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Operating costs are up – should agencies absorb the increase, or raise fees?


By Sam Bradley, Journalist

September 21, 2022 | 8 min read

Each week, The Drum asks agency experts from across the world and the ad business for their take on a tough question facing the industry, from topical concerns to perennial pain points.

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When should agencies decide to swallow costs? / The Drum

Operating costs are going up for businesses across the board, but agencies aren’t just dealing with inflation around supply costs or rising energy bills – they’re coping with higher wage bills too. What’s to be done?

Some agencies tell us they’ll be raising their client fees, but others have indicated they plan on absorbing at least the greater part of those increases (and a couple have told me they plan on undercutting those rivals putting prices up). So, faced with rising costs and shrinking margins, how does your agency decide which course of action to take?

How do you solve a problem like... deciding if (and when) to absorb higher costs?

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Shenda Loughnane, global managing director, iProspect Global

Rising costs are likely to be an economic reality for the foreseeable future for all parties. But while increasing prices may be required, this is not always the only answer.

The best approach is to have an open conversation with clients about increasing costs and to explore potential solutions. This might mean looking at how we offshore or near-shore certain roles or activities to help balance inflationary impact, or investing more in automation – again with a goal of maximizing efficiency.

Ultimately, it’s about working together to find the optimal solution, which meets both the individual client needs and those of the agency.

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Annabel Mackie, managing director, Five by Five

As an independent agency, we’re uniquely positioned to control our own destiny. We aren’t weighed down by any group charges and are agile in how we support our clients, ensuring the most efficient and effective team structures. This, coupled with our proprietary production management tool – which enables us to deliver volume at pace (for example, for Activision we deliver 8,000+ assets to 25 markets in 28 languages in 10 working days) – means we can keep our client costs competitive.

We appreciate that our clients are facing the same challenges, and we partner with them using our creative and tech expertise to problem-solve together. For us, it’s less about passing on rising costs to our clients but partnering with them to find more efficient and effective ways to deliver for them, which is a win for both sides.

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Anton Jerges, chief executive officer, Collider

As we emerged from the pandemic, we took the expensive decision to hire only senior people to create a team that could win work, build strong client relationships and service complex campaigns to an exceptionally high level. To offset the talent cost, we cut fixed overheads: rent, subscriptions, back office... This built flexibility around staff remuneration.

Will we put our prices up? Yes. Will it have a negative effect on client relationships? No. If you invest in the right staff, you build strong client relationships, meaning you don’t have to worry about competing on price as clients will value what you do.

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Gilbert Corrales, chief executive officer, Leaf

Raising prices in a market that’s oversupplied, during a crunch on operating expenditure, is risky. Managing costs is the only thing a business can truly control.

Having a fully-remote working model and investing in proprietary automation and technology are key strategies that have enabled us to drive critical operational efficiencies and improve client LTV through reliance and results.

Global remote working and building technology at the core of our service allows for much higher margins, and provides commercial headroom and stability for us during periods of inflation. We can remain competitive on price and still make good margins.

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Chris Mele, managing director, Siberia

I’m afraid there isn’t an easy out. A healthy P&L is all about balancing competing priorities. Readily-available client work and wage increase demand go hand in hand.

Any agency primary will tell you that we are no longer living in the Covid halo wage demand boom that we have been for the last two years. The labor market has softened. For better or worse, so has the influx of clients with urgent briefs and minimal price sensitivity.

Do the dance. Set priorities, stay disciplined on costs, treat new prospects preciously and, above all, take care of your current clients.

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Dan Rawley, marketing manager, Evoluted

At Evoluted we’ve decided to absorb the rising costs for the foreseeable future. During the pandemic we supported clients with billing freezes or payment plans – likewise, now we recognize they’re facing squeezes on everything from wages to manufacturing costs too.

Besides, until we know the crisis’s duration or the government’s response, hiking our prices now could cause long-term reputational damage.

We’ve given all staff an annual £2,000 cost of living payment. The months ahead will be difficult for everyone, so that amount is not pro-rata and was extended to employees on long-term sick and maternity leave.

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Scott Harkey, co-founder and chief executive officer, OH Partners

The most important thing is making sure the key people at your agency are well compensated based on both your market and the job. Do those audits. We buy less into agencies and more into strategic talent, because losing good people due to insufficient pay is the worst.

For us, we’ve been raising rates to compensate. Not for existing legacy clients, but based on what new projects require the highest strategic work. Our rates are broken down meticulously by project function, title and scope, so when entering a new partnership there are no unanswered questions.

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Anthony Santiago, managing director, Pink Sparrow

It’s unavoidable to not pass along some cost increases to clients, but we’ve looked inward to help make up the difference and ensure clients are getting the best possible value. We’ve developed strategies focused on dialing in our internal processes and working closely with clients to gain optimum visibility on projects to ensure proper planning and efficient build times.

These strategies, paired with calculated investments in new technology such as large-format 3D printers, result in efficient, effective systems that lend cost-saving solutions.

We believe creativity and innovation should never be sacrificed in the pursuit of affordability. We’re always up for a challenge.

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Emilio de Haan, founder and executive creative director, Herc

We try to work smarter during our production process. And we make sure to communicate transparently with our clients. For example, if our client wants to have a certain level of production, it will cost something. However, if their budget does not match their desires, we find new solutions.

Every unfeasible situation creates new possibilities. So, instead of working with the big names, we try to find new talent. By doing so, we create paid opportunities for them to make portfolio work that is on our level. A win-win situation.

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