The Four Key Factors Affecting Your Agency’s Profits

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In this episode of the Agency Accelerator Podcast, host Rob Da Costa delves into the topic of profitability. He provides advice on ideal profit margins and four key areas that can impact the bottom line: undercharging, over-servicing, not using time efficiently, and high client turnover.

Time Stamp

[00:32] Introduction

[01:13] Overview of the episode: Rob talks about the focus on profitability in this episode

[03:21] Ideal profit margins: Rob discusses gross profit and net profit targets for agencies

[06:10] Impact of undercharging: Rob talks about charging a fair price and understanding client outcomes

[08:25] Impact of over-servicing: Rob advises against giving away too much for free

[09:55] Impact of high client turnover: Rob stresses the importance of retaining clients

[11:39] Impact of not using time efficiently: Rob discusses how to create more efficient processes

[16:05] Recap and invitation: Rob summarizes the key points of the episode and invites listeners to join Agency Accelerator Live


“Focus your pricing based on the value that the client will receive, not the time it will take!" - Rob Da Costa
"If you're not making enough money, four on four areas - undercharging, over-servicing, poor time management and high client turnover." - Rob Da Costa
"The more value you can add, the more you can differentiate yourself in the marketplace and the more you can move away from just being a commodity based on price." - Rob Da Costa

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 Full Episode Transcription

Rob Da Costa [00:00:00]:

I recently started running a weekly free live training called the Agency Accelerator Live. And in these short 45 minutes training sessions, we are covering everything to do with running your agency from making sure you're profitable to tips on attracting more clients to increase your revenues, how to scale your agency, how to get work off your plate, becoming a better time manager and many other topics. And I thought I would share with you today the body of our first session, which was why isn't your agency making enough money? And we are really unpacking profitability in this episode, so I know it's value-packed. So let's get on with the show.

Rob Da Costa [00:00:38]:

I'm Rob de Costa, and this is the agency Accelerator Podcast. As someone who has stood in your shoes, having started, grown and sold my own agency, I know just how it feels in the ups and downs of agency life. So this podcast aims to ease your journey just a little by sharing mine and my guests' experiences and advice as you navigate your way to growing a profitable, sustainable and enjoyable business. We are focusing on profitability today and looking at maybe why your agency isn't as profitable as it could be or why you're not making enough money. And the purpose of the session is to help small to midsize agencies, which hopefully you guys improve their profitability by addressing some of the common issues that can impact the bottom line. We're going to look at what your ideal profit margin should be or could be. We're going to discuss four key areas of what causes lower-than-ideal profit margins. And then I'm going to share four solutions and those areas are around how to increase your prices, how to stop over-servicing, the importance of measuring utilisation in your agency and client retention. And I think it's important to say it doesn't matter how big your agency is today. If you're a one person agency, this completely applies to you. If you've got ten people in your agency, it applies to you as well. So don't think any of what I'm talking about today isn't relevant because trust me, it is. And I always tell my clients to start putting the infrastructure in place to be the agency that they want to step into in the future. And much of what we're talking about today is really relevant for that one person agency, but that agency that also wants to grow as well. So do bear that in mind as we work through this. So let's start off by talking about by the way, if you've got any questions, just either stick your hands up or write something in the chat. And if it's relevant to what I'm talking about right now, I'll jump in and answer it. Otherwise, we'll have time at the end for the Q and A. So let's start off by talking about what a good profit margin is to aim for. And this is based on sort of industry-wide examples. So it's giving you a rough idea. Anyway. So gross profit should be around 50% plus. And we define gross profit by talking about, sorry, I'm jumping ahead here, talking about the revenue in any given month or any given period minus the cost of goods sold. So it would be your revenue that you earn in a month, minus things like wages, freelancer, costa and costa to deliver the service such as printing and all that type of stuff. So that is gross profits and we want to be aiming for around 50% or more. And then net profit we should be targeting around 20%. So net profit is basically the total revenue minus all of your expenses and that should be 20% or more. So let me just give you an example of that. So let's say we've got a small marketing agency or a marketing agency that turns over about 25,000 pounds in revenue, more people arriving in any given month and they've got about 10,000 pounds worth of cost of goods sold, such as employees and salaries and expenses and all that type of stuff. And that means that their gross profit for the month would be 15,000 pounds. So 25,000 minus ten gives us 15,000 pounds, which is a 60% margin, which is a good margin. And then continuing with that example, let's say the agency has an additional 10,000 pounds in operating costs for that month. So this would be utilities, offices, insurance and all that kind of stuff. Then the net profit for that month would be 25,000 -20,000, of costa and expenses, giving us a total net profit of 5000 pounds, which is 20% margin. So you want to make sure, I hope that's not confusing everybody, I just want to give some context to all of this. But you want to make sure that you are measuring these numbers on a monthly basis. Because remember, revenue is vanity and profit is sanity. And as I said, it doesn't matter what size your agency is, even if you are a one person agency today, you should still be measuring this every month because we don't want to be busy fools working super hard but not earning much money. So if you're not consistently hitting these kinds of gross profit and net profit numbers, then we need to dig into why. And as I said, there are usually four areas that this can happen and when this happens, as I said, we're being busy falls, working super hard, working long hours, but not earning very much money. And this leads to stress, it leads to high turnover and it leads to burnout for you. So none of those are good. And that's why we really need to tackle, we need to tackle this topic. So the first area of why we are often not profitable enough is because we are not charging enough money. And I'm going to dig into each of these in a moment. The second reason is because we are over-servicing our clients, and we believe that we have to overservice clients in order to keep them, which isn't true. The third area is we're not using our time efficiently. And then the fourth area is a high turnover of clients. Now, I totally get that there are lots of other things that impact your profitability, but these are the four areas that I see time and time and time again when I'm working with clients to help them improve their profitability. So let's dig into each of these four areas one at a time. So, number one, we're not charging enough money. And of course, we want to price our work to win the business, but that doesn't mean we should be the cheapest, because often, if we're the cheapest if we think, I'm going to win that piece of work by being cheaper than everybody else, then the client's probably going to think there's something wrong with you. So clients often won't pick the projects, or the agencies they want to work with just by finding the cheapest one. There's a whole bunch of other factors. And what you really need to do here, and this is a topic that I'm going to, a theme that I'm going to touch upon a couple of client times in this session is that you need to make sure you're focusing on the outcomes that the client is looking for and pricing accordingly against those outcomes. So that means that you have to have those conversations early on when you're having those early conversations and then doing your proposals or pitches, that you understand what they're trying to achieve and what good looks like and what the outcome is and how they will judge the success of that outcome. And if you understand that early on, then you can price accordingly against that. And that will mean that you're winning business at a fair price rather than winning business because you're cheaper. Now, it might be you're thinking, yeah, Rob, but I don't believe I can charge more. Or you might be thinking, yeah, Rob, you don't really understand the market that I'm in. We're really special and trust me, I've heard it all before. So one thing I've learned over the years is that 50% of getting your pricing strategy right is mindset. And of course, if you don't believe that you're worthy of charging higher fees, if you don't believe in the work that you're doing, or if you don't believe the client will pay it, then, of course, you're going to price really lowly. So 50% of pricing is a mindset. So just take that key learning away with you because it's completely true. Now, another reason you might be not charging enough is because you don't know enough about your marketplace. And quite simply here, you need to be aligned across four areas. You need to be aligned across the market you serve, and the product you deliver. And when I say product, I mean product or service, the service levels associated with that product and the price that you charge. Now, the important thing here is to be aligned. So if you were being a premium agency, you would be targeting the premium market with a premium price, with a premium product and with exceptional levels of service. And the opposite of that is that you were targeting, like a low web-based product, you would be targeting a low-end audience with a low price, with very little service levels and lower product quality. And there's no judgement about that. The key here is you have to be aligned. So if we take airlines as an example, if you look at, for example, Etihad or Qatar in the airline industry, you'd say they are targeting the premium market with a premium product with great service levels and you expect to pay more money. Similarly, if you look at Easyjet or Ryanair, you're going to say they're targeting the low-end market in the airspace, in Aeroplane market space, with a low-end product, with local levels of service and a low price point, and both of those are completely aligned and therefore they are both profitable. Whereas if you take someone like British Airways, and if I ask you to do this exercise now, you probably sort of struggle to say, well, is British Airways premium? They certainly used to be premium, but then they started trying to compete against Easyjet and it's not really clear. And the net result of that is British Airways are nowhere near as profitable as Ryanair, because Ryanair is really clear about the market they serve. And you could play the same thing against supermarkets, which is why the Audis and Littles of this world are doing so well because they're really clear about their market. So I want you to be really clear about that alignment. And of course, that means that you understand your market. So you might need to go and do some research. And that leads us on to the next point, which is you're too much of a generalist. And if you're a generalist, well, you can't really do the research because you're trying to target everybody. And in my experience, especially for smaller businesses, it's a really bad idea to be a generalist. You want to make sure that you are a specialist. And this is one area that I really dig into in the programme and actually, one of these sessions in the future is going to be unleashing. So something I'm really passionate about. It made a huge difference in my business when I started coaching. For the first year, I was trying to be a generalist and in theory, I could go and talk to Barclays Bank one day and then one of you guys the next day. But I wasn't winning the Barclay Bank type of business because I didn't have the experience. And then I talked to a smaller business and they'd say, well, if you work for those big corporates then definitely not going to understand me. And it wasn't until I niched down and then niched, even more, to work with marketing agencies that my business started taking off. So you absolutely want to make sure that you are seen as the specialist. Not the specialist, not the generalist. And if you think about it, if you needed, for example, knee surgery, you could go to your GP or you could go to a knee surgeon. Well, guess which of those two of you had to pay for it are going to charge you more money? And which of those two are you immediately going to trust more to do that surgery? Well, the knee surgeon, because you believe they've got lots of experience, they really understand the knee and so on. So the more niche you are, the more specialist you are and the more specialist you are, the higher the fees that you can charge. So that's something to take away from this as well. So that is point number one, which is we are not charging enough and that's why we're not profitable. Now point number two is over-servicing. And in the agency world, I think there is a massive epidemic of over-servicing. I think a lot of the time, especially at the moment when times are a bit tougher, we think we've got to keep pleasing our clients and saying yes to everything. That's how we keep them. And I think actually the opposite can be true. So this starts by having those early conversations when you're winning the client and then putting together a clear scope of work about what's included and what's not included and making sure that the client understands that scope. But also if you've got a team, they understand the scope as well. Now of course we want to please our clients, so we want to be able to say yes to their demands. And I'm done about you, but my heart used to sink when a client would say hey Rob, can you just do this thing? And in their mind can you just take 20 minutes? And in reality, it takes you or your team two or 3 hours to do so. We want to please our clients by saying yes. But I want you to know that there are five answers when a client says can you just and this is something that you should take away for yourself but also your team. So the first answer of course is yes, we can do that. And there'll be times when you want to say yes to that. The second answer is yes we can do that. But on a future date. And you agree that with the client, the third answer is yes, we can do that. But we need to swap something else out that we'd agreed to do this month. So they are understanding that actually we've got a scope of work but you're changing it. So we need to swap something else out. The fourth answer is yes, we can do that and it will cost you this month's extra because it's not included in the scope of work. And then the fifth answer is no, we can't do that. And you need to be willing to say all of those responses, not just the first one. And you also need to challenge your mindset again here because if you think if I say no to something or if I push back on a client they are not going to love me and they're going to fire me, then of course you're always going to say yes. So you need to be able to start with that clear scope of work and then use those five responses when they ask you to do something else that leads to overservice. Now I believe that your agency can overservice by say 10% of the fee because you're probably going to be able to pull that back at some other point in the future where things aren't quite as busy. But when it starts to look more like 15, 20%, we're immediately eating into our profit margins and that's going to lead us to be less profitable. So that is the second point which is stop over-servicing. The third area I wanted to talk about is the inefficient use of time. And this means your time and your team's time. So we need a way of measuring the utilisation of our staff and knowing how much capacity we've got in the team so that if we win new business or a new project, we can make an informed decision, such as Fred can take that on, or Jane can take that on, or, actually, we need to hire somebody new. So we need to measure the capacity of our team and the utilisation of the team. And your goal should be to hit 80% capacity. So that means that if someone's working 40 hours a week, for example, 32 of those hours could be billable hours, leaving 8 hours in a week to do all those other admin-type things and just inefficient time and looking on social media and so on, that's the ultimate goal. I mean, most people aren't going to hit that, but that's what you should strive for. Never strive for 100%, but strive for 80%. Now there is no other way of measuring this than using some kind of time-tracking tool. Now when I ran my agency back in the 90s, or early 2000s, we used a spreadsheet. But these days there are some fantastic tools available that are really aligned to the way agencies work such as harvest and stream time and toggle that make it really easy to track that time and ultimately help you identify any bottlenecks in the agency, any inefficiencies where we are, for example, writing a press release. But instead of taking 2 hours, it's taking half a day and therefore training needs. If someone is taking too long to do something. Is it that they are just faffing around and inefficient or that they genuinely need some training? And by measuring time, you are going to be able to analyse this and understand this. Now, it's really important when you do this that you implement it in the right cultural way. Because the team needs to understand the reason you're doing this is for everything I've just said. But if they think the reason you're doing it is because you're Big Brother and you don't trust them and you're checking up on them, then, of course, they're going to be very resistant. So make sure you communicate this really clearly. Now, as it happens, I've got a podcast going out tomorrow with a really great guest where we're talking about utilisation. So when I follow you guys up with the replay of this, I'll also send you a link to the podcast as well, if you want to learn more about utilisation. So that's the third area of inefficient use of time. The fourth area is that you've got a high turnover of clients. Now, the reason why I included this in my list is because we all know that in the first three months of a new client, we are going to be not profitable with them. Because we've got an onboarding process. We are getting our feet under the table. We're learning everything about them. So we're going to have to over-service them. And we need to claw that back over time. So it's important that we keep our clients for the long term to make them profitable and no one wants to have a revolving door of new clients coming in and old clients leaving. We want to make sure that we are retaining our clients for the long term and that means that it's really important that you have a client retention strategy in place. And what I mean by that is that you do some proactive account development planning for your key account. So you might only do this for two or three of your key biggest accounts. And this is where you take a strategic view of your accounts. You do a bit of a SWOT analysis to identify any opportunities and any weaknesses. For example, you might identify that you've only got one key contact point and if that person left, you're at risk of losing the client. So we need to have a proactive plan for building some other relationships. And in this account development planning, which is something I do with all of my clients, you need to have an action plan and this action plan is what we're doing to mitigate those risks. And what are we doing to win additional business with existing clients? Because we all know it's cheaper to retain and grow existing clients than it is to win new ones. So it is really important that you do some account development planning and as I said earlier, that you align the work that you're doing with the client's bigger business goals. And this means that you're having these frequent conversations to say how is the work we're doing going to impact the bigger business, your goals, how does it align with those goals? And that you make sure you're assessing yourself and the clients, assessing you against not only the work you do but those bigger business goals. That is definitely a way to retain your clients for the long term. And that is really taking a value pricing and a value selling approach, which is really simply offering a fixed price for the work that you do, but basing that price on the value it will deliver to the client rather than the time it's going to take you or the bits and bytes of the resources that you need. And looking at the latest bench press reports, 60% of agencies are still selling based on time, which is crazy, and only 23% of agencies are using this value pricing approach. So I would really encourage you to think about value pricing and a really quick story on this to help you understand it. If you had really bad toothache and you were in agony all weekend and if anyone's had a toothache, you know how painful it is. And on a Monday morning, you get an emergency appointment and you sit in the dentist's chair and they say you've got an infection, we need to take your tooth out. And within 20 minutes they've extracted the tooth and the pain is instantly gone. And you walk up to reception and they say that's 300 pounds, please. Would you say, my God, that's a lot of money for any 20 minutes of work. And then they could turn around and say, well actually if we took 3 hours to get rid of that pain. So 100 pounds an hour, would that make it more valuable to you? And it's like, no, of course, it wouldn't. I want you to get rid of the pain as quickly as possible and you are getting rid of the pain for your clients. It's just you have to understand what that pain is and price and report against that pain. So that's simply what value pricing is. So make sure you're pricing values and outcomes and you're not being the cheapest to win a piece of business. Make sure you challenge your mindset around pricing and how much your agency is worth and what it's worth to the client. Be clear about what's included in your proposals, in your scope of work, in your onboarding and in your monthly reporting so you can push back if necessary. Make sure you're measuring capacity so that you can assess inefficiencies and where you've got bad utilisation and go for that 80% of staff utilisation and finally put a client retention strategy in place.

Rob Da Costa [00:20:36]:

So there you go. That was the body of the first of our agency accelerator live sessions and I hope you found that valuable and more importantly, I hope you're motivated to join me live for the next sessions. Now, one of the big advantages of joining us live is that you get a chance to ask me questions directly. And I didn't include the questions in this episode, but if you join me live, you will be able to hear them, hear what questions other agencies have and get your own questions answered so super valuable and as I mentioned at the beginning, covering all aspects of running your agency. So I hope you found that useful and I will see you on Wednesday for the next agency, Accelerator Live. And if you can't make that, then I will see you next Thursday for the next episode of the Agency Accelerator Podcast.

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