discovery. So instead of going directly into a retainer engagement, pitch some sort of a discovery type project, strategic engagement, planning process, something like that, where it’s a very defined work product that you’re putting together, and there’s a very defined price for it, and it may be higher than what your monthly engagement would be going forward, but you’re also giving them a very concrete deliverable that they can see and is tangible to them, and you’re still de risking it for them because they could simply say, No, we don’t want to proceed after this.

And so I would prefer that over saying it’s a 12 month engagement, but month one or month two is going to be, you know, a higher number. So consider that because now you’re, you’re getting the best of both worlds. You’re getting paid for all of that upfront work. But you’re also doing a discovery project that, to your point, allows you to identify other things that they might want to hire you to do.

You’re able to figure out, does your pricing for that monthly engagement need to change? Because you’ve seen how they operate, and we talk about this all the time. It’s as much for you to feel them out as it is for, for them to understand you. And so I, so that would be the first option that I would suggest that you consider.

Instead of some sort of a setup fee on top of moving directly into the monthly engagement.

Gini Dietrich: To that end, I have a client who does VIP sessions every month. And so when she’s working with a prospect, she will say, I have four dates available this month for a VIP session. And they get to choose one of the dates and it makes them feel special.

And the, the VIP session is the, a day that she just focuses on that new client and does exactly that. Like some discovery, she does some research, she does competitive analysis, she does all of this stuff. She probably meets with them for two or three hours of that day. They’ve reserved that day to help her with marketing and PR questions and making sure she has everything she needs, getting her the reports, getting her access, all that kind of stuff.

And she charges a good sum of money for it and the client feels really special. It’s like, Oh, this is, I’m a VIP and this is like, it just goes to that human psychology piece of it. And it gives her everything she needs so she doesn’t have to say, okay, well we need access to this, this, this, and this, and then wait a week.

And then we need this, this, this, and this and wait another week. And like, so it gives her the opportunity to get everything that she needs done in one day. She blocks off her calendar. She, she and her team focus just on that one client. To get everything done and the client does the same. And, and she, she tries a good, good sum for it.

So it allows her to do it and they get it all done in one day too, where they don’t have to like drag it out over months and months and months or weeks and weeks and weeks. And the client feels like, wow. And then the client says, okay, well now that you have this and you’re making these recommendations, let’s go for this.

So almost always they sign on with her.

Chip Griffin: Yeah, no, that’s, that’s a great idea. And, and it just goes to show you that there are so many creative approaches that you can take to solving this problem of overwork at the front end of an engagement that you’re not able to recoup otherwise.

The other option that I would encourage you to consider, and this is, this is really if you take my approach, which is, I know one that you don’t agree with, Gini, but my approach of just doing month to month engagements.

I, I, I have been doing that for 25 years, with all of my businesses. I love it. I’m committed to it. I know that you think I probably should be committed for it, but it is what it is.

Gini Dietrich: I do.

Chip Griffin: And, and it has worked for me for 25 years, so why would I give it up? But if you are in that same mindset where you have really a 30 day out for anybody who is with you, and frankly, many of you, we’ve talked about this before, many of you who have annual contracts still have 30 day outs.

Yep. So you don’t really have annual contracts. Yep. So. Some of you may. Some of you may require that people pay for the full year. But if you have any kind of 30, 60, 90 day out, that’s the length of your actual contract. So, put that in your head first. The other option in those cases, if you are operating that way, where you do have a 30 day, 60 day out, or you’re doing month to month explicitly, or however you’re handling it, is to require a minimum engagement to make sure that you recoup the cost.

And so with some of the, the project work that I’ve, or some of the retainer work rather that I’ve done over the years where it required a substantial amount of upfront stuff. And I think of this in terms of particularly, clients who hired my agency for reporting and analysis type work. There’s a huge amount of upfront work to do all the configuration of the reports that collect data and putting all the pieces together and doing whatever subscriptions you need and all of those kinds of things.

And so in those cases, what I would do is I would have a minimum engagement of three, four, six months, whatever it took, I did the math to make sure that at the least I come out break even. Right. And so you need to figure out where do you at least make sure you’re not losing money. Now, the reality is most clients stay beyond it.

So you actually start making money, but by putting a minimum length of the engagement in there that they can’t just break out of, that can be another way to solve this problem so that you make sure that you’re, you’re not really putting your, your own business at risk during that setup stage.

Gini Dietrich: Yeah. It’s, I mean, the reason I don’t agree with it is because I think that too many clients say, Oh, well, you have a 30 day out and I’m just going to give you two weeks notice. And then you’re screwed. Like you don’t have the income and, and I, I prefer to have, to know that I have consistent income and it usually takes me 60 days to replace a client.

So if I have 60 days, we can make sure that transition is done correctly and that, you know, they get everything that they need. And on my side of the thing of the business, I can ensure that that client is replaced. So I keep the pipeline nice and full. But, like, you do have a point that if you have a 30 day out, it’s month to month.

So, I do like the idea of saying this, you have to, it’s a minimum agreement of three months or four months or six months or whatever it happens to be so that you don’t lose money on the deal. But I think that’s a nice compromise to where we both are.

Chip Griffin: Yeah. I mean, well, one of the reasons why I like it too, is it allows you to have the conversation with the prospect to explain to them.

Normally I don’t have that, but because of all of the upfront work that’s involved, that’s why this is required for this particular project. And so it helps, it helps them to understand that you’re really going to be putting in a lot of extra upfront effort, but you’re not making them pay for it. So, yeah, at least not explicitly, right?

And so, you know, it can be a selling point as well as part of the conversation because you’re trying to make it look like you’re trying to help them in the process when the reality is you’re helping yourself and making sure that you don’t end up upside down on the deal.

Gini Dietrich: I think that that requires something that a lot of agency owners struggle with, which is understanding how to charge for things, understanding how to price for things, understanding what your profitability is.

You have to understand your financials so intimately to be able to do this that you can’t screw it up. So that like nowhere should you, that is the first thing you have to do is understand those financials and if you don’t have the mind to be able to do it or you avoid it or you don’t want to do it, hire somebody to help you because if you don’t know those numbers intimately, you will not know how long it’s going to take before you are break even.

You won’t know.

Chip Griffin: You’ve got to know your numbers. Have to know them. You absolutely have to. So all these people out there were like, Oh, time sheets are silly. You don’t need to do that. You just stop, stop. You need to know. You need to know what your work is costing you to do. I don’t care how profitable you are.

You can be a wildly profitable firm. And, and so your instinct may be, well, I don’t care then what… you care because you, you still need, if you want to keep growing, you need to figure out which projects you should be taking on or which projects you shouldn’t. And it often surprises people when they actually dig into the data what it actually costs to complete work.

Gini Dietrich: Yeah, yeah.

Chip Griffin: But now that I’ve, I’ve completely spent the last, you know, 15 minutes dumping on the idea of charging more upfront. I do wanna, to carve out one circumstance in which you may want to consider that approach. Okay. Because, because it, to me, there is one time when it does make sense for just ongoing retainer work to charge more for the first month, two, three, whatever it is.

And that is if the perception from the client is that you are doing a lot more work in that window.

Gini Dietrich: Oh, sure.

Chip Griffin: In other words, if you are spending a lot more time with them or providing them with a lot more deliverables, in that case, you should carve it out and either do it as a discovery project or charge more for those months.

Because otherwise, it becomes very difficult for the client to see you pull back two or three months down the road. And so if they’re used to hearing from you every single day during those first couple of months, and all of a sudden, they only hear from you once a week. That’s a problem if they’re paying the same amount.

And so it helps them to understand, we were doing a lot more work, you paid for it. Now you’re paying less, and so we’re pulling back. And so, that is the one exception for me, to my overall guidance of not charging more. If it’s mostly behind the scenes work, because you’re doing all of the, the learning, and the setup, and the building of the list, and all, and most of it is, is not something that the client is actually seeing, that’s when you shouldn’t charge.

If it is that you’re spending time with the client, they’re seeing you, they’re hearing from you, they’re getting things delivered to them. That’s the one time where you may want to consider that higher up front so that they can see as their money goes down so does your work product?

Gini Dietrich: Yeah, that’s a really good point.

So behind the scenes you’re okay. If you’re in front of them, maybe you should think about it But again, you have to know your numbers and you’re gonna have to know your process really really well And they will be able to be able to do this.

Chip Griffin: Right? Yeah And it’s really it’s because you need to think about this from your perspective as well as the client’s. And I think that’s, that would sort of sum up the overall advice I have here, which is, you know, think about not just how are you making your books correct, but think about how the client is perceiving it.

And so if you’re charging more but they’re not seeing additional work, well then that’s increasing the risk from their perspective. If, you know, if you want to protect against over servicing over time because they’ve come to expect that they hear from you every day and that you’re sending them tons and tons of stuff, Well, then, then you do need to charge so they can see that.

So make sure you look at it, not just from your perspective, but how the client perceives it as well.

Gini Dietrich: And the last thing I will say is that I always like to put myself in the shoes of the buyer. So if I’m hiring somebody and they want to charge me three times more, two times more than they would get in the first three months than they would the last nine months.

I need to understand why and what makes me comfortable. And if I can’t get there, if I’m in the buyer’s shoes, then I probably shouldn’t do it. So if you can put yourself in their shoes and say, Okay, if I were being pitched this program, how would it make me feel? Would I be able to do it? What questions would I have?

And really think about it from their perspective so that you can start to figure out what makes sense and what doesn’t.

Chip Griffin: Absolutely. I think that’s a good place to wrap up this episode because we’ve given all the advice we have on this and we didn’t charge you any extra for it.

Gini Dietrich: We did not.

You still paid us zero dollars.

Chip Griffin: Zero dollars. Zero

Gini Dietrich: dollars. Completely free.

Chip Griffin: Some people might say that they’re getting what they pay for here, but others feel like they’re getting a good deal. Hopefully if you’ve listened all the way through to this point, you’re one of those folks who think it’s a great deal. So with that, that draws to an end this episode of the Agency Leadership Podcast.

I’m Chip Griffin.

Gini Dietrich: I’m Gini Dietrich.

Chip Griffin: And it depends.