Some marketing and advertising agencies have a hard time understanding why increasing their work isn't turning their business into a profitable one.
Agency leaders can run profitable small and medium-sized operations profitably. But as agencies begin to grow and explore new markets and industries, it is inevitable that they will find their profitability out of line with their revenue growth.
This doesn't always have to mean a mistake; it can even be a sign of great work. Clients are so satisfied with the agency's work that they request more projects and even refer their colleagues to you.
As the scope of work in demand grows, it evolves into a job that requires a larger team, overhead, and more management. So there is more business and new customers, but the profit margin remains the same (or lower) at the end of the month. It may be natural to assume that more clients equals more revenue, but when there are profitability issues and process inefficiency within an agency, more revenue may not necessarily equal greater profitability.
When scaling a business, you need to solve the profitability and efficiency problems that already exist. Take a closer look at each area and department of the agency. Analyze how costs and revenue are handled. With some tweaks and adjustments, net profit margins will grow with the size of the agency. Is it necessary to hire outsiders when in-house teams can be trained? Is your current pricing strategy correct? Does automation benefit your agency?Offering expensive services and taking on every project may be a reason why you have to downsize or even close your business.
Few agencies continue to use billable hours as their main pricing strategy. Many have moved to flat fees or value-based pricing. These models can be extremely beneficial and bring higher wages for the same amount of work, but this is not always the case. They can introduce other types of risk that are okay with billable-hour strategies.
When pricing is based on hours worked, that work is billed to the customer as extra hours when the client requests revisions, additional tasks, or a finished project in the work. However, when value-based pricing or flat-rate billing is used, this will translate into a loss of revenue when a project is not properly scoped and work is not reassessed in the signed contract.
Understanding what fees and billing should be without a billable hour strategy requires much more in-depth study. The workflow requires a deeper and more precise analysis of COGS (Cost of Goods Sold), gross profit, overheads, and employee costs. Because it's so easy to fall on a falling income slope, it's crucial to measure every aspect of cost and revenue while having a flat wage model. Setting wages should not be an intuitive or instinctive effort, but an informed and data-driven decision. A good and efficient way to manage this problem is to calculate the value-price for each working hour that goes into the generation of project deliverables and distinguish between which hours are billable and non-billable.
When running a business, not every task is directly dedicated to revenue generation. Networking, training seminars for employees, developing company culture, and investing are important elements of creating a long-lasting and profitable company. The same concept applies when dealing with profitability within the agency. There are different levels of understanding of how pricing and billing work internally.
C-levels and managers need access to a variety of information and datasets to grasp the intricacies of setting prices. It is important to distinguish between target margins set for each type of service offered and to set several pricing tiers for different customers based on their loyalty and the volume of services requested.
Leaving aside the obvious reason that agencies are not for-profit businesses, why is profit so inconsequential?
Is it an element? Is it in the client's best interest to work with a profitable agency?
Agencies need to have a profit margin so they can invest in both soft and hard-indirect skills, remain competitive in their industry markets, and be open to improvement in other areas. Investing in talent, technology, global coordination capacity, researching new services and even creating new business ideas is beneficial not only for the agency itself, but also for its partners and clients. A streamlined operation requires continuous improvement. Let's see some concrete examples.
The advertising and marketing industry often produces services, and so much of the operating cost structure is directly linked to talent and related expenses. Team members and collaborators are an agency's main productivity drivers, so recruiting and retaining the best talent is vital. Paying competitively and offering corporate benefits ensures you don't lose your talent.
Planning talent promotion initiatives is a great way to reduce attrition levels. Many creative agencies lose their best employees due to a lack of career opportunities and limited growth. Motivate your talent pool with training seminars, benefit packages, performance incentives, and career path studies. This is not only a financially conscious move, as the costs of attrition are astronomical, but also an indirect investment in the future of the business. Developed, happy, and driven staff keep the business competitive by producing the best possible results for the customer. So how will these talents be captured? Only profitable agencies are able to offer these opportunities to their talent pools.
The R & D department in any industry is costly and often time-consuming, but it is also where businesses can gain a greater competitive advantage. Researching, testing, evaluating, acquiring, and optimizing new technologies can greatly improve campaign results and business platforms.
When an agency has a healthy income, it can invest in creating new opportunities to provide services and create new channels. This would be a great way to acquire new customers as well as retain loyal customers.
In the post-pandemic environment, we have seen an increase in hiring talent from all over the world. There are many advantages to getting the best collaborators from anywhere in the world, regardless of geography and distance. Employees also need hybrid workflow methods, with some days choosing to switch between working from home and going to the offiThis. It is not possible to limit this possibility and will reduce your agency's attractivento for potential recruits.
Aside from HRRR concerns, most markets today are global affairs, at least most of the key markets. Investing in a global infrastructure system, effective project management software, and efficient communication channels is essential for collaboration. Even if you don't expect to grow internationally, at least some of the workforce will continue to work from home in a certain capacity. Paving the way for streamlined channels of coordination and collaboration can go a long way. This also includes investing in leadership training and remote work process optimization.
At Finsmart, we create a positive and welcoming atmosphere to foster collaboration and creativity. Our team is treated with respect, kindness, and professionalism, leading to increased productivity, innovation, and success.