Why do you charge the figures you do? Are they based on what you think you can charge, competitor research, or what your actual costs are?
For a lot of agency owners, the honest answer is some combination of the first two. And that’s the problem.
Pricing based on gut feel or what the market seems to be doing isn’t wrong exactly – it’s just incomplete. If you don’t know what a project actually costs to deliver, you have no way of knowing whether your rate covers it.
The estimate trap
When you price a project, you’re making a guess based on experience. How long did something similar take last time? What feels right for this client? What will they push back on? What have they said as a figure for the piece of work?
You land on a number, it feels reasonable. You send the quote.
But none of those questions actually tell you what the project costs to deliver. They tell you what you think you can charge. Those are very different things – and the gap between them is where margin disappears.
Understanding your actual costs
This is the part we see so many agencies skip (before using Rofinery…), and it’s a fundamental problem that will affect everything if you don’t get it right.
For every person in your team, you should have a rate card that covers their full cost to the business. Not just their salary – that’s only part of it. You also need to factor in employer national insurance contributions, pension, any other salary related costs, and also a proportion of your overheads based on their utilisation rate.
When you add all of that up, you get a precise figure. It might be £65.60 an hour, or £48.90. It probably won’t be a round number, and that’s fine. That figure is your baseline – the minimum you need to cover just to break even on that person’s time.
Once you have the baseline, you add your profit margin. That’s a conversation to have internally – what margin does the agency need to be sustainable, to invest, to grow? There’s no single right answer, but once you’ve decided on a figure, everything else follows from it.
If your baseline cost is £48.90 an hour and you want a 50% margin, you need to be charging £97.80. You might round that to £100. The exact figure is up to you – but now you know your margin precisely, rather than hoping it’s somewhere in the right region, and you can ensure your rate cards are set to achieve that margin.
Building the proposal and costing the work
Now that you know the cost and the margin for each person, you can build a proposal that actually tells you something.
To price accurately, you need to build your proposal around who is actually going to deliver the work and how long it will take them – not just what you’re going to deliver.
That means getting specific. Is it one person or several? If it’s a mix of an account manager and a senior account manager, you need to account for the fact that they cost different amounts. If the senior ends up doing hours that were allocated to the junior, those hours cost more than you planned for. That’s now margin gone.
The proposal needs to reflect reality. Who does the work, how many hours, at what cost. When you assign team members to tasks, you can see the cost of those allocations in real time. If the mix shifts – if a more senior person ends up carrying more of the work – you can see what that does to the numbers before it becomes a problem.
By the time you get to the end of the proposal, you will be able to see the total projected profitability for the whole project: what it will cost to deliver, what you’re charging, and what you’ll make in profit – assuming the team delivers it in those hours, at those rates, as assigned.
The next big trap - not amending your rate cards
Every one of those changes affects the baseline cost of your team’s time. If your rate cards haven’t moved to reflect them, you’re costing projects on numbers that no longer exist. You are no longer pricing accurately for the team you have.
Review your rate cards whenever something changes – a new hire, a salary increase, a shift in your overheads. It doesn’t need to be a big exercise and perhaps it won’t make much of a difference. But if you leave it for two years, you could find that the margin you thought you were making is no longer achievable.
