We are calculating the rate per hour of agency work

The article was originally published on Medium in December 2016 by Konstantin Kanin and then republished on Konstntin’s blog in Polish.

Last year at DaCompany [2016], we introduced pricing our services by calculating the hours we spend on the selected service. This data aims to show how many hours we can devote to the customer in a month, and to give a better understanding of what a particular service consists of.

The model has its drawbacks. For example, the customer may have doubts whether we worked on his campaign exactly 20 hours, not 19. However, compared to a common model  in Poland of settling accounts based on the percent of the client’s budget, it seems to me that the model of the man-hour pricing is more fair. The cost of the service depends on the time of our production department, and not on the client’s expenses for clicks or ad impressions.

Everything that I managed to find about the cost of man-hours in Polish agencies is a short statement here. [Update] In 2016, hourly rates of agency and media house employees were researched, the results of which you will find here [PL].

The described method does not take into account some of the nuances, such as the percentage share of production resources in the agency, the ratio of hours paid by customers, etc. So I decided to dig a little deeper, and finally used the article from the Russian source, adapting the described method to Polish conditions. I am open to correcting this method, so please leave your insights in the comments.

Let’s first describe the example agency for which we will be doing calculations

Marketing agency with up to 10 people; the major part of the team works remotely; employees can be divided into three categories: sales department (sales, account), operational department (SEM, SMM, copywriting), and administrative department (CEO, accountant, etc.). Depending on your company’s model and agency structure, each department may consist of different numbers of employees. For example, there is no sales department in our company. On the other hand, in many SEO agencies, the sales department can account for half of all human resources. In our case, a remote company deals with the accounting, and HR, operational, and financial management is dealt with by a CEO, namely me. In larger agencies it is profitable to hire an accountant and HR, which in turn increases the administrative department.

For example, we will consider a Social Media department employee, who gets a net salary of 3000 PLN and works on a contract of employment. You can calculate the total employee cost for the employer using the calculator. In this case, it is 60939,6 PLN gross per year.

Below is a full calculation of all values and ratios, and a link to the Google Docs file, followed by a detailed description of each indicator [remember that those are rates in polish currency and based on polish standards – like days of annual leave]:

Monthly net remuneration, PLN:
3000
Annual total cost for the employer, PLN:
60,939.6
Working days in a year:
252
Days of annual leave:
20
Sick leave:
3
Paid working days:
229
Hours of work per day:
6
Ratio of the time paid by the client:
0.7
Hours paid by the client per day:
4.2 = 6 * 0.7
Hours paid by the client per year:
961.8 = 229 * 4.2
The cost of the production department employee’s hour for the employer, PLN:
63.36 = 6093.6 / 961.8
Share of expenditures on production workers:
69%
The cost of a man-hour for the agency, PLN:
91.83 = 63.36 / 0.69
Agencies’ planned profitability ratio:
10%
The cost of a man-hour for the client, PLN net:
102.03 = 91.83 / (100% -10%)

To be able to edit the file [PL], copy it to your files choosing File – Create a copy.

Now, let’s see where all the numbers come from.

  1. Calculating the number of working days

In 2016, there were 252 working days in Poland. Of these, each employee on a contract of employment is entitled to 20 days of leave. On average, our exemplary employee takes three sick leaves a year.

In total, we have 252-20-3 = 229 actually worked days in 2016.

  1. Calculating the number of working hours.

On average, the employee devotes no more than 6 hours a day to real work. The other 2 hours are lunch, cigarette breaks, Facebook and other necessary things.

It is worth taking into account that the client won’t be willing to pay for some of the agency’s tasks. First of all, it’s about preparing offers, forecasting a campaign, correcting mistakes due to agency’s fault, or when the agency is doing additional activities willing to exceed customer expectations. In my experience, the production worker spends about 60-70% of their time on work paid by the client. But let’s assume it is 70%. In total, it turns out that the client pays the agency on average for only 4.2 hours of a specialist’s daily work.

In total, we have 971.8 hours paid by the client per year.

  1. Calculating the cost of employee’s man hour.

In order to calculate the employee’s hourly cost for the employer, we divide the gross annual income by the number of hours during which the employee actually performs the work, and for which the client pays. We receive 60939,6 / 961.8 = 63.36 PLN.

At the beginning of the article, when I was describing an examplary agency, I mentioned three departments. All agency departments are indirectly involved in customer service, but the client is obviously not ready to pay the account manager or accountants separately. Nevertheless, since the entire agency must be profitable, and not only selected departments, we must include their cost in the employees’ working hours.

To achieve this, we need to look into the agency’s profit and loss account and calculate how much of the total operating expenses the production department accounts for (wages + taxes).

In our agency this indicator is 69%, because we do not have a sales department, we do not have an office and related administrative costs, etc. In the case of your agency this ratio will probably be lower – max. 50%. Accordingly, the total cost of an employee’s working hours will be 63.36 / 0.69 = 91.83 PLN.

The cost of 91.83 PLN per hour means that the client paying for the agency’s time allows it to break even. But the agency still has to earn something, so the final cost for the customer must also include a profitability ratio. The average profitability ratio for PKD 73.11.z (advertising agencies) in 2014 was 2.95%. But let’s assume that our planned operating margin is 10%. Then, the total cost of the employee’s working hours for the customer will be 91.83 / (100-10)% = PLN 102.03 net.

In conclusion

In a small marketing agency, where an SMM specialist gets 3000 PLN net, the production department accounts for 69% of all company expenses, and the planned margin is 10%, the client, while buying the SMM service, should pay PLN 102.03 net per hour of agency’s work.

I hope that this text will help your agency price services more effectively. Please, let me know how to correct the described model .

woman doing yoga on deskHow to give discounts and don't ruin your company