How Agencies Make Money

Most internal teams don’t ask this question directly. But if you’re hiring an agency, partnering long-term, or auditing current spend, you need to understand how their business model works. It’s not a trust issue. It’s a visibility issue.

Whether your agency engagement is time-based, deliverable-based, or scope-based, the way they earn revenue directly impacts what they prioritize, how they staff your account, and where waste or misalignment can creep in.

If you don’t know how your agency makes money, you’re flying blind.

Understanding How Agencies Make Money Matters

You’re not just paying for creative. You’re investing in people, time, and business operations built around profitability. And that profitability isn’t neutral—it shapes how your account is managed and how fast (or slow) things move.

Understanding how agencies make money helps you:

• Identify bloat or redundancy in your current engagement
• Flag when a team is stretching scope or time to hit revenue goals
• Evaluate performance with the right context, not just gut feel

Without that clarity, you’re likely to feel the effects (delays, misfires, overages) before you understand what caused them.

And if you’ve been burned by agencies in the past, this is often why.

How Agencies Make Money From Markup Models

In a markup model, the agency makes money by reselling something (usually media, production, or software) with a percentage added on top.

If you’re paying for ad spend through your agency, or using contractors they manage, that fee is baked into your monthly costs.

Markup isn’t automatically shady. It helps cover management and risk, and some clients prefer it over hourly tracking. But when it’s unclear or undisclosed, it can cause confusion fast, especially if you’re also seeing hours logged for managing the same thing.

Good questions to ask:

• How much of this total is passthrough vs. markup?
• Are you billing time and markup for the same service?
• What happens if I want to pay vendors directly?

If your agency resells services, you should know how much they’re profiting and why. That transparency helps you make smarter decisions about what to keep in-house and what to delegate.

How Agencies Make Money From Billable Hours

In a time-based model, agencies earn money by tracking time against tasks.

That doesn’t mean you get more value if they work slower—it just means time is the commodity.

When done well, time-tracking creates accountability and predictability. But it can also lead to over-servicing, under-delivery, or weird math if roles aren’t clearly defined.

You’re not just paying for one person’s time. You’re paying for strategy, review, admin, and communication layers that support the work. If you don’t know which roles are billable and why, your costs can balloon without warning.

Watch out for:

• Time logs with little to show in terms of volume or quality
• Repeated revisions with vague strategy alignment
• Multiple layers of review that don’t move work forward

If you’re getting billed for time, make sure you understand whose time, what roles, and how those hours translate to momentum.

How Agencies Make Money From Retainers

Retainers offer predictable income for agencies and predictable support for clients. But not all retainers are created equal.

In some cases, they function as pre-paid time blocks with rollover. In others, they lock in a fixed monthly price for a certain volume of work. If your scope isn’t clear (or your agency doesn’t track delivery against the retainer) you could be paying for unused hours, vague consulting, or padded deliverables.

Retainers work best when they’re tied to specific outputs or goals. They break down when they become vague access fees with no accountability. If you’re on a retainer, ask:

• What does this monthly amount include?
• What happens if we go over or under?
• How are you tracking usage?

The clearer the scope, the easier it is to assess performance. And if your team’s needs change often, make sure your retainer has room to flex without a fight.

How Agencies Make Money From Project Scopes

Project-based engagements are priced around outcomes: launch a brand, write a website, build a campaign. The agency scopes the work upfront, adds buffer, and delivers against that agreement.

This is often the most transparent model, but only if the scope is solid.

If your agency didn’t dig deep enough in discovery, or if your internal team changes direction mid-stream, that scope can unravel fast. When that happens, agencies either eat the time (and slow down) or renegotiate and reprice.

Your job is to make sure the scope actually reflects what you need. 

That means:

• Get clear on success metrics at the beginning
• Push for phased delivery to avoid endless revisions
• Ask how assumptions were priced and what changes trigger scope creep

When scoped well, projects create fast wins and clear benchmarks. When scoped loosely, they become war zones of vague expectations and mismatched assumptions.

How Agencies Make Money From Hybrid Models

Most agencies use a combination of billing models. You might be on a retainer with project scopes layered in. You might be getting time reports and passthrough fees in the same invoice.

That’s not necessarily a red flag. But it does require clarity.

The more billing models involved, the easier it is to lose track of what you’re really paying for, and the harder it is to track outcomes against spend. 

Before you sign off on a hybrid model:

• Clarify what’s time-based, what’s outcome-based, and what’s marked up
• Confirm who’s tracking what internally (and how often)
• Ask what happens if work stalls or pivots mid-month

Mixed models offer flexibility, but only if you understand how the money flows. Otherwise, it’s too easy to mistake effort for value or momentum for chaos.

Final Thoughts About How Agencies Make Money

No billing model is inherently bad. But every model has blind spots.

If you’re struggling to evaluate performance, feel like things are stalling, or aren’t sure where your money’s going, the agency’s revenue structure is usually part of the picture.

Ask questions. Clarify models. Don’t let confusion linger for months while budgets bleed. The more visibility you have, the better decisions you’ll make and the faster your agency partnership can actually deliver results.

 

FAQ

Q: How can I tell if an agency’s billing model aligns with my internal team’s workflow?
A: Start by mapping how your team plans, approves, and executes work. Then compare that to how the agency scopes and charges. If you work in sprints or need rapid iteration, fixed-scope or rigid retainers may clash with your pace. A good agency will adapt billing models to fit how your team operates, not the other way around.

Q: What red flags might indicate a billing model is causing performance issues?
A: Repeated delays, vague deliverables, or inflated invoices without matching outcomes can be signs. If your team constantly feels behind or unsure where time/money is going, it’s worth reviewing how the agency’s incentives (markup, time blocks, or retainer minimums) may be misaligned with your goals.

Q: Can an agency’s pricing model evolve over time?
A: Absolutely. As priorities shift—from launch mode to ongoing optimization, for instance; agencies can move from project-based pricing to retainers or hybrid setups. Periodic reviews help ensure the billing model still supports the results you’re aiming for and doesn’t become a drag on momentum.