Flat Fee Agency Retainers Are Killing Your Brand’s Growth

If you’re working with a digital agency that charges you a flat monthly fee, they’re either overcharging you now or they’re going to be under-servicing your account in the future. Either way, your brand’s growth is going to suffer.

Agencies are businesses, and we need to make money. No agency is going to lose money on your account. To pretend otherwise is foolish.

The Flat Fee Trap

Brand managers and founders love flat fee pricing because it’s predictable and, more importantly, they think it protects them from agencies making “too much money.” This mindset is completely backward. You shouldn’t be worried about your agency making too much money; you should be terrified of them not making enough.

Here’s why: When you’re scaling up ad spend from $50k to $500k per month, the workload for your agency doesn’t stay flat. More spend means more creative testing, more complex account structures, more creative types, more asset acquisition, more research, etc. But guess what isn’t changing? The flat fee you’re paying the agency.

The Math Problem for Flat Fee Models

Now, let’s talk about what happens when an agency’s costs go up but their revenue stays flat. There are only three possible outcomes, and they all suck:

1. They quoted you a massive flat fee upfront to cover their future costs, meaning you’re overpaying right now
2. They’re going to replace senior talent with junior/low cost talent
3. They’re going to drop the number of hours they spend on the account below where it should be

There’s no fourth option. I’ve seen this play out dozens of times with brands that come to us after their flat fee agency relationship imploded.

Scaling Retainers

Hopefully you’ll agree that in an environment where brands are scaling, a flat fee model is bad for all parties involved. We need to find a model that aligns incentives for both the brand and the agency. And there are a number of different models that can work here.

The Percentage of Spend Model

The most common model that scales along with complexity is the percentage of spend model. It’s simple and straightforward. It also gets a ton of flak because brands are worried that agencies make too much money in this model. It is true that with flat percentage of spend models, agency profit margins do generally increase at scale because cost of delivery does not scale linearly with ad spend.

Some agencies (including us) will work to add scope to projects as they scale in order to maintain a stable profit margin. Ultimately, a $500k/mo spending account is not 10x the work of a $50k/mo account, so an uncapped flat percentage of spend model will result in an agency making fatter profit margins at scale.

Tiered Percentage of Spend

A better model is the tiered percentage of spend model. As your ad spend increases, the percentage decreases. This ensures three critical things:

1. Your agency can maintain healthy margins without having to cut corners
2. You’re not overpaying at scale
3. The agency is incentivized to grow your account profitably

For example, an agency might charge 10% up to $100k in monthly spend, 8% from $100k-$250k, 5% from $250k-$500k, and 3% over $500k. The agency makes more money in absolute terms as you scale, but their margin percentage stays relatively stable.

There are many other scaling models, including percentage of sales, profit share on credited sales, and many others. The most important key with any model is ensuring that the agency’s incentives are aligned with your brand’s.

A Final Note on Agency Economics

Here’s what brand managers often miss: a good agency relationship is like a good marriage, if one partner is struggling, the whole thing falls apart. When you squeeze your agency too hard on fees, you’re not being clever, you’re sabotaging yourself.

The goal shouldn’t be to pay your agency as little as possible. The goal should be to pay them enough that they can dedicate their best resources to scaling your business profitably. Because at the end of the day, an extra few percentage points in fees is nothing compared to the cost of working with an agency that’s underwater and cutting corners.

If you’re currently on a flat fee model with your agency, it’s time to have an honest conversation about switching to a structure that works for everyone. Your growth depends on it.