How to negotiate a lower hourly rate with an ecommerce agency?
I haven’t found a single post talking about such negotiations. Therefore, as always, I’ll simply present to you the answer to this question.
Ways to negotiate a lower hourly rate with an ecommerce agency
Where did the idea for this post come from?
By how much can you realistically lower the hourly rate?
What happens when an ecommerce agency lowers its hourly rate by 1.25 USD/EUR?
Negotiations with an ecommerce agency
6 Ways to negotiate a lower hourly rate
Summary
What you can offer in return for a lower hourly rate from an ecommerce agency are:
That way, you’ll get a lower hourly rate. Suppose you want to find out how much you can realistically reduce the hourly rate at ecommerce agencies or software houses responsible for your ecommerce. In that case, I encourage you to keep reading.
There are a few ecommerce directors or owners I’ve recently spoken with who were very satisfied with the revenue currently generated by their online store.
Every ecommerce is looking for additional profitability points, which is understandable. If revenues are falling, there is less money, and campaigns’ efficiency is decreasing due to data collection restrictions, everyone is looking for opportunities to improve profitability.
One way is to negotiate with the ecommerce agency responsible for the support, maintenance, and development of the online store or B2B ecommerce.
Agencies working on maintaining and developing Shopify, Magento, or Presta usually work within the Time & Materials model, meaning we pay them for hours worked. The hourly rate is a critical element of the contract, and additional profitability can be found by reducing this rate.
While researching for the episode, I found an excellent LinkedIn post. Data obtained from the financial reports of about 200 companies, generating revenues from 250.000 USD/EUR to 25.000.000 USD/EUR, show that the average profitability of these companies was 5.79% in 2023.
To illustrate, a company with profitability below 5% is practically dying. Profitability at 5-10% means that the company usually operates. From 10% to 15% is a very good level, and above 15% profitability is an exceptionally high result, difficult to achieve.
Therefore, if companies achieve an average profitability of 5.79% in 2023, it is an incredibly low value. This means that they are practically on the verge of profitability.
Let’s analyze another situation: what will happen if an ecommerce agency with a profitability of 5.79% decides to lower its hourly rate, for example, by 1.25 USD/EUR?
Suppose the agency currently offers its clients a rate of 65 USD/EUR and then decides to lower this hourly rate by 1.25 USD/EUR. This is only a 2% price reduction.
Reducing revenue and the hourly rate by 2% significantly impacts the entire company’s profitability. Assuming that through negotiation, you will reduce the hourly rate from 65 USD/EUR to 50 USD/EUR, it probably will not happen because, at such a rate, the ecommerce agency would immediately find itself at a loss.
If we have roughly defined the range, we can discuss it. It seems that realistically speaking, it is possible to negotiate a rate reduction of 2 USD/EUR (in the extreme case, if the agency you work with has exceptionally high profitability, you could fight for 5 USD/EUR). What can we do next?
The book Never Split the Difference, which focuses on negotiations, clearly outlines the difference between negotiations and haggling.
It wouldn’t be a good idea to go to the ecommerce agency with a proposal to lower the price by 2 USD/EUR without any argument. After all, we are supposed to negotiate, not bargain.
Several different people from the agency often work on your online store. Some of them may have less experience. You don’t have to be exclusively served by senior-level devs – a mid-level or even a junior specialist could appear.
In this case, you can propose a change of one of these people to someone less experienced. This would lower the agency’s labor costs, allowing you to negotiate a lower hourly rate.
Usually, ecommerce agencies issue an invoice on the last day of the month, according to the hours worked.
However, you can propose that if you have agreed with the agency on 20 hours of cooperation per month, the agency can issue an invoice on the first day of the month. This improves the agency’s cash flow. In return for an improved cash flow, you expect a rate reduction.
You can pay once a month, at the beginning or end of the month. But you can just as well propose to the agency to settle twice a month, for example, on the first and fifteenth days.
The agency would have slightly better cash flow here, just like in the previous method.
The ecommerce agency cares about receiving money for the work performed as quickly as possible.
The time from issuing the invoice to receiving the money is essential. If you have negotiated a 30-day payment term with the e-commerce agency, you could propose shortening this period to 15 days.
The fifth point could be to propose joint marketing efforts with the ecommerce agency. This is often something the agency cares about.
It could be preparing a case study, leaving a review on Google Maps or Clutch, or perhaps video references.
Such sales and marketing support could be a good argument because it could help the company generate higher revenues in the future.
The last aspect is proposing a contract for a more extended cooperation period. For example, suppose you have a contract with a two-month notice period for ongoing cooperation in maintaining and developing your ecommerce. In that case, it’s worth considering signing a contract for a year, two years, or another selected period.
If you are satisfied with the current ecommerce agency, this can be beneficial as the agency gains security and predictability of income, which they probably need.
Lowering the hourly rate at an ecommerce agency or software house by about 2 USD/EUR is possible. A reduction of 5 USD/EUR seems already extreme. This is due to the current profitability of firms.
I’ve prepared 6 solutions you can propose to the agency to reduce the hourly rate. Armed with these arguments, you can start a conversation and begin negotiations.
Unfortunately, if you care about significantly reducing the rate, you will probably need to change the ecommerce agency. If you currently cooperate with an ecommerce agency at an hourly rate of 75 USD/EUR, getting a rate of 65 USD/EUR at the same agency will be rather difficult. In this case, you should probably look for a solution to changing the agency.
By the way, if you are wondering what cooperation with our company could look like regarding ongoing support for your ecommerce, write to us here. After completing the form, we will contact you within 15 minutes, talk about the business preliminarily, and arrange a more extended (one-hour) meeting. During this time, we’ll discuss your situation in detail and see if we could be useful in developing your e-commerce.
