More and more, relationships with clients are project based. The days of large retainer clients making up a sizable portion (or any portion) of your client base are long gone, especially for smaller independent agencies.
Added to this, are trends like having multiple specialist agencies, bringing work in-house, and shorter term commitments.
It is easy to set up an Agency as the barriers to entry are low. More and more, executives are leaving large, public agencies and starting their own shops. The market is competitive and with sufficient supply, simply charging more is easier said than done.
Clients usually come to our firm having been in business a few years. While they have been successful at generating revenue, sometimes they are not as profitable as they had hoped. Also, as they grow, their risks expand. Often being personally liable for these risks, they are looking to strengthen their financial infrastructure.
Want to improve your marketing firm’s profits? We suggest the following:
- Make financial results visible
- Know your capacity and match your capacity to your revenue
- Make forecasting a best practice
- Maximize growth opportunities with existing clients
- Look for opportunities to productize your service offering
- Invest in Project Management
1. Make financial results visible
The first step to improving your performance is actually measuring it and making the results visible. Too often small agencies are using their bank balance to measure their performance but unfortunately it can have nothing to do with your actual profitability. We suggest monthly financial reporting, that at minimum, includes:
Company Profit and Loss
Revenue by Client
Efficiency by Client (how well you recovered your time invested)
It is essential to understand your key drivers of performance when reviewing your financial statements for the current month and on a YTD basis:
- What were your staff costs as a % of your AGI?
- What were your overhead costs as a % of your AGI?
- Who are your largest clients and what % of your overall revenue do they contribute?
- How well are you recovering your time invested on your clients? Are there any clients that are really profitable (your revenue > 120 % of the billable value of your time)? Or really unprofitable (your revenue is < 80% of the billable value of your time)?
- How utilized is your team?
It’s essential to identify your least profitable clients through this process. Once the least profitable clients are identified, you’ll need to figure out if you can improve your pricing with those clients or service them less. Failure to do so represents a large opportunity cost for your business as the resources working on the low profitability accounts could be working on higher profitability work.
Small increases in pricing can have a big impact on your Agency’s profit.
2. Know your capacity and match your capacity to your revenue
What is your capacity? It is the maximum amount of revenue your team is resourced to do.
How do you calculate it?
Estimating your maximum capacity is as easy as multiplying the following:
- Number of billable FTE’s
- Number of Available weeks in a year (removing 6 weeks for statutory holidays, paid time off and company admin days is common)
- Number of hours in each work day
- Agency average blended rate
For example, a 20 person agency with 18 billable FTE’s, 46 productive weeks a year, 37.5 hour weeks, and an average blended rate of $150/hour would have maximum available capacity of $4,657,500 per year or $388,000/month.
The best performing agencies usually realize at least 60% of their available capacity. In this case, that would be $2,764,000 per year in AGI, or $232,800 per month.
This is a good number to keep top of mind. When you are reviewing your monthly results, you should be evaluating your AGI in the context of what your firm’s monthly capacity is. If you are doing better, high five! If you are doing worse, you will want to understand what is preventing you from converting at least 60% of your available capacity into AGI (do you have too many resources? Do you have the right resources for the work you are currently doing? Are you overservicing your clients? Have you priced your engagements properly? etc).
3. Make forecasting a best practice
The better job you can do at predicting your AGI 3-4 months out, the better you can optimize your resource mix. The better you optimize your resource mix, the more profitable you are likely to be. We suggest forecasting your AGI once per quarter at minimum.
To do so, you will want to look at all the projects confirmed and determine the amount of AGI that has not already been recognized. This becomes the AGI in “inventory”. Then you will want to add to this number all of the projects you have confirmed that you haven’t already recognized AGI for. This is the AGI for all known work. You might also want to add an amount for new business you expect to secure. Lastly you will want to compare this forecast to the amount of capacity (see #2) to see if you are likely to have enough resource, too little resource, or too much resource over the next 3-4 months. With this estimate, you can start to think about how you will resource your business
The better job you do at matching your capacity to your forecast, the more profitable you will be.
4. Maximize growth opportunities with existing clients
Pitching and onboarding new business is expensive. Of course we would never suggest you don’t do this, but a plan to grow existing clients should also be in place. New revenue with existing clients is almost always more profitable than revenue from new clients, especially in the first year.
We suggest you include your Account Directors in the planning process. They should be participating in the budgeting and forecasting process for the clients they lead. They should also be responsible for identifying a stretch goal and putting a plan together to achieve it.
5. Look for opportunities to productize your service offering
The goal here is to create more predictable revenue streams. This makes resource planning easier, gives you more certainty over covering your fixed costs and should lower your selling costs. If your agency produces content for clients, one idea would be to standardize 2-3 monthly “packages” (small, medium and large for example) and seek out clients looking for this service. The better job you can do creating repeatable processes around delivering these services, the more scalable they will be. With scale, generally comes more profit.
6. Invest in Project Management
Account management and project management are not the same function. Experienced project managers are skilled at building budgets, managing timelines and resource planning. A good project manager will identify scope creep in time to do something about it. Projects should move through the agency with more efficiency. A good project manager will ensure your agency delivers more work with the same number of resources. More work with the same number of resources means more profit for your Agency.
Historically marketing and advertising agencies have generally used a “costing” approach to price projects. Hours to deliver the project were estimated, billable rates were applied, and this data was translated into an estimate. In this approach, if work was more or less delivered in the number of hours estimated, your agency’s target profit should be achieved as long as the business was not over-resourced.
More and more, we’re seeing Agency’s adopt a value based approach to pricing. There are a lot of great resources out there about pricing creativity. If you haven’t already, I encourage you to check out the work of Blair Enns, Tim Williams and Ron Baker. Value based pricing values outcomes vs. inputs. The better the outcomes for your clients, the more you should be able to charge.
No matter your pricing methodology, providing pricing options is also a good way to increase your scope with clients.
Three options are generally provided:
The Safe Bet: this option provides your client exactly what they asked for in the brief, no more, no less.
The Optimal Option: in the Optimal Option, you meet all the requirements as set out by the client in the brief, but provide value added features that are worth the upgrade.
The Expensive Option: this is the goal. In this option, you put your experience to work to exceed the client’s expectations and intrigue them enough that it is possible that they will select this proposal.
A wholesale change to your pricing methodology isn’t easy and in some cases you might have contracts that prevent you from changing your pricing structure. But we encourage you to try to think differently about pricing when you have opportunities to do so. Small increases in pricing can have a big impact on your Agency’s profit.
Improving your profit isn’t something that is usually fixed overnight. It requires realistic goal setting, consistency and discipline. Small changes, like the above suggestions, consistently applied over time, will have a material impact on your bottom line.