Latest / The CMO Podcast with Fexingo: Marketing Leadership, Budgets, and Executive Strategy / Why Agencies Are Ditching the Hourly Billing Model
Transcript
- Lucas: So there's a quiet rebellion happening in marketing agencies right now, and it's not about AI or remote work. It's about the bill. Luna: The bill? You mean how agencies charge? Lucas: Exactly. The hourly billing model — the six-minute increment, the timesheet, the 'we'll track every hour' approach — it's under serious pressure. And a growing number of agencies are walking away from it entirely. Luna: I've heard whispers. A friend at a mid-sized shop in Chicago said they switched to value-based pricing last year. She said it was terrifying but transformative. Lucas: Terrifying is the right word. Because if you've been billing by the hour for decades, changing that feels like stepping off a cliff. But the data is pretty compelling. Agencies that switch to value-based pricing — charging for the outcome rather than the time spent — report, on average, thirty percent higher profit margins and forty percent lower client churn. Luna: Forty percent lower churn? That's massive. But I wonder — is that cause or correlation? Maybe the agencies confident enough to switch are just better run. Lucas: That's a fair challenge. And there's definitely a selection bias. But I'd argue the pricing model itself creates better incentives. When you're paid for the outcome, you're motivated to be efficient, to use better tools, to front-load strategy instead of padding hours. The client feels that alignment. Luna: And yet, some clients prefer hourly. They want to see exactly what they're paying for. Lucas: That's the old mindset. And it's rooted in a lack of trust. But I think the bigger issue is that hourly billing punishes efficiency. If an agency figures out how to solve a problem in ten hours instead of twenty, they make half the money. So there's no incentive to improve. Luna: Right — the better you get, the less you earn. That's broken. Lucas: Let me give you a concrete example. There's an agency called Skeleton Key — they're a mid-sized shop in Denver, about forty people. In 2024, they decided to move entirely to value-based pricing. Not a hybrid model, full switch. Luna: Oof. Bold move. How did they do it? Lucas: They spent six months preparing. They analyzed every client engagement from the previous three years — what was the actual business impact? Then they built pricing tiers around that impact. For example, one tier was 'brand awareness lift of X percent in six months' — priced at a fixed fee, not tied to hours. Luna: And clients bought in? Lucas: Most did. They lost two clients — but those were clients who were deeply attached to the timesheet. Skeleton Key's founder told me that the conversations shifted from 'how many hours are you billing?' to 'how do we get better results?' Luna: That's the ideal. But I've heard horror stories too. There's a boutique agency in Austin — really talented creative team — they tried to switch cold turkey in 2025 and lost three clients in two months. Lucas: I know that story. The issue was they didn't do the preparation. They sent an email saying 'we're changing our pricing model' without a transition period, without education. Clients panicked. The lesson is that you have to bring the client along. Luna: So what's the right way to do it? Lucas: Experts recommend a phased approach. Start by offering value-based pricing as an option for new clients. Grandfather existing clients on hourly for a year. Use that time to build a track record — show that the fixed-fee projects deliver equal or better outcomes. Then, when you do switch, you have data. Luna: And what about the numbers? Is there a standard formula for value-based pricing? Lucas: There's no universal formula, but a common starting point is to estimate the financial value of the outcome to the client — say, a campaign that drives an extra two million in revenue — and then charge a percentage of that value, typically between five and fifteen percent. So that could be a hundred thousand to three hundred thousand dollars for that engagement. Luna: That's a huge range. How do you justify the higher end? Lucas: It depends on risk. If the agency is taking on more risk — maybe they only get paid if the outcome is achieved — they can charge a higher percentage. If it's a guaranteed outcome with a fixed fee, the percentage is lower. The key is that both sides have clarity on what success looks like and how it's measured. Luna: This reminds me of something I saw on Reddit. A CMO posted that their agency proposed a value-based pricing model — but the agency wanted to define the success metric themselves. That's a red flag, right? Lucas: Huge red flag. The metric has to be mutually agreed upon, and ideally tied to something the client already tracks — revenue, leads, market share. If the agency picks a vanity metric like impressions or engagement, that's not real value. Luna: So how do you, as a CMO, evaluate a value-based proposal? Lucas: First, make sure you can measure the outcome independently. Second, negotiate a cap — a maximum fee — so you don't overpay if the outcome is huge due to factors outside the agency's control. Third, build in a clawback or adjustment mechanism if the data changes. Luna: That last one is interesting. What do you mean by clawback? Lucas: Say the agency has a campaign that's supposed to drive a hundred thousand new users. But halfway through, the client changes the product pricing, which kills conversion. The agency shouldn't be penalized for that. So you need a clause that adjusts the target for major external changes. Luna: Makes sense. I think the reason agencies are nervous about this shift — beyond the logistics — is that it forces them to actually quantify their value. And for some, that's uncomfortable. Lucas: Exactly. Hourly billing is a crutch. It lets you avoid the hard question of 'what am I really worth to this client?' Value-based pricing demands that you know your impact. And if you don't know it, you find out fast. Luna: Which is probably why so many agencies are staying with the old model. Lucas: But the market is pushing them. More and more clients — especially at the enterprise level — are saying, 'Don't tell me your rate, tell me what you'll deliver.' And if an agency can't answer that, the client moves on. Luna: Speaking of moving on — a quick thing. If these marketing conversations have sparked something you've actually used in your work, or if you just get value from the show, there's a small way to support what we do. Lucas: Yeah — it's a buy me a coffee model. If today's episode was worth a coffee to you, that's the link. It's buy me a coffee dot com slash fexingo. Seriously, it's the smallest ask and it keeps everything ad-free. Luna: And we really appreciate those who do. Now, back to agencies — Lucas, you mentioned that some agencies are hybrid. What does that look like in practice? Lucas: A lot of agencies are doing a blended model. They charge a base retainer — which covers overhead and planning — and then a variable fee tied to outcomes. So the client has predictable costs, but the agency shares in the upside. Luna: That seems like a smart middle ground. It de-risks the switch for both sides. Lucas: It is. And I think that's where the industry is headed. Pure hourly will still exist for commoditized work — like a simple ad buy or a one-off design — but for strategic engagements, value-based or hybrid will become the norm. Luna: So for CMOs listening, what's your one takeaway? Lucas: Next time you're reviewing an agency proposal, ask one question: 'How does this pricing model align your incentives with my outcomes?' If they can't answer clearly, that's a signal. And if they're still billing by the hour, ask them why. Luna: That's a good place to leave it. Thanks, Lucas. Lucas: Thanks, Luna. See you next time.