What should recruitment agencies charge for their services?

What should recruitment agencies charge for their services?

As a top-billing perm recruiter since I was 23 and now founder of DG Recruit, it’s crucial to understand how to negotiate your recruitment fee.

So, what exactly should recruiters* be charging for their services?

*For direct hire aka permanent hires, which is billed typically off of first year base OR total comp or a mix of guaranteed comp, depends on specific market dynamics. I haven’t done contract placements, this is only directed towards the perm market.

Here are a few ways to break down the answer:

#1. How well established are you in your market niche as a dominant player?

If you’re a top recruiter in your field, you can charge over 25%, perhaps as high as 35% (executive shops charge that on retained regularly – different story for different day of how long those rates will last). If you own the majority of the passive candidate market, you can start shifting your rates higher. That’s why the top billers today are highly specialized. It’s much easier to bill massive amounts on a niche market strategy that spans multiple states, than regional approaches that cover multiple verticals.

Unless…

You work at a major recruitment firm that is so saturated nationally that they have offices everywhere and just break down their business in a regional model. While that’s good for the company in terms of penetration, it penalizes the employees. That’s why most recruiters that work at large agencies are best suited to leave the comfort of such a cannibalized low-growth opportunity for a high-growth, high-reward, smaller recruitment firm where they can land all the national accounts they want and start from the top, instead of being one of many on the bottom of the totem pole.

Sometimes large recruitment firms sign terms at 15-20% for the “future promise to recruit” or to land on a PSL (preferred suppliers’ list). This penalizes financially-motivated go-getters because the reward is not worth the work.

#2. What’s your market strategy?

If your company strategy is that mass-market, national, high-volume approach (what I term WHOLESALE), then of course, rates will suffer as a result of that. Profit margins also shrink. This is the volume play so naturally the business dynamics follow. Recruiters, instead of being individual business entities that can generate and close business alone, can’t function without each other and need to rely on a “fleet” model to survive. This is a high cost model that provides little commission reward. Top producers in these setups eventually wake up and realize they’re massively underpaid.

Those who are money-hungry and exceptionally motivated tend to thrive at smaller recruitment firms that are much more niche and higher margin (so they can increase their commission reward potential). Average perm deal sizes are above $20k and usually the recruiter themselves is learning the business development piece and earning income on both the client and candidate side of the deal. This is what we call full-desk recruitment and for sure, it rewards top billers and creates top producers early in their career.

In my past, as a niche permanent recruiter on a STEM market, if I were to have my way, I’d never agree to sign terms under 25%. However, sometimes, like I said, as my past employer grew, they needed to land strategic accounts that candidates find highly desirable to work at. This is a good play because it allows you to land clients that you can use as bait to capture a candidate market segment you otherwise wouldn’t have had without those strategic accounts.

Thus, rule of thumb is that most Fortune 50, 100, 500 tend to force you to sign rates at 20%-25% in order to be on the PSL.

Take a look at this graph to understand how much rates vary across agencies:

#3. Startups should pay more for recruitment services, NOT LESS.

I hear a lot from recruiters who feel that startups should be given a price break due to their “lack of money”. I argue the very opposite. Startups are tricky customers because they’re often led by people who aren’t that experienced. Furthermore, it is a risk for your candidate to go there professionally and personally! Candidates actually ask for MORE money, front-end AND back-end to move to a startup.

Thus, it stands to reason that recruiting for startups take MORE time and effort to successfully place and have your candidate STICK. Startups should pay the full fee that you would charge. They don’t even have a “PSL” that is worth taking a cut for! Of course, the odds are there – a high potential startup could be a very desirable long-term play. However, based on the law of large numbers, most startups don’t actually succeed.

Even if startups do succeed financially, it still may be very hard to recruit for them and you should charge more for the work and time required to complete the placement. Successful startups are tough places to work, usually led by legendary founders who are also legendary you-know-whats.

With all things considered: long hours, bad reputations, hard-to-work-for hiring managers, and some pricing constraints, I’d caution recruiters against giving their startup customers a discount.

Sometimes, it’s not worth it and is double the work. You’re going to end up shuffling your best candidates to your best clients who pay the full fee for an easier sell/process, so just make sure you don’t screw your customer over by agreeing to a contract you don’t want to deliver on!

TIP: Startups are usually funded well and have the budget to spend on recruiters. I have had many startups and smaller-sized firms pay 25-35%. I’d again only give 20% to strategic partnerships that makes sense for other divisions to expand into.

#4. Nationwide and niche market focuses can command higher rates.

As a headhunter that was always niche and nationwide, I got to provide candidates to my clients that my competitors could NEVER find. I was very deep into my networks and I covered all major metropolitan cities and all the others in-between. You can work on clients in random locations and provide them a volume of candidates in a niche market that your competitors are just not finding because they’re more generalist and regionally focused.

The relocation piece of your business (especially in today’s day and age where people are constantly relocating) is a HUGE money maker. I signed the best rates at 35% in markets where no one was paying any attention to them and candidate flow was literally non-existent. That’s the power of a nationwide niche play through one central source that is highly systematic and thorough in terms of candidate market domination.

#5. Rates are dictated by your market and competition at the end of the day.

This article sums up my experience as a STEM recruiter for a highly niche perm market where average client rate was 20-25% and average salaries from $120-150k. For your own markets, you need to understand your competition’s pricing strategy and what the clients are getting for it.

For instance, if you’re in a market where there are a TON of excellent recruiters all charging 20% and all better than you, then yes, it may be impossible to come in doing worse work and charging more. However, if your competition charges 20% and they absolutely stink, there is no reason why you should charge the same price as an underperforming team. You should obviously be entitled to a higher rate if you perform better and do more work.

In Conclusion

No matter what market you’re in or how the economy is, the best recruiters who have the best candidate and client relationships in a niche market usually will win and survive through any downturns or market shifts. Insulate yourself by being the hardest-working, most thorough, and well-connected go-to source and team in your market.

No matter what, good recruiters, if they establish themselves and build their long-term market dominating strategy, they’ll be able to consistently charge above market rate for premium positioning and candidate quality. They’re worth the extra money and will actually be a reliable long-term source of candidates for you if a. the relationship between client and recruiter is managed right and b. the recruitment firm manages itself right.

Utter candidate market domination is the recruiter’s only shield against economic, financial, and market risks.

Tip: For firms who are only client-centric mindsets, they’re totally missing the point of how profitable a fully candidate-driven permanent business can be. These are things that sadly recruiters can’t change. Mindset views are impossible to bridge. Thus, recruiters can change their surroundings and work for more knowledgeable, open-minded, and adaptable leadership by switching employers to work for another recruitment firm.

If you’re a recruiter that resonates with my articles and advice, reach out to me so we can have a confidential conversation about the recruitment firms my team and I can introduce you to maximize your career!

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