If raising PR rates is a scary proposition to you as an agency owner, you have a lot of company. Many business people in a wide range of service industries feel that raising fees is one of the most difficult tasks they face. Nobody wants to lose clients who can’t afford the new rates, or who feel they can find less expensive companies, or simply decide to do without the services.
The first step in raising rates is to decide whether current rates are adequate to cover expenses and provide a decent profit. As a guideline for the profit level that comparable firms are making, according to an annual survey conducted by consulting firm Gould & Partners, PR firms with under $3 million in revenue made an average of 14.9% profit in 2018. Firms with $3 million to $10 million netted an average of 12.3% profit. Agencies with revenue of $10 million to $25 million netted 18.8%. Companies with more than $25 million in revenues had an average net profit of 15.7%. If your firm’s net profits are far below these averages, it’s a good guess that something is wrong. Either expenses are too high or rates are too low.
You can also compare your PR rates with competitors in your region, and with others in your PR specialty. Gould & Partners also does an annual survey of PR rates in the United States. The data is reported by type of PR (healthcare, tech, consumer/lifestyle products, etc.), for different staffing levels, by size of agency and region of the United States. If your rates are significantly below what others in your area are charging, and your firm isn’t making a profit comparable to other PR firms your size, the evidence points to a PR rate increase.
The consequences of undercharging clients are not having adequate resources to give salary increases and hire needed staff. This leads to disgruntled and burned out employees and higher staff turnover, neither of which makes clients happy. Another consequence is ending up with an inadequate profit (your own income). Check out this way to make passive income if you want to retire at a young age.
The reality is that today’s competitive hiring environment leaves agencies no recourse to paying higher salaries. Salaries and benefits aren’t the only expenses that rise each year; rent, insurance, office services and almost everything else are increasing year by year as well.
The revenue an agency needs to cover expenses and make a profit in today’s dollars is significantly more than what it was just five years ago. You can use an online calculator of inflation in the cost of services to measure the difference in today’s dollars against the value of the same dollars in past years. For example, an hourly fee of $150 in 2014 dollars is worth $171 in 2019, a 14% increase. A monthly agency fee of $10,000 a month in 2014 bought about 67 hours per month at a rate of $150 per hour. The agency should only spend 58.5 hours a month in 2020 for that $10,000 fee. To keep providing 67 hours, the rate should go up to $11,400.
This subject is intimately tied to “over-servicing,” giving more service to a client than what the client is paying for. Keeping time sheets is a must for PR firms as a way to measure the hours being spent on each client. Even if an agency charges flat fees for projects rather than hourly fees, time sheets provide guidelines for how many hours various projects take, helping with estimates when similar work comes along.
Advice from boutique agencies on increasing PR rates
It’s unlikely that your problems with raising fees are unique. So, here’s some advice from a few agency members of the PR Boutiques International network of PR firms:
Michael Burke, director of science and technology at MSR Communications in San Francisco, suggests avoiding the rate increase problem altogether. “You might want to bake an inflationary percentage raise into the contract from the start so that you don’t have to hit clients up for fee raises.” This makes it clear from the beginning that fees must go up over time.
Tarunjeet Rattan, partner, Nucleus Public Relations, headquartered in Bangalore, India makes the following suggestions:
- Have a discussion about fees with every client at contract renewal time.
- Start preparing for requesting a fee increase about six months in advance. Be sure that all client reports capture the successes your firm has had.
- In India, it helps a lot to provide details on how you plan to use the increased budget to add to the client’s PR program. [Author’s note: This is a cultural factor and is a common necessity in Asia. In the U.S. and Europe, however, consultants advise agencies against this, since doing more work for an increase that’s intended to keep up with the cost of living just exacerbates undercharging!]
- In Nucleus PR’s experience, there is a 50-50 chance that a client will agree to the increase or say that they’re not willing to pay more. Be prepared to walk away from the account if you are unhappy with the money. For a mutually beneficial relationship, both parties need to feel happy about the deal.
- It’s much easier to get agreement for a fee increase when a client views your firm as a valued part of their team, not just a vendor.
Rattan feels it’s not a good idea to “grandfather” old clients and not raise their rates. “It builds up resentment. You need not raise rates as high as those for new clients, as a show of loyalty, but help them understand that you are part of their team, and every team member deserves a raise based on performance.”
She added, “Some agencies build in bonus fees at the end of a quarter or year based on their performance, instead of a fee increase. However, I have rarely seen this work without altercations and heartache on both ends. I prefer to stay away from such arrangements. I believe it also has to do a lot with the maturity level of the market and the client / agency. They need to understand that the cost of living goes up for the agency, but it’s an uphill battle for us in this part of the world, a hill we are trying to scale!”
Juris Petersons, founder partner of Jazz Communications in Riga, Latvia, reports that his agency raised rates at the end of 2019. “Latvia is a small market, and major industry players have some level of knowledge about each other,” he says. “We’re quite sure our fees were in the lower 50% of the market. The decision to apply the new rates to all existing clients at the end of the year was a conscious one – we had been discussing the matter with our clients over a two-month period, using natural opportunities. All potential clients received cost estimates based on new fees starting in October, 2019.”
Petersons adds, “The end of the year has proved to be the best choice for raising fees since it is the budgeting and contract renegotiation period.”
A few points from Petersons:
- A candid and open attitude towards client’s concerns goes a long way.
- It also helps a lot to be prepared in advance if the client says no. It’s crucial for the agency to demonstrate confidence that the fee increase is a correct and logical move. Most industries have increased prices for their services and products, with stable but low inflation across most of the economy. Bringing in the bigger picture and showing where the markets are moving has also helped the clients to better understand our proposals.
- We only grandfathered old rates for clients over a three-month transition period. We were open about the process, how, when and why it would end. Both transparency about this process and the clear-cut transition period helped our agency and clients to reach desired outcome and get a good start for 2020.”
Finally, David Eichler, creative director and founder of Decibal Blue in Phoenix and Decibal Green in Denver, says, “It’s always a struggle to help clients understand the economics of running a PR boutique. There’s only so long we can provide the same service for the same price when everything else is costing more. When I find the key to successfully explaining fee increases to clients, you’ll be the first to know.”