Most agency owners have never been business owners before.
They were a great designer/developer/marketer and they saw the opportunity of leveraging their skills by setting up a business.
When those first projects come in and you see the cash hitting the bank, you wonder why you spent all that time delivering work for someone else to earn the profit. Now you are in control of your own destiny and it feels good.
But as your agency grows and you start to hire people, build systems and rent studio space, everything starts to become a whole lot more complex. You need more income to cover the overheads you have built up, but you need more investment in sales and marketing to generate the income.
So now you have even more overhead. Then you run into staff issues – people underperforming, causing internal politics, leaving. Your systems are not up to scratch and you keep changing the software you use as if that’s the reason. You struggle to devote the time you need to be spending on your own marketing and so you perhaps you don’t have a queue of your dream clients, which you can pick and choose to work with. You’re constantly battling to find the right solution.
Your time is sucked up fixing problems and you’re struggling to work out where you should be focusing your time and energy. Why am I doing this again? What are we trying to do with this agency? Where are we heading?
This is where a lot of agency owners can start to look for the next exciting opportunity. That client who wants to give you a share in their business for your hard work. Sound more exciting than solving those boring challenges of your agency right.
The Networking Curse
Every time you go to an event other business, people ask “How big is your business now? How many people do you have? What’s your turnover?”
You’ve become conditioned to think that your turnover level or the number of people you hire are the ultimate indicators of success. Believe me, they’re not. I’ve worked with countless businesses who are growing turnover and making no money. They are hiring staff every time they win a piece of work and wonder why they are not making profit. These agency owners are in pain. They have the cool studio with the life size stormtooper in the corner, but they don’t sleep at night.
Before you even think about growing your business, there are some fundamental controls that you MUST have in place to avoid sinking the ship, but which few creative agency owners ever get told by the people who SHOULD be advising them:
1. Control the cash collection
If you currently set payment terms and hope that your clients will pay on time, good luck. Research shows that the average settlement days on small business invoices is 1.5 times the payment terms. So if you set 30 days payment terms, your clients will on average pay on 45 days. Some will pay significantly later which if it’s a big invoice and you have payroll to meet can be a serious problem.
Some will never pay at all.
If you blame everyone else for this, your staff for not chasing hard enough, your clients for not keeping to the agreement, the economy for not funding small business well enough, you are placing yourself in a position of having no responsibility. If you blame others, you distinguish your power to do anything to make things better.
You must create payment processes that put YOU in control.
Ideally, you will set up automatic collection using a payment merchant like GoCardless or Stripe where your clients sign a mandate before you begin working on their account which allows you to automatically collect payment of future invoices on the dates they become due. If your client is not willing to do that, then the only way you get peace of mind that you get paid, is by creating payment milestones based on criteria that YOU control.
That involves invoicing the client every time you are moving a task over to them. For example, If you are building a website and the first step is to draw up the wireframe, you invoice at the point where you deliver the wireframe to the client for review, NOT when they have reviewed it. They could take days, weeks, months to sign off. Meanwhile you’ve been paying staff salaries, freelancers and overheads to fund the work that has gone into the project.
And this could be for many reasons. Maybe the project you’re working on, which was a priority for them 4 weeks ago, is no longer their No. 1 priority, and so your money is held up through something that’s no fault of yours.
Or we’ve all had one of those clients who stalls us because they don’t have the means to pay you. And they stall you by telling us they’re not happy with your work, which makes you feel bad and requires you to put more effort into correcting it, which further eats into your profits. The reality is they just don’t want to pay you, and because they’re in control of paying, they can say whatever they want and cause you endless problems.
This can all be solved up front by taking control of payments. And I know this can feel daunting putting in place or even challenging your clients on, but I’ve seen it done. In fact I’ve helped clients to do it.
I’ve seen 80% of a £50,ooo project be paid, two weeks into an 8 week project, so I know it can be done. It just requires YOU to change your thinking, NOT your client.
2. Look for easy wins
It’s staggering how many of your clients just ‘expect’ you to pay for all the additional costs that emerge as a result of delivering their project, with little or no re-charge.
Purchasing stock images, music licences, plugins, etc on behalf of clients might seem like small fry but it’s eating straight into your margin and where do you draw the line? At a higher value, the lack of control around billing for server hosting is costing agencies a small fortune.
Some charge nothing at all, others charge a fixed fee and never increase it, and a rare few set a price that delivers a margin AND have controls in place to ensure that whenever the cost of hosting the site increases, the price charged to the clients increases at the same time.
And one of the problems that causes this is… your passion.
You want to deliver an outstanding project and so what if they need an extra image buying or another web page designing or one more iteration of that logo. But it’s in these small decisions where profit is eaten up and you’re left frustrated having delivered an awesome project which benefits the client, but which you never saw the full benefit for yourself.
You work so hard to bring new clients and projects in and the average profit margin for a UK digital agency is around 25%. So every £10,000 of hard earned income (hard earned in winning the project and then again in delivering it) is giving your business just £2,500 of profit. Yet you might have charges that you are not passing on to your clients that could deliver £10k of revenue at a 100% profit margin = £10k of profit.
And do you know what? When you block these leaks up and grab these easy wins and see profits shoot up overnight, you’ll be like “Why didn’t I do this sooner?”
3. Raise your prices
It’s very rare that an agency is over-pricing its services. Most agencies fear coming across as too expensive. But the reality is that there is no such thing as too expensive, only too little value being given. Price is what you charge. Value is what they receive.
Sure there is a going rate for certain services in certain markets, but if you are too expensive for the market you are operating in, you’d be wise to consider changing the market rather than reduce your price.
If you reduce your price, you don’t usually reduce the cost of delivering the project (try asking your staff to take a pay cut or your landlord to reduce the rent) which means 100% of the price cut goes straight off your bottom line.
You are where you are, with the team that you have and the overheads that you have built up. So assuming you have reviewed your outgoings for obvious savings, you can see that the only way to increase profit margin is to increase prices (bringing in more clients or delivering more services to your existing clients leads to extra cost which doesn’t increase the margin and you’re back to growing for growing sake).
What a lot of agency owners never get told, is that any discount, comes directly out of profits, and in a BIG way.
Just a 10% discount can result in you taking a third off your profits. Which means that you need to do a third more work just to make the same amount of money.
But a 10% increase in price, can boost profits by a massive 25%, which means you can afford for clients to say no, and you’ll probably end up making more money for doing less work.
Write down a list of all the services that you provide and the prices that you charge.
Ask yourself what would happen if you raised the prices by 20%.
Would you lose 20% of your clients? If not, you will have more revenue. If you lost 15% of your clients, you will have 2% more revenue with less 15% less clients to service. What would happen if you increased priced by 30%? 40%? 50%? Of course less clients are going to accept the higher you go but at what point will you be worse off from the clients that say no vs the clients that say yes and pay more?
Bottom Line: Turnover is for the vain. Profit is for the sane. Your profit is the only number that matters. Focus on profit and commit to discovering it’s true importance.