Client profitability - Part 1
Excerpt from 'How to Wrestle an Octopus: an agency account manager's guide to pretty much everything'. Available now!
Having profitable clients and campaigns is what agencies strive toward. Your daily account management decisions will make or break the profitability of your accounts - from quoting to setting price structures and retainers, coordinating internal teams and handling client changes. Remember, if your work is not profitable, you (and your colleagues) won’t have a job (no pressure)!
What is the right level of profit?
There is no right or wrong answer to that question. It will depend on many factors, which may include:
- What level your management determines is acceptable.
- The type of services your agency offers.
- The age at which your agency’s owner would like to retire.
Revenue vs profit
Whilst a healthy revenue figure always looks great on your monthly management report, the real indicator of success is the level of profit and margin that you make out of that revenue.
An above-the-line campaign with revenue of $300,000 and costs of $250,000
= $50,000 gross profit (16.7% margin).
A social media campaign with revenue of $80,000 and costs of $45,000
= $35,000 gross profit (44% margin).
Beware the often-blinding glitter of ‘revenue’.
What could lead to low profitability?
There are common traps that you could fall into which may lead to low, zero, or negative profitability on your projects.
Have you ever done out-of-scope work without telling your client that the work was out of scope or asking that they pay for it?
You are working on a complex web development project, and your client has come back with a list of comments and changes. Within the list are a couple of new requests - functionality that was not discussed previously, and falls outside of the scope of work (SOW) that has been quoted.
You tell your developer to do the extra work as they can make all the changes at the same time. You do not tell your client that the requests are out of scope before making the changes, nor do you charge your client for the work that was out-of-scope.
15 minutes here, 10 minutes there - it doesn’t sound like much, but soon adds up. You need to look at the repercussions in three ways:
- Lost revenue. By not charging for out-of-scope work you are directly responsible for a loss of revenue for your agency.
- Wasted studio time. The time that your studio consumed doing your not-charged-for work could have been used producing chargeable work.
Negative time. Assuming that your studio team accurately captures and codes all of their time, out-of-scope work will likely be coded as either:
• Chargeable time, which means you will get a time blow-out on your job; or;
• Non-chargeable time, which will show as reduced profitability on the JCR (job control report).
Either way, you and your agency lose.
Having a conversation - with your client - about work that is out-of-scope is not easy. It can feel like you are going cap-in-hand asking for more money. Do remember that your client is the one asking for the changes, and most clients should be reasonable enough to know that additional requests will cost additional money.
As long as you have previously supplied a water-tight quote which outlines what your client is getting for their money (with ‘inclusions’ and ‘exclusions’ as appropriate), then conversations about out-of-scope work should be easy. Ensure that you talk about out-of-scope requests BEFORE you execute them, to avoid any invoice disputes.
A big agency problem occurs when time is not tracked accurately. [Refer Ka-ching! | ‘Creating a culture of honest hours’ for more information]
Mistakes (even small ones) cost your agency in time and loss of profit. In spite of your best efforts, some mistakes will slip through, so here are some ideas to give yourself the best chance of success:
- Make sure that the briefs you take, and the briefs you supply to your team, are accurate.
- Ask your team if they have any questions before they begin work.
- Ensure that your team communicates with you if they foresee or encounter any issues.
- Double-check all proofs before they are shown to your client.
- Check print-ready files before they are sent to print.
- Check digital work before it goes live.
- Check all work created by external suppliers before it is delivered to your client.
- Ensure delivery addresses are correctly supplied.
This one is a killer for agency profitability. If a project has been quoted and that quote is approved by your client, it is extremely difficult to go back to your client (post-completion) to say that you got the quote wrong and you’d like them to pay more.
The quoting error may not have been yours; it may have been that the hours or prices you were supplied by your team were wrong. However, as you were the person who supplied the quote to your client, you will be held responsible, and you will need to deal with the profitability issues that will result.
There is also a danger that an under-quoted project sets a pricing precedent for the next time your client needs similar work done. At some point, you will need to tell your client that there was an error. Even if you can’t fix it this time, you may be able to revert to accurate pricing going forward.
It’s a no-brainer to say that if you cut your pricing, and all other factors remain the same, then you are also reducing your profit. You may decide to reduce your usual charge-out rates for one reason or another. You may do it to win the sale, or to meet your client’s budget; or in the hope that you will make the shortfall up later on another job. These days clients want more work, for less money, and in less time which squeezes the profitability of a job to begin with - cutting your price only serves to reduce the profitability further.
Two things to think about when offering a price reduction:
- You are setting expectations. Unless you are very transparent about giving your client a special, one-time deal, they will expect similar pricing on all work in the future.
- You are banking on an uncertain future. Basing your pricing on what MIGHT happen in the future is too risky. There is no guarantee that your client will give you more work in the future, or that you will be able to recoup costs going forward. Your goal should be to make a fair profit right from the start, as you do not know what tomorrow will bring.
Dealing with demanding clients is a test of an account manager’s mettle. Some clients will make it their goal to grind an agency down to the bare bones of pricing; some will challenge every line on a quote; whilst others use their bloodhound-like senses to sniff out the best deal.
When confronted by a strong client who is demanding a sharper price, or asking for work to be done for free, it is far easier to capitulate than to push back. Just remember that every time you drop your price, or get your team to invest time into non-chargeable work, your profit is going down.
It is better that you learn how to work with strong personalities; develop negotiation skills; and understand the various factors that make up profitability. This will equip you to handle difficult conversations that will inevitably come.
Leave a comment
Comments will be approved before showing up.
Also in Latest Tips & Tricks
Just as ‘many hands make light work’, many brains can make for quicker and more robust solutions than what we could usually do on our own. Here are some ways to ensure you get the best out of your agency brainstorming sessions.