Paying a retainer every month may sound like kind of a nice deal, if you can get a lot of work done for your business without spending too much money.
It can also sound like your cash-flow problems are over, if you're a business receiving a retainer. But in reality, there are plenty of pros and cons to this arrangement.
Retainers are an idea that has been around seemingly forever, but it has been catching on in recent years, says Ray Grainger, CEO of Mavenlink, a company that provides project management software and services.
Grainger says that while PR firms and marketing agencies have historically been retainer-based, he is seeing it happen more with consulting companies, IT service businesses and professional services organizations, as well as in architecture and engineering firms.
“Clients are demanding greater speed, quality and agility from service providers," Grainger says. “At the same time, providers are facing more external pressure than ever before, which is materializing as increased competition, compressed delivery timelines and tighter margins. With all of these dynamics changing frequently, clients require a much more flexible work arrangement."
But like so many business concepts, there are good reasons for paying a retainer and receiving one, as well as reasonable arguments that you should stay away. Before you jump into any agreement, you'll want to weigh the pros and cons first.
Paying a Retainer: The Pros...
If you're paying a retainer, you can stop feeling nickel-and-dimed.
You respect your vendor's time, and you don't want to take advantage of his or her business. Still, it can be a drag to feel as if you're in a taxi watching the meter climb every time you work with a vendor.
A retainer can allow you to feel like you have a true business partner. A partner who won't require you to pull out a calculator to figure out how much it's costing you every time you have a request or want to jump on the phone to discuss a project.
Generally, when you're paying a retailer, you pay one flat monthly fee and you can use your vendor's services whenever you want. (Well, within reason. More on that in a moment.)
If you're receiving a retainer, there's the upside of guaranteed income.
Guaranteed income can lead to fewer cash-flow problems and more peace of mind. But there's another benefit, according to Lloyd Silver, the CEO and founder of Crush My Market, a boutique marketing agency in Walnut Creek, California. Those monthly retainers, he says, allow you to do your job better.
“In marketing, it often takes time to see results," Silver says. “So we want to get started immediately and front-end load our work to expedite those results. We'll often do much more work at the onset of a relationship then the retainer would normally allow. We might even lose money the first few months. But we're able to make a quick impact on their results. We couldn't do this if not for the retainer."
—Crystal Richard, owner, Crystal Richard & Co.
That said, some business owners have monthly retainers that can be dropped at any time.
“I don't make my clients commit to long-term engagements," says John Goodman, who has his own PR firm, John Goodman PR, in Yonkers, New York. He's offered monthly retainers for more than 20 years, and says it's worked well for me.
He adds that many of his clients are startups or small businesses with limited budgets. By not being locked into a contract, Goodman says that they're more likely to work with him.
If the monthly retainer arrangement is working out for the client, he says, they won't drop him. And if it isn't working, well, yes, they can give him the ol' heave ho. But he can drop the client, too.
“If the client is impossible, and getting coverage is more of a hassle than it should be, and there's no appreciation for my efforts, I want out," Goodman says.
...And the Cons
If you're paying a retainer, you could end up wasting your money.
It seems unlikely that you'd start paying a retainer and not use the vendor's services, but it could happen. A major project that you'll need the vendor's services for could start late, or there might be a lull one month. In theory, you could have a month or two pass by and not use the vendor—throwing good money out of the window.
There's a pretty easy fix, though, according to Umera Ali, a Chicago-based partner at Michelman & Robinson, a national law firm.
“The best retainer arrangements allow a certain amount of flexibility," Ali says. For instance, Ali points out you might have in your contract a roll-over period that would accommodate months when you didn't get much for what you paid.
If you're receiving a retainer, you may feel like you're doing so much work for a client that the dollar signs now look like quarters.
“One of the biggest risks of a retainer is scope creep—where the client asks for more and more to be done within the retainer relationship," Silver says. “Clients sometimes think that a retainer means they have endless access to time and resources. That's unfortunately not the case."
There's a fix for this problem, too. Many businesses receiving or paying a retainer first write up a statement of work (or SOW for short), which can be a contract or at least an agreement of how this payment arrangement will function.
A good SOW sets those expectations for both sides, Grainger says.
“On the other hand," he adds, "a bad SOW can ruin a client relationship with budget overruns, delays and underwhelming business results."
(For those interested in learning more about SOWs, Grainger has written a free downloadable ebook called The Definitive SOW Template and Writing Guide.)
If you're planning on paying a retainer, or receiving one, there are a few strategies you can keep in mind as you hammer out your agreement and discuss expectations.
1. Think in hours and not an entire month.
If you're paying a retainer, you don't get to have someone do whatever you want, 24/7, for as long as you're paying them. It's more likely that you'll be hiring a vendor to be available to work for a specific number of hours a month. Beyond that, you'd pay for additional time.
“Whenever I sign a new client on a monthly retainer, I sell based on hours they will receive, and I make this very clear in both the proposal and the contract," says Crystal Richard, owner of Crystal Richard & Co., a public relations company in Moncton, New Brunswick, Canada.
“I think that too many agencies mislead clients on how many hours they're receiving and then act surprised when a client expected more," Richard adds.
Still, Richard says that retainers can work out well for everyone.
“If you know you get a company on retainer for X amount of hours a week and have a general idea of what they can accomplish in that time, expectations can be properly managed," she says.
2. Make your arrangement as flexible as possible.
This is important for everyone. It can help keep either side from feeling like they're getting taken advantage of.
"We live in a fast-changing world," Silver says. Keeping that in mind, he says it's important to build into the retainer the ability to allow the scope of the work to evolve.
“That doesn't necessarily change the amount of the retainer, but it might change the services performed," he says.
3. Review your retainer periodically.
You may want to examine your retainer periodically and make sure you feel it's fair—especially if your SOW doesn't have much flexibility
Silver says he regularly looks over his retainer structure with his clients.
"We've definitely been in situations where we were asked to perform a considerable amount of work and it definitely felt like slave labor. And we've also had times where we didn't feel like we were doing enough," Silver says. "So we're constantly looking at ways to improve our approach."
Ideally, you'll examine ways to improve the retainer not only for your business but for your vendor or client as well. Because in the best-case scenario, paying a retainer and receiving one is like being in a good marriage—and you want to stay in a good marriage. If a retainer relationship isn't beneficial for both sides, one of you is going to suggest a divorce.
Read more articles on cash flow.
Photo: Getty Images
The information contained herein is for generalized informational and educational purposes only and does not constitute investment, financial, tax, legal or other professional advice on any subject matter. THIS IS NOT A SUBSTITUTE FOR PROFESSIONAL BUSINESS ADVICE. Therefore, seek such advice in connection with any specific situation, as necessary. The views and opinions of third parties expressed herein represent the opinion of the author, speaker or participant (as the case may be) and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions. American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any such opinion, advice or statement made herein.