Calculation of hourly rates, and operational reality

I have just been working on a consultancy project which involved examining the agency’s hourly rates for sales.

When taking a closer look at reality, we unfortunately often see that theory and practice are two completely different things. Why is that? External hourly rates are by no means astronomical; they simply reflect the agency’s cost situation and profit expectations. The first goal must thus be to achieve these prices on the market.

But let’s start right from the beginning. How are agency sales rates calculated? While there are of course different approaches to this issue, the calculation theory is very basic, and can be described in a simplified manner as follows:

The hourly rate per professional group or staff member is calculated based on the gross salary costs and the hours of potential sales. If you add another 100% to cover overheads and another 25% profit margin (depending on cost situation and profit expectations) on top of the hourly rate, you get the external hourly rate which should be achieved on the market. But this simplified calculation implies that the costs for each hour put in for the customer can also be passed on.

And we soon find ourselves coming full circle. The reason for the vast discrepancy between the hourly rate needed for business operations and the hourly rate actually achieved on the market often ultimately lies in the many unpaid correction sessions and the number of hours whose costs cannot be passed on – which are usually disregarded in the aforementioned calculations. And in today’s world of advertising, invoicing at actual cost is virtually impossible.

To counter this trend and assess the hourly rates, the agency first needs to know the prices it achieves on the market with customers or in the individual areas. Many agencies end up flying blind here.

The hourly rates actually achieved can be calculated based on gross earnings and the hours worked, and that is where cold, hard reality often kicks in.

The actual work begins once the weak areas have been uncovered. Strictly speaking, it must be performed on both the cost and revenue side, meaning that, where possible, framework contracts and prices must be tested out by customers. You’ll also end up saving costs and hours internally.

While this process can be long and painful, it does create crucial competitive advantages in the mid and long-term.