How is effective hourly rate calculated?
Take the fee revenue earned from a client over a period and divide it by every hour the team spent on that client in the same period. Include non-billable hours: account management, internal reviews, rework and the hour spent in the status call. Exclude pass-through costs such as media spend from the revenue figure, because the agency did not earn them.
The period matters. A single month can swing on a large deliverable, so most agencies calculate the rate on a rolling three-month basis per client and a twelve-month basis for the agency as a whole. The formula stays the same at every level: revenue divided by hours.
- Per client: fee revenue from that client ÷ all hours logged to that client
- Per retainer: the monthly fee ÷ all hours consumed in the month
- Per project: the fixed price ÷ all hours from kickoff to final invoice
- Agency-wide: total fee revenue ÷ total hours logged by delivery staff
How does effective hourly rate differ from the billing rate?
The billing rate is what the agency charges. The effective hourly rate is what it keeps per hour after unbilled work, discounts, write-offs and fixed-fee overruns. An agency with a $150 blended billing rate and an effective rate of $110 is giving away 27% of its labor without deciding to.
The gap between the two is the realization rate. A realization rate below 85% almost always traces to one of three causes: scope creep on retainers, hours that were never logged, or fixed-price projects that were estimated too low. Effective hourly rate shows the size of the leak. The realization rate shows where it is.
What is a good effective hourly rate for a marketing agency?
There is no universal number, because rates vary by service line and market. The useful benchmark is relative: effective rate as a share of billing rate. Above 90% is excellent, 80 to 90% is normal for a well-run agency, and below 75% means pricing or scope control needs attention.
The second benchmark is against cost. Salaried delivery staff cost the agency their loaded salary divided by 173.3 hours per month, and the effective rate must sit well above that. A rule of thumb is that the effective rate should be at least 2 times the loaded cost per hour to leave room for overhead and a 15 to 25% net margin.
Verbial computes effective hourly rate per client from approved time entries and invoiced fee revenue, with pass-through costs excluded.
How do agencies raise their effective hourly rate?
The fastest fix is usually to log every hour, since unlogged time makes the rate look better than it is while the margin quietly falls. After that, the levers are scope enforcement on retainers, tighter estimates on fixed-price work, and repricing the clients that sit furthest below the agency average.
Repricing does not always mean raising the fee. Reducing the deliverables inside the same fee, moving a client from a flat retainer to a drawdown retainer, or adding a paid overage rule all raise the effective rate without a rate-card conversation.
Worked example
A 12-person agency bills a client a $15,000 monthly retainer scoped at 100 hours, which implies a $150 blended billing rate. In August the team logged 125 hours to the account, including 15 hours of account management and 10 hours of revisions the client asked for outside scope. Effective hourly rate = $15,000 ÷ 125 = $120 per hour. That is 80% of the billing rate, so the realization rate is 80%. At a loaded cost of $65 per hour, the 125 hours cost $8,125 and the retainer still earns a 45.8% gross margin, but every hour over 100 pushes that margin lower. Holding the account to 105 hours would restore the rate to $142.86 and the gross margin to 54.5%.
Questions
Should non-billable hours be included in effective hourly rate?
Yes. The point of the metric is to divide revenue by the true labor it took to earn it, so account management, internal reviews and rework all belong in the denominator. Leaving them out produces a flattering number that hides the cost of servicing the client.
Is effective hourly rate the same as realization rate?
No, but they are closely related. Effective hourly rate is a dollar figure per hour, while realization rate is the effective rate expressed as a percentage of the billing rate. An agency with a $150 billing rate and a $120 effective rate has an 80% realization rate.
Does effective hourly rate apply to fixed-fee and retainer work?
It applies most usefully to exactly that work. Hourly clients pay for the hours they consume, so their effective rate rarely drifts far from the billing rate. Retainers and fixed-fee projects are where hours grow without revenue growing, and effective hourly rate is how that shows up.