How Does a Retainer Work? (+ Tips and Best Practices)
A lot of freelancers and small businesses have problems with figuring out their pricing model. In order to have a reliable source of revenue, companies often use the retainer model. It ensures a monthly income which is essential in order to run a successful business.
When you consider other payment models, you’ll see why retainers are so popular. Charging by the hour is a safe model only if you have steady work and know that you’ll have projects to work on in the future. It does make sure that you never work overtime. However, it’s not a reliable option for freelancers.
In this article, we’ll share the benefits of retainers, how to calculate your monthly retainer and our tips on how to make the most of your retainer pricing model.
What is a retainer?
A retainer is a pricing model that lets you bill your clients a fixed amount every month in advance. It workes for clients and companies that have a lot of trust between them and work on projects that require a lot of work over a longer period of time.
It is usually used for services that need to be done all year round, no matter if every month is as busy as the one before. A great example of that is accountants, social media community management agencies, lawyers, and such.
If a month goes by where the client didn’t need a lot of work done, they’ll still pay the same fee, because other months that were busier balance them out.
That way the service providers get to work on long-term projects and get paid regularly, while clients ensure the availability of the company or freelancers to work on their projects no matter the scope.
As long as there is trust and transparency between client and service provider, the retainer can be a successful payment model.
Who is retainer pricing for?
Seeing how retainers are recurring revenue models used by businesses that provide ongoing service, it’s easy to see why it’s mostly used by agencies, IT, and SaaS companies.
For smaller businesses, retainers provide security, since it allows them to grow while having a revenue stream to fall back on. The same goes for freelancers who are trying to stay afloat and are trying to work regularly and not just on a project-to-project basis.
The retainer model works great for companies and freelancers that are flexible and can shift their responsibilities in order to take on more work. Because of the nature of a retainer, clients will expect you to be at their disposal whenever they ask.
If there is ever a period where the workload is light, the client might expect you to make it up once things pick up, which is why you need to be able to handle more work on short notice.
Pros and cons of a monthly retainer
We’ve already mentioned some benefits and downsides of a monthly retainer, like security and client expectations. If you’re not sure whether this type of pricing model is for you, these are the things you need to consider.
|Financial security||You earn the same amount every month, no matter the value you bring to your clients|
|Allows you to focus on the work||Doesn’t give you the incentive to grow|
|Helps you build long-lasting relationships with clients||Clients tend to give more and more responsibilities|
Retainers ensure a long-term relationship with your client, meaning you’ll have a reliable revenue stream. In turn that helps you estimate your earnings for the years which makes budgeting easier.
Because you’ve secured payment, you can focus on your work and give it your best effort, instead of focusing on finding new clients and projects to work on. This is evident to your clients as well, which means that they’ll expect you to work until the job is done, instead of working for a specified amount of hours.
Retainers let you create and nurture long-term relationships with your clients, which can lead them to allocate more projects to you or recommending your services to their friends. The more you get to know your client and their goals and needs, the more ideas you can suggest ideas and take calculated risks.
One of the biggest downsides of retainers is the fact that no matter how much value you bring to your clients, they will pay you the same amount. This doesn’t give you the incentive to work smarter and provide your clients with ideas to help them increase their revenue and double their sales.
This is a big disadvantage for your clients, but it’s also damaging to you, since you end up doing the same things every month, without learning or progressing in any way. If you decide to go beyond the scope of your monthly retainer and work out a way for your clients to sell more, they will still pay you just for the hours it took you to implement the changes.
In those cases, your client is the only one that is profiteering from your hard work and tangible results.
How to calculate your monthly retainer?
The questions you need to ask yourself before you set your monthly retainer are:
- How much do you want to earn in a year?
- How much are your expenses?
- How much work do you estimate your clients will require you to do on a monthly basis?
The expenses in question are taxes, rent for your office space, utilities for your office, salaries for your employees and more. Once you calculate them, add them up to the amount you want to earn.
Let’s say that you want to earn $75,000 and your expenses are $15,000, when you add it up it comes to $90,000. Once you get that number, add a profit margin. The profit margin is different from industry to industry, usually going between 20 and 50%.
In this example, we’ll use the profit margin of 25%, which is 22,500. Once you add it up to the 90,000, you get 112,500.
Once you add those numbers up, think about the amount of time you’ll set aside for this client. If you’ll work on their projects for 4 hours a day, 5 days a week, you’ll end up working 1000 hours in a year.
Having 1000 billable hours in a year leaves you with simple math – divide the first number (112,500) by the number of hours and you’ll get your hourly rate.
Don’t worry, we won’t leave you hanging. We’re sure you still have some questions and reservations about the possibility of a retainer. Here are some of our tried and tested tips you need to follow if you want to implement a retainer model in your business.
Your contract needs to be airtight and cover all sorts of unexpected situations. We offer a variety of easily customizable contracts that can be applied to this situation. Make sure you clearly define which projects you’ll be working on, how much work will need to be done in a month and what type of work are you responsible for. These pieces of information would help you manage your time wisely, avoid being overworked, and boost your productivity.
Define the extra fee your clients will need to pay for anything outside of the scope defined in the contract. Think about inducing a stipulation on how many revisions your client is allowed to ask for as well.
In most cases, your client won’t have the same amount of technical knowledge and experience, so you’re the one who has to explain the whole scope of your services and how much time different tasks take up.
Make sure your client understands what your services can provide them in the long run, but also take part in active listening and find out what your client’s goals are and how to go about achieving them in the right way.
Your client’s vision may be different from what their current practices are achieving so make sure to explain to them what they’re doing wrong and how you’ll help them. Tell them the time frame in which they’ll start seeing results and all other relevant information.
Make sure that both of you are making a well-thought-out decision.
This only applies to people who have team members to help them out. You’ll need to know who to choose for different roles and at which point in the project should you have them start their portion of the work.
Not everyone in the team will have the same amount of responsibility and therefore, you need to calculate exactly how many people will be working on the project and how much time will it take them.
Once you put everything on a piece of paper, you’ll see if the retainer model of pricing is the right fit for you. If you’re craving security and want to make the most out of your business relationship with the few clients you have, you might be a match made in heaven.
Still, make sure to follow our tips on implementing a retainer and keep all your bases covered. Transparent communication with your clients is extremely important and it’s essential that you’re on the same page when it comes to the expectations both of you have for your business relationship.
The better you understand each other, the better you’ll be able to work together. However, don’t forget to put everything in writing and create an airtight contract that helps you get out of undesirable situations.
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