If I’m already paying my team anyway, we might as well put extra hours in for a client hadn’t we?
When you grow a business’s revenue, you typically grow your cost of sales proportionately. If you sell a product, that’s simple to understand. Every product you sell requires x% of materials. So if you sell a product for £100 and it costs £80 for the materials then every £1 of revenue generates 80p of costs and 20p of profit.
When it comes to a service business like an agency, it’s not quite so simple. Often you will be able to generate revenue with little or no direct cost of sale. If you sold a £54k web build project and required no freelancers, and didn’t need to buy in imagery, hosting etc then there could be no additional costs that your agency takes on to deliver the project. Arguably, the entire £54k project value is profit. The biggest investment by you is the team that will be assigned to the job but they are paid their salaries regardless of whether you take on the project or not, so by definition they are not a cost of sale.
Protect Your Capacity
If you have spare time available from your team, then asking them to put additional hours into an existing project won’t actually cost you anything. You won’t affect your bottom line profit directly. So why wouldn’t you do it? Well, the clearest reason is that you now have less capacity available to deliver new revenue. If they are working on client projects without being able to achieve extra revenue from the client, then that becomes unrealised revenue that will have been worked into your financial model as the revenue generating time.
Keeping that spare time available forces you to find revenue-generating work from existing or new clients. You need that time to generate revenue because your staff and other overheads are flowing out of your business and need to be recovered for your business to survive.
There are other reasons too:
Raising The Client Expectation Bar
If your clients see that you are putting extra time into their account, they may start to expect it as normal. Despite you feeling like you are doing them a favor, giving free time can cause them to devalue your time and expect more of it for nothing.
If your team get into the habit of taking their time on projects, knowing that apart time is available, then they get into bad habits. Then when you have a tight deadline and they need to be slick, it’s difficult to snap them away from those lazy habits and back into shape.
You Lose Confidence
Reporting on project profitability is essential in order for you to plan and grow your business. With the right information, you can make decisions on the type of projects that you deliver profitability, how to price them, who to get working on them and you can put energy into finding more of them and less of the unprofitable projects. When you have unnecessary time spent on projects, your reports will be distorted and you are having to use judgment instead of facts to determine profitability.
Over Service vs Over Deliver
There is often confusion when thinking about this whole subject: “I want to delight my clients, not just do the bare minimum”. Of course, delivering above expectation is important. Your clients are used to being let down by suppliers in the past. If you can show that you keep your word and deliver what is expected, they will be satisfied and keep working with you. If you deliver more than expected then they will be delighted, increases what they are buying from you, accept price rises and refer new clients to you.
Over Delivering is good. It can be done at little or no cost. It can be that extra phone call to check how your client is doing and how you are performing for them, it can be referring them to a useful contact, or it could be giving them anything that is valuable to them but free for you e.g. the book, white paper or report that you wrote.
Over Servicing costs you in lost revenue, lowers standards, and makes decision making challenging.
Know your capacity revenue and plan how you will achieve it every month. Don’t waste any of that time on none paying client work. Spend the rest of the time building your assets, generating new business and developing your team.
Find our your capacity revenue and profit using this simple tool.