Marketing agencies and consultancies can see increased profits by using a fee-at-risk contract model for client work. We discuss the benefits here.
There are a lot of pricing models out there that service providers can use when bidding on projects.
However, many business owners who do contract-based work may not have heard of a risk-reward pricing model that is typically referred to as a fee-at-risk contract.
You may be wondering what the fee-at-risk contract model means, how a risk-reward pricing model works, and whether or not it is right for your company.
This article will answer all these questions and more to help you understand the details of this unique type of agreement model so that you can determine if it is right for your company and clients.
RISK REWARD PRICING MODEL
Before we dive into the specifics of the fees at-risk model, just know that there are a lot of pricing models out there for service providers, such as a consulting firm, to use. They all have their potential benefits and risks when trying to close a sale with a client.
What we're covering here today in general are the basics of what we mean by a risk-reward pricing model.
A true risk-reward model aligns the outcome of the service provider company and the client while enabling true performance and financial accountability.
The most extreme form of the pricing model is a success fee, where the service provider company only receives compensation for the work completed upon successfully achieving pre-defined goals outlined in the client agreement.
It’s not the pricing approach every business can afford to risk. However, when it’s appropriate, companies can see sales and profits jump from these business outcomes.
When service providers get this model wrong, unfortunately, it can mean potential budget problems at best — and lost profits at worst.
Using this approach on potential projects, as you can imagine, requires a strict risk management strategy.
WHAT IS A FEE-AT-RISK CONTRACT MODEL?
The fees-at-risk model is a true risk-reward contract. Contracts with this type of agreement are designed to align the interests and goals of both the client and the service provider in the joint venture.
In essence, it is an agreement where each party’s outcome incentives work together for mutual benefit instead of a contentious relationship.
RISK REWARD / PERFORMANCE SCENARIOS
With a fee-at-risk contract, if your delivery team gets the client the results they want on the project (profits for example) the client shares a percentage of the profit as a reward. The contract incentives are centered around project results for the client. And, the profit percentage amount shared in this model example will depend entirely on the industry you’re in.
Otherwise, and here’s the business risk, if the project fails to provide the agreed-upon value for the client, regardless of the work effort put into the project, then all proceeds from the project stay with the client. Ouch.
REAL-WORLD EXAMPLE OF A FEE-AT-RISK CONTRACT MODEL
Even though you are more likely to see this type of pricing model in the online advertising and marketing agency industry, it is still valuable and applicable to other consultancy industries.
But agencies and other industries didn’t always use this model on projects. They used to operate on a retainer model or an hourly model primarily.
THE RETAINER PRICING MODEL WORKS, UNTIL IT DOESN’T
The retainer pricing model sounds rewarding, and it can be for a number of organizations.
Let’s pretend for a moment that you charge a client an annual retainer fee of $100,000 for potential work. You benefit by having a predictable annual revenue reward for this relationship.
So far, so good. But if business takes a downturn because of the economy or a global pandemic, let’s say, then the client would rather pull back on the purse strings as they say because its budget will be under review. Clients at this point will usually want to dump the idea of having you on a fixed-cost retainer that they may no longer see the benefits of.
With the retainer model, one party is usually experiencing more value than the other party and it doesn’t always tend to be fair and balanced.
THE HOURLY PRICING MODEL IS A RACE TO THE BOTTOM
Moving on to the hourly pricing model, and experience has proven that the interests of consultants or agency owners and their clients aren’t always on the same page.
For example, hourly pricing models turn the consultants or agency model owner into a commodity and there is always other parties cheaper willing to do the same amount of effort and still undercut your price.
This doesn’t bode well for their profits, but it did get them in the door with new customers. Now the stage is set to provide value and work on growing that relationship and increasing their rates over time.
Keep in mind, you’re still out the clients and the future payments. Time for your sales department to get to work and replace that missed profit.
PUTTING IT ALL TOGETHER
The Fees at Risk model serves as a great way to show the client that you’re interested in a long-term relationship and you’re willing to take on the risk now for mutually beneficial reward later down the road.
It also a way to show the client that they reduce their risk exposure immediately for your high-value services.
There are three pieces to this recipe for success and we’ll cover those now.
THE BASE ENGAGEMENT
The first ingredient in this relationship we’ll call the base engagement.
Just for example, let’s say that you’re used to charging clients a $100,000 annual retainer and you want to start using the fees at risk model going forward. We’ll use that same $100,000 annual revenue number in the example below.
We will divide that $100,000 amount into thirds because there are three pieces to this contractual relationship.
So your agency’s base engagement is $33,000 and this number goes directly into your statement of intent to the client.
You’re telling the client that your agency is full of smart people who know exactly how to get the results they’re looking for.
You’re demonstrating to the client just how confident your marketing agency is in getting the client the results (and more) that they’re looking for. Plus, you’re signaling that you’re in this partnership for the long term.
To begin working with you and your team, the client writes a check for the $33,000 that we mentioned above.
Yes, this is less than the $100,000 you’re used to charging on an annual retainer, but stick with me here and we’ll move on to the second piece of this model.
PROJECT MILESTONES OR KPIs
Every project is going to have defined KPIs and these will get negotiated with the client before the project.
Remember when we divided that $100,000 that you’re used to getting in an annual retainer into thirds? Well, the client just wrote you a check for the first $33,000 (above) to start working with your team.
Now is where we bake in the second $33,000 chunk of money. It comes from your team executing on the predetermined KPI milestones that both parties agreed to.
For example, you may have a milestone for completing the SEO audit of the client’s site. You may have another for hitting a pre-decided health score for the site. Remember, KPIs are any documentable work that your delivery team has accomplished.
This stage is super-important for a couple of reasons.
You’re providing value and proving to the client that your marketing agency is ready, willing, and able to produce the results you said you could. You’re building a pattern of producing SUCCESS.
YOU PAY FOR WHAT YOU GET
By documenting and reporting on the KPIs and milestones that your team is hitting for the client, you’re demonstrating to the client that you’re doing everything you said you would do. This is followed by a reminder that they only get charged a fee once your team delivers on your promises. In other words, they aren’t paying for anything other than promised results.
COLLABORATIVE UPSIDE POTENTIAL
Here’s where things get exciting for both parties.
You clearly explain that you only make $xx,xxx if and when the client gets $xxx,xxx in results.
If your team’s work results in the client earning an additional $1,000,000 from your agency’s efforts, you will share in their success by earning 10% of that.
You only make money by producing amazing results and getting the client the huge win in the industry that they’re looking for.
You’re now both on the same side of the table.
GO BIG, OR GO HOME
It’s not human nature to dream small. This means that clients aren’t typically going to get excited about fee structure if you’re pitching them on small profit numbers.
Go big, or go home. Meaning, get the client dreaming about big backend profit potential numbers.
When targeting a client with a higher service package, you become more of an equal partner rather than another price commodity. This means they are much less likely to shop your services or leave your marketing agency in the long run.
With brand new clients, you know the ones, they are still getting to know your firm and your firm is still building trust in their eyes. With these clients, it might be smart to approach this strategy on a smaller-scale project.
This gives them a chance to sample the risk-reward model without feeling overwhelmed. Basically, let them ease their way into seeing the value advantages with fewer risks.
With newer, or smaller clients, be sure to pause and spend plenty of time on the KPI/milestones that I covered earlier. Slow down here and make sure they completely understand what they will be financially responsible for when your team hits those critical KPIs.
WARNING: An existing and UNhappy client is never going to agree to higher fees. Repair the client bond before proceeding to and new models.
If it’s an existing client that loves your work, and you’re providing an unforgettable customer experience, read on.
WIth your next conversation with the client, introduce this new fee structure along these lines:
“We love working with your team and it seems like you’re happy with our work too. Because of this, we have a strategy that’s working really well with some of our other clients to get them faster growth. We’ve tested it, and we want to share this strategy with you now to see if it makes sense.”
At this point, it’s just a conversation and they have no risk in wanting to hear more. Move straight into focusing on the value both parties will get by working together in a more collaborative way that could have huge upside.
THE FEE-AT-RISK CONTRACT MODEL? W.I.I.F.M.
It’s probably making sense as to why this risk-reward model works for your marketing agency or consultancy. There is the possibility of long-term bonus payments that leads to higher profit.
However, when and why does it work for your client over other pricing models?
It really comes down to value because of the risk-reward ratio. Organizations can’t be taken advantage of from a cost standpoint and if your work helps them to become wildly successful, they win on the backend as well.
The client should love the financial safety they get if the results aren’t there, and your firm will love the added income on the backend when your amazing team proves how much value you can provide.
GET THE HELP YOU DESERVE, AND . . .
GROW YOUR BUSINESS
We reserve time on our calendars every week to talk with business owners just like you. Let’s see if we can solve a problem or two for you this week with a coaching call.
TIME TO IMPLEMENT YOUR FEE-AT-RISK CONTRACT MODEL?
I’ve discussed the benefits of using the fees-at-risk pricing model for agency owners, and consultancy businesses. I’ve also outlined the three main components of this risk-reward pricing model.
And, finally, I gave you some ideas on how to discuss it and implement it with your new prospects and existing clients.
Now that you understand what this pricing model is and how it works, I hope you will be inspired by all the upside potential–both financially and in your personal growth–and decide to try it out as you build your success.
When you’re a marketing agency with a fee-at-risk contract, the more the client’s business grows because of your work, the more your company stands to make as well. That’s because you’re both participating in the upside results that your team accomplished.
I’m curious, would this work in your industry?
Leave me a comment below and we’ll continue the discussion down there.