B2B Pricing Models: Retainer vs Project vs Hourly

Many deals mix these. A firm might bill a project fee for the main job and an hourly rate for any extra requests.

Sources: The table is the editors' own plain-language summary of common billing practice.

A retainer is a fixed fee paid on a regular schedule, usually monthly, for an agreed level of service. The buyer gets reserved capacity. The seller gets steady income and can plan staff time.

The logic is simple. If you need regular output all year, a flat monthly fee is easy to budget, and it saves both sides from quoting every small task.

The risk for the buyer is paying for hours or tasks that go unused. Write down what the fee covers, how many requests or hours it includes, and what happens to unused time.

Sources: Editors' own summary of common billing practice.

A project fee is one price for a defined piece of work. The seller agrees to deliver the result for that price, no matter how many hours it takes.

Jobs with a clear end point, such as a website build or a one-time report, suit a single price.

US federal buying rules show the same trade. A firm-fixed-price contract has a price that does not change based on the contractor's cost experience. The Federal Acquisition Regulation (FAR) says this places on the contractor "maximum risk and full responsibility for all costs and resulting profit or loss." The same rule says it gives the contractor the most reason to control costs.

The weak spot is scope. If the work is not defined well, the seller may cut corners to protect margin, or the two sides may argue over what was included. A detailed list of deliverables and a change process fix most of this.

Sources: Federal Acquisition Regulation 16.202-1, Firm-fixed-price contracts

With hourly billing, the seller records time and bills a set rate for each hour. The buyer pays for the effort that was actually used. This suits work that cannot be sized at the start, such as an audit, a rescue job or open-ended advice.

The FAR describes the public sector version, the time-and-materials contract, which pays for direct labor hours at fixed hourly rates. Federal buyers may use it only when it is not possible at the start to estimate the extent or duration of the work, or to predict costs with reasonable confidence.

The same rule also names the risk. It says this contract type "provides no positive profit incentive to the contractor for cost control or labor efficiency," so the buyer must watch performance closely. A private buyer can borrow that lesson. Ask for regular time reports, set a cap or a check-in at a set number of hours, and agree who approves extra time.

Sources: Federal Acquisition Regulation 16.601, Time-and-materials contracts

The ANA has tracked how marketers pay agencies for decades. Two of its surveys give a view of how common each approach is.

• In the survey the ANA fielded in early 2013, 81 percent of marketers used some form of fee-based pay. Labor-based fees, which are priced from staff time, rose from 49 percent of marketers in 2010 to 65 percent in 2013.
• In the 2017 report, described in the ANA's May 2017 release, which drew on 82 member companies and more than 1,100 client and agency agreements, the use of labor-based fees was falling for the first time since 2006.
• The same report found commissions up from 3 percent of respondents in 2010 to 12 percent, and value-based pay used by 7 percent after no reported use in the two earlier surveys.
• Use of performance incentives also fell, and respondents said incentives did not improve agency performance.

These are marketers buying agency work, so they do not cover every kind of B2B service. Still, they show that time-based fees are the most common baseline, and that buyers are slowly testing other structures.

Sources: ANA press release, August 19, 2013; ANA press release, May 22, 2017

Start with how well you can describe the work. Then match the model to it.

1. Can you list the deliverables? If yes, a project fee fits. If not, use hourly billing for a first phase, then switch to a project fee once the scope is clear.
2. Will the work repeat every month? If yes, a retainer gives you steady capacity and a predictable bill.
3. Who is better placed to manage the risk? The party that controls the scope and the pace should carry more of the risk.
4. Can you measure the result? The ANA's 2017 study found that respondents said incentives do not improve agency performance, and that incentive plans are complicated and time-consuming to run. A simple, fair fee is better than a bonus nobody can calculate.

Whatever you pick, put it in writing: the rate or fee, what it covers, how changes are priced, and how invoices are approved. A clear scope document makes every model safer.

Sources: ANA press release, May 22, 2017; the rest is the editors' own advice.

1. Association of National Advertisers, "ANA Study Finds Agency Compensation Models Shifting Away From Fees and Incentives," press release, May 22, 2017. ana.net
2. Association of National Advertisers, "Fees Remain Dominant Form of Agency Compensation," press release, August 19, 2013. ana.net
3. Federal Acquisition Regulation 16.202-1, Firm-fixed-price contracts. acquisition.gov/far/16.202-1
4. Federal Acquisition Regulation 16.601, Time-and-materials contracts. acquisition.gov/far/16.601