Making your agency more lucrative doesn’t only mean securing a truckload of new business. Winning work at the right price and finding ways to extract more profit from your current operations can be just as effective. To get the inside track on staying firmly in the black, we talk to agency leaders and specialist marketing accountancy firm, My Accountancy Place, for their top profitability tips.
In Part 1 we discuss the worrying trend of low profit margins in the agency sector and the foundations needed for profitability.
Take a Drive Down Revenue Boulevard
The profitability equation is a simple one: more money in, less money out. But when My Accountancy Place ran a project to benchmark all their clients against each other, they were shocked to see some “terrifyingly low” net profit margins.
Paul Barnes, founder of My Accountancy Place, says the key to profitability is pricing and recovering people’s time:
“You’re the experts and excellent at what you do so you need to charge a substantial rate for your time with a suitable return. To generate a 55% margin, an employee on £20k per year needs to bring in £31k.”
If you don’t make enough profit, when something goes wrong – and it will – the time you put into resolving it comes straight off your bottom line. What could have been a lucrative client becomes a loss maker, often sucking up more time and resource to fix whatever’s gone awry. By building sufficient margin into your fees, you’ll protect your profitability even when things aren’t going smoothly.
Set Expectations Through Your Fees
Pricing is a contentious point for many agencies and is an area that John Woodall, founder of Space 48, believes many agencies don’t get right:
“Some agencies quote for the same service but price over 50% lower. How can this be possible? Many just try to bring in work for work’s sake which might not be at a profitable level for the business.”
While being competitive is necessary to secure business, fees need to be set realistically to ensure financial stability and enable business growth. But some owners get nervous when pulling together their pricing strategy, not only undercutting the market but the value of their own services too.
Barnes points out that pricing sets the standard and expectations for your clients: they pay a premium because they are getting exceptional service and talent. In return, you have better clients you’re happy to go the extra mile for which protects your reputation and makes the work you deliver more complete and meaningful.
Woodall agrees, advising agencies to “know your value”:
“Have confidence in what you’re doing, review the work you’re most proud of and find out what value that provided for the client.”
Of course, this is easier for digital projects. Assess what your most recent campaign bought in for the client then ask yourself truthfully whether or not you could have charged more for it. You could be surprised to find yourself looking at a lot of lost revenue thanks to false modesty.
The importance of charging the right amount is clear but including the right services is just as important.
As a marketer, you know it’s cheaper to secure business from existing customers than it is to attract new ones. And it’s easier to upsell to people who are already happily eating out of your hand.
There are a range of reasons why clients haven’t taken up your full range of services: budgets may have been tight when you originally started working together or perhaps they lacked the confidence to fully commit. Or maybe you’ve recently added additional services that weren’t available at the time. Whatever the situation, if you’ve got a range of added extras that can take their main course from nice to amazing, it’s time to help existing customers upgrade.
A great way to get the ball rolling is to arrange a catch-up. Woodall recommends avoiding email and choosing the right communication method to get the deal done:
“Many agencies miss out on wins because of poor communications. We see it as vital to deal face-to-face with clients or to pick up the phone. That way you can communicate effectively, gauge the reaction and negotiate through difficult conversations.”
As with any pitch, sell your client on an idea rather than a product and you could find you have a win-win situation on your hands. And more money in the bank.
Control Pricing, Give Free-Reign to Selling
Barnes advises that, while it can be tempting to keep clients happy with gestures of goodwill, giving away the “odd small project all amounts to lost billable time and comes straight off your bottom line”. The key is to know what you should be charging and make sure you bill clients for all the work you do.
A major obstacle to this is giving account managers too much control. Their job is to keep clients happy which often sees them agreeing to work that isn’t profitable for the agency. Barnes recommends owners put controls in place so account managers can only sell to pre-set pricing that works for the business. This way you’re firmly in control of fees and your team can focus on delivering all those perfectly-priced projects.
Mind Your Overheads
Bringing more money in is one side of the coin; reducing overheads is the other. Many businesses turn to items like service providers, catering and overtime payments to control costs but it can also be worth making a bolder move,like considering where you service your work from.
Ben Quigley, CEO of Everything Different, lives up to his agency’s name by running sales, marketing and account management from the capital but servicing work using a team based in the north:
“Our production team in Newcastle gives us a competitive advantage over agencies who deliver campaigns using teams based in London. By keeping operating costs down we increase our profitability.”
Another way to protect the bottom line is to look after your agency’s cashflow. Look in-house to enhance your billing procedures or improve how you communicate with your clients. Barnes recommends ensuring customers are clear about your terms of business, invoicing dates and processes and how you will collect their fees.
Using automated processes or tools like GoCardless wherever possible removes the headaches associated with collection and puts your hard-earned money where it should be. Getting cash into your business gives you the option to offset loans, make investments back into the organisation or expand and grow.
Read Part 2 of our agency profitability series for expert advice on how to:
- Increase billable time
- recruit and develop profitable teams
- Improve productivity through agile working practices