In this session, Danilo discussed:

  • What are retainer agreements, how they came to exist, and the value clients often get from them.
  • How your consulting practice benefits from having clients on retainer.
  • Unconventional truths and hidden challenges of selling retainers (what no one tells you).
  • Recommendations for solo and boutique consultancies to do retainers right.
  • Questions about billing upfront and trends in retainer agreements.

Links and resources mentioned include:

Video Recording


Welcome, everyone. Today we're going to talk about retainers. What they are, the pros and cons of adding them to your offering mix, and also some unconventional truths most consultants would benefit from hearing. For those of you who are here for the first time, BCC Bites are chats we run every other week on a specific topic followed by a quick Q&A. If you have any questions, please put them in the chat. And we'll go through them at the end, OK? Right.

So before anything else, let's make sure we're speaking the same language here. What is a retainer? I think that's a good definition for us who are in the professional service industry. A retainer is an agreement between a client and service provider where the client pays a fixed and recurring fee (usually on a monthly or quarterly basis) in exchange for ongoing services or access to expertise.

Now, this is simple enough. In practice, though, there are a few reasons why clients see value in retainer agreements. Let me quickly talk about some of them.

Ongoing services. A retainer agreement is convenient for hiring services that the client will need over an extended period, right? Nobody likes to search, vet, negotiate, and hire consultancies. It's time-consuming. It's difficult since the client often doesn't even know how to assess what they really need, what kind of expertise they need. So if you know that you will need the same services time and time again, it might make sense to find one consultant you trust and hire him for a longer period of time, right?

Guaranteed availability. When we look back, it's interesting. In medieval Europe, retainers were payments made to knights or other service providers to secure their loyalty for a specific period. That's why it's called a retainer. Even a few decades ago, that was the exact same logic for law firms. You can ask older law partners, partners of law firms, they will confirm this. A retainer was basically the payment a client made in advance. When they needed any work, the firm would start working and billing against that money, right? And as the balance got low, the client was asked to transfer more money to top it up. And it was only over time, really, that firms started to associate a retainer agreement with fixed monthly payments. But at the core, clients still benefit from guaranteed availability. That's why, for example, retainers are so common among PR agencies. If there's a crisis or an emergency, having a consultancy on retainer means that they will be available to help immediately when needed, right? The consultancy can't say, "now we're busy." They can't work with direct competitors. So in that sense, having professionals on a retainer is almost like hiring insurance. You never know when you might need it, but sometimes you can't afford the risk of not hiring it, right? That's one advantage for clients.

And priority access... Some retainer agreements, they include the option for clients to access additional services or kind of specialized expertise that's not generally available to other clients. Let me give you an example. Imagine I'm the founder of an IT consultancy specialized in systems integration, let's say. The projects typically require spending a lot of time with the client's team. If I did all the work myself, it would be impossible to deliver more than one or two projects at the time, right? So I might have a small team of technically skilled consultants who do the job. And I only engage with clients during the sales process. Or onboarding. Or at the end of it, at the end of the project, when reviewing it, asking for feedback. That's one way to protect my time. Right? Now, let's say I notice a few clients refuse to talk to my team and want me to be present on every call during the whole project. In that case, I might consider creating a retainer that includes access to me. If they want to hire my personal time, access to my personal time, I have all the rights to ask them to pay a premium for it. And for some clients it does make sense. They want to have direct access to partners or if you or one of your partners are authorities in the field... many people are willing to pay a premium. Many companies are willing to pay a premium to have direct access to you.

These are some of the reasons why clients hire retainers. Now, before we talk about the benefits retainers bring to your consulting practice, I would like to highlight one last thing. What characterizes retainers, the main feature of a retainer is not the scope of work, but the pricing structure. Of course, the scope of work and your value proposition matters. It is those things that support your price after all. But what makes retainers a special case among your other service offerings, and why we're talking specifically about retainers here, it's the pricing structure. It's its fixed and recurring fees. This is the source of the unique benefits and challenges to your consultancy.

Now, what are the benefits of adding retainers to your consulting practice, to your consulting business?

First, predictable revenue. And we could stop right here. Having a more predictable revenue is something that every consultancy dreams of. Even if this was the only benefit, it's still a very big one. When you sign a retainer agreement, you know exactly how much money is coming in, when, and for how long. So it smooths the highs and lows of revenue coming from projects. It brings you peace of mind, right?

Now, this leads to improved resource planning and allocation. So more predictability makes planning infinitely easier. Once when you have more confidence in your revenue numbers, you can commit to investing in initiatives that do not provide immediate return and immediate ROI, but they are essential for long-term. So for example, you can hire tech solutions to automate or streamline activities. You can invest in strengthening your brand through content creation, improving your digital presence, your digital footprint, standardizing the look and feel of your brand. If you're always tight on cash, these are things that will be left aside. So revenue predictability is key. But what retainers, they also give you is more visibility on future volume of work. So you know how much you need to deliver in the next 6, 9, 12 months. And that helps you plan capacity. So it's easier to estimate if and how many people you will need to hire, and for how long.

Now, if this is done right, if you do planning and do allocate resources wisely... It will lead to improved margins and client relationships. And here, where does this higher profitability come from? A few places. So first, the many long-term investments you made with your additional revenue. Second, from a cheaper client acquisition, because after all, the more retainers you have, the less clients you will need to bring in, right? The less new clients you will need to bring in. And we know that selling to an existing client is four to five times cheaper than to a new one. So you improve your margins there as well. And third, also... You benefit from more upselling or cross selling opportunities, right? Having an ongoing relationship, makes it easier to identify, to find additional needs that clients may have. So you not only sell cheaper, but you also sell more. It is this ongoing nature of retainer agreements that allows you to earn more trust, to solidify client relationships and really make your practice more robust.

These are the main advantages. Now let's talk about the interesting part, the challenges. Many consultants, they see retainers as the ultimate goal, like a holy grail of consulting agreements. We saw the benefits, they are obvious. But I think that consultancies don't give enough attention to their downside. And just like anything, there are pros and cons to retainers. There are right and wrong ways to structure a retainer agreement. And here I'll talk about three challenges that I think are critical, but neglected by solo and boutique consultants.

First, retainers often lead to over-servicing. This is a consequence of seeing retainers as this holy grail, the engagements we need so much to protect. Sometimes it is you who does more than ask. Other times there might be what we call scope creep. Clients may start expecting additional work that's outside of the scope of the retainer. When that happens, you have two choices: Have uncomfortable conversations to stick with the scope, or do what you're asked and make your retainers less profitable. Most consultants choose to overservice.

But you know what's interesting? Actually, you could argue the exact opposite of what I just said right here. You could say that the long agreements, they hide or mask client dissatisfaction, right? Because they're locked in the contract. I had a conversation with another marketing advisor a few weeks ago about it. And he said, "if you look at any retainer relationship that is at least six months old, you will see that one of the parties is not happy." Either you feel like you have a bad client because you're overserving him, or the client feels like they're being underserved and taken advantage of by the consultants. It's very rare to feel like both are happy after a while. And I agree. What I can say is that, at least from my experience, most solo advisors or partners from boutique firms tend to overserve, not underserve.
And that is a challenge. Let's move to the next one.

Retainers push you toward productization. Imagine you have two or three retainers, two or three clients on retainer. This is what will go through your mind at some point, inevitably. "Okay, I have two clients paying 8, 10k a month for more or less the same thing. What if I package it all up in a service and offer it to other clients, offer it to other organizations?" That's the temptation. It seems like it's an easy way to improve margins through efficiency, right? You start getting this similar clients on retainers. And the temptation is: "Let's package it up."

Now that may or may not be a problem, depending on your business model. Let me explain.

Most boutique consultancies, they work like this. They take in few clients, they offer bespoke, customized work, and they price each client differently. This is one kind of firm. But there are also productized service firms. So you serve more clients by offering the same service for the same price. When you start to sell more and more retainers, you will be pushed toward productization. Of course, it's not a given that you will give up the temptation, but It does seem to me that consultants start to think more about efficiency and cost rather than innovation, the more retainers they sell. So if you fall on the other side of the spectrum, if you brand your consultancy highlighting a tailored and bespoke approach, support, retainers can create this challenge. You win on efficiency and the ability to scale up, but you also remove the value of discovery, consultative conversations. And also you make your services more prone to commoditization.

The third one, a neglected challenge is retainers can create complacency. And to explain this, let me just open a quick parenthesis here.

I don't know how many of you do this, but I have something I call my curiosity catalog or CC. It's a massive list of questions that I use to guide my learning, clarify my thoughts, build expertise. Know where to research, what to research. And one of my questions there was, do selling retainers increase or decrease consultants' risk aversion? Do selling more retainers increase or decrease consultants' risk aversion? I think that's an interesting question because it's easy to see how it could do both, right?

As a consultancy founder, the more retainers you have, the more revenue predictability you have. So the more comfortable you can feel to invest and take risks. You could argue that. But on the other hand, the safety of guaranteed income can make firms less willing to take on risks. Starting and launching potentially risky but rewarding initiatives.

So it's not an easy question. And of course, it changes from person to person. When you look at research, the prevailing view is that risk aversion arises from a combination of genetic and environmental factors. But I had a hunch that for most boutique consultancies, the security of a retainer, of retainer income, was making the firm too conservative. I don't have a huge sample, but I do think this is true.

When I look at the consultancies I worked with, the more often retainers were used the higher client concentration was. Partners got comfortable. There was a complacency for creating a new client relationships. Not much was made in terms of client acquisition. So take this as a warning. These three challenges... I don't see many people talking about really.

Before we open to questions, I want to close this with three high-level best practices for you to do retainers right, which is the topic of this chat. Of course, advice needs to be tailored to your context. Feel free to reach out. But I believe most of you would benefit from the following activities.

First, document your scope of work and set boundaries. Scope creep is difficult, is particularly challenging for strategic advisors because of what we sell, because of the nature of the work, right? Sometimes it's complex and abstract. Sometimes you really are selling your time and helping clients with multiple things. The impact of the work is so big that it is difficult to be measured by KPIs, right? It affects the whole business.

But that's exactly why you should be as clear as possible on what your retainer consists of. Let's take the simplest example possible. Say your retainer consists of providing executives advice, coaching or mentoring through online conversations. Here are some questions that a potential client might ask. How frequent will those calls be? Once a week, once a month? How long will it take each call? 30 minutes, one hour, two hours? Where will they take place?

I mean, these are the obvious questions and you probably already specify those things when you're talking about your retainer offering, when you present your retainer offering. But what you need to do is to go beyond and really think about the practicalities of it. So for example, I think it's very likely that a client would ask himself, what happens if I miss a call? Can we reschedule it? If I think it's relevant, can I bring other people to the call? Or it's just a one-on-one thing? Will someone record a call or document what we talk about? Are we following a predetermined agenda or not? What happens if I feel like I need to speak to you more frequently. What happens if I want to reduce the number, the frequency of calls?

These are all questions that are important. They go through your prospect's mind. Scope creep is born out of these unanswered questions, right? If you didn't specify who takes notes on your calls and one of your retainer clients asks you to do it, "can you take notes on the calls?" You will do it. But if you have specified, you have clarified from the beginning, "I do not take notes." They will probably never ask. And if they ever do, you can just point them to your terms, to your methodology.
So what I recommend here is for you to really detail how it's going to work. And not only the things you do, but also everything that you don't or it's not included in the service in the retainer agreement. Also, don't forget to set rules for how unexpected situations or out-of-scope work will be handled. I mean, we do our best to predict where discussions can arise. But every long engagement will at some point include unexpected situations. Whenever something comes out that it's not in the scope of work, how are we going to go about it? How are we going to proceed?

A second recommendation: structure modularly for flexibility and effectiveness. So remember one of the challenges of retainers is that they push it toward productization. The moment you sign the first couple of retainer clients, you're tempted to package it up in one single service. You can sell too many more clients, right? Now this is smart, but the problem is, again... If you're going to sell the same thing, you need to charge the same price for everyone. And this in consulting equals to leaving money on the table. Different organizations have different needs, different ambitions, different budgets. That's why we have this golden rule in business development, which is "you price the client, not the job."

But what if you could conciliate those two things? So providing a tailored retainer service without having to create a new solution for each client from scratch. And you can, if you structure your retainers modularly.

And to be clear, you can structure any service offering modularly. The main idea here is to break down your services into smaller components, that can be easily added or removed from a proposal, depending on your prospect's needs. This allows you to, not only to easily customize your services, but also to offer different levels of service at different price points. And this makes it easier for prospects to buy, right? We don't have time to expand on this today, service design, but it's basically a three-step process.

So first you look at your current retainer offering. If you already have clients on retainer, you can document what you do, for each one of them. What are your deliverables and activities.

After you do that, you break it down into more specific service components. Where each component needs to add value on its own to clients but also complement each other. So for example, my retainer services, they might include activities like one-on-one strategy calls, creating and sharing structure assignments, overseeing marketing agencies or contractors who are working for the client, etc. Now, not every client wants it all in the retainer. That's why you're breaking it all up.

When you have the components, then as a last step of the process you standardize, you document, you create assets for each component. And that makes it easier to combine them into custom retainer agreements.

So I would highly recommend you to structure modularly. Do not package it all up, resist the temptation unless you're already familiar and you're following this business model of selling highly productized services. Listen to client needs. And price the client, not the job.

Now, the last recommendation is align your systems and KPIs. As I mentioned, the comfort of predictable revenue can lead to a lack of urgency, and lack of drive in pursuing new opportunities. Taking risks as a whole. Sometimes you ignore the yellow signs, but often it's unconscious and we don't even notice. Lack of action, right? For this, I suggest what I always do. Find out what are the numbers that matter, measure and keep track of them consistently.

For a consultancy that has several clients on retainers, those KPIs would probably include client concentration, the percentage of new contracts or engagements coming from existing versus new clients... you want to gradually improve those numbers, right? But also, I'll suggest you to check industry specific benchmarks when setting targets. For example, we identified that the healthier consultancies don't let their biggest client represents more than 25% of their gross profit. That's a healthy number. If it's between 25% and 35%, that's a red flag. And if it's over 35%, if your biggest client represents over 35% of your gross profit, you're putting your survival at risk. So these are numbers worth knowing.

And knowing your numbers, keeping track of them, seeing them week after week helps you not only to reduce complacency, because you're reminding yourself that there's a problem here, there's something wrong. "I need to take action." But also to reduce scope creep. For those of you who have clients on retainer, do you know the profitability of each one of your retainer clients? Do you know how many hours you really dedicate to them? Not the number of hours you said you're going to dedicate to them, but the number of hours you really dedicate to them? Do you know how much they cost you? I remember that once I did this exercise with a consultancy partner, and he found out he was overserving clients so much that he had a lower hourly rate than his assistants, which is absurd. But that's why you want to track your numbers. That's why you need to know your numbers.

So these are the three challenges and three recommendations I think every consultant would benefit from. Now let's open the questions and let me see what you have here for me. Right, George asks:

"What are your thoughts on billing the whole retainer agreement upfront?"

It definitely works depending on your service. I like the idea of, I like the idea of billing upfront. And that's how I personally work with retainer clients. They pay my six-month fees upfront when signing the contract. But of course, it's not the only way to do it. I charge upfront for many different reasons actually, but it also fits the work that I deliver, which is marketing and business development strategy. So most of the value and the heavy work really comes from the first couple of months, let's say first two or three months where we're working through the heavy, difficult things, the fundamentals. We're fixing the fundamentals. We're finding focus, we're finding direction. Over time, I become less and less involved. It's more about coaching, overseeing, and just working as a sparing partner.

But another option, which probably many of you use, is to keep your fees flat for a long time. You don't charge upfront, you keep them flat for a long time. I think this works if you're delivering an ongoing service, right? And you expect the client will need you for longer. Agencies that use retainers, that's how they bill. If you're an IT consultancy doing maintenance, implementation. This is also an option. Keep your fees flat for a long time.

So I don't think there's a recipe here that you should follow. It really depends on what problems you're solving and how you're solving them.

Emma asks:

"What are some trends or innovations that you've been seeing around retainers?"

Good question. One thing I'm seeing more often are shorter retainers. So traditionally retainers are yearly contracts. But now you can see many consultancies doing retainers that last for three or six months. And I think the biggest advantage is that by lowering the duration, you make it easier for clients to commit, especially if they are new or smaller businesses. Startups. I do think there are hidden dangers to shorter retainer agreements in terms of the level of commitment you're asking clients... but probably it's not a bad idea. It's something that the market has welcomed. If you're selling to individuals, executives, or smaller businesses as a whole, SMBs.

Thank you all for joining. The next BCC Bites will be Thursday next week. So on the 12th of October. And we're going to talk about the three components of strong consulting value propositions. So if you have plans to improve your messaging, invest in brand or run any kind of marketing campaign really. I'm going to present a simple but very useful framework to improve your value propositions. I'll send the link with the recording, okay?

But that was it. Thank you again. Stay safe. And wish you all a great end of the week.

Thanks for watching or reading. You can get more specialized and actionable growth insights for micro consultancies in our newsletter. Every Tuesday, you get one idea from Danilo, one quote from other experts, one number you need to hear, and one question for you to level up your consulting practice.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.