9 areas where creative agencies lose profit and how to prevent it

While most owners of creative agencies would love to focus their energies on creative work, the reality is that if you aren’t watching your numbers, you won’t get ahead.

Financial management isn’t always a natural strength for creative types, but understanding your agency profitability is key to survival.

Creative agencies walk the tightrope of delivering exceptional service while protecting their profit margins. Unfortunately, many digital agencies struggle to perform this delicate balancing act. And though they may not realize they’re doing it, they are losing their hard-earned profits.

In this blog, we’ll point out nine common ways agencies undermine their own efforts and explain how they can be spotted and fixed to increase profit margins.

1. Under-servicing and Over-servicing Clients

Time is money for every creative agency, and there’s a sweet spot between under-servicing and over-servicing clients. Under-servicing clients means your agency may appear disengaged, reactive, or prioritizing other clients. When you’re not impressing your clients by being proactive and staying engaged in their business, it’s hard to take offence when they decide not to renew your retainer.

Over-servicing clients can be equally harmful. When you do too much work for clients you either have to charge the client more or absorb the cost of the additional work which will impact your digital agency profit margins. Clients often don’t want to pay extra, but absorbing the cost sets an expectation with clients that can be difficult to break. Over-servicing also comes at an opportunity cost– when you are over-servicing one client it’s likely you are under-servicing another.

Under-servicing and over-servicing are both familiar aspects of creative agency life. Occasional instances are tolerable but ongoing patterns will drain profits for your marketing agency. The secret to finding the sweet spot between under and over-servicing is effective time management and real-time reporting to track how time is used.

Keep an eye on your monthly dockets to ensure your retainer clients are getting the attention they deserve, no more or less. Sometimes a monthly docket will run over budget (this commonly occurs when a major project kicks off and the bulk of the work is completed upfront) so it’s important to focus on trends and averages rather than any individual month.

2. Not Properly Managing Your Agency’s Capacity

Effectively managing your agency’s capacity to take on new work is essential to digital agency profitability. Proper capacity management strikes a balance between:

– Client demand for services.
– Time available within the agency to support the demand.
– The cost to the agency of delivering those services.
– The fees paid by the client for those services.

Low capacity teams are problems for creative agencies because teams with extra time on their hands are a cost to the agency. Similarly, teams that are over-capacity are at risk of burnout, work longer hours, and hire extra (expensive) contractors to keep pace with client demand.

Creative agencies need systems to monitor the number of hours an employee has available to work each day and the number of hours they actually work to deliver client services. The ideal creative team has a utilization rate of roughly 80%. Too high or too low and you risk one of the above scenarios coming to fruition. By keeping an eye on your employees timesheets and workloads, you can make sure everyone is properly engaged with work.

3. Cost Tracking and Charging

Creative agencies frequently incur costs on behalf of clients, which are budgeted elements of the project. Thus, accurately tracking time spent on a project is essential for billing clients and calculating the project’s profitability. Otherwise, neglecting non-billable hours can slowly erode profits over time. All too quickly, those costs can mount up and spiral beyond what was forecasted due to them coming in from a range of sources. 

To preserve profit margins, creative agencies should have systems that let staff accurately quote on client projects, track actual costs against estimates, identify out-of-pocket expenses early, gain insights to where time is being utilized and be able to invoice quickly and easily. Correctly recording billable versus non-billable hours is crucial for controlling costs and maximizing profits. 

It is also vital to ensure all employees adhere to your time-tracking system. By holding everyone accountable for their hours, agencies can precisely gauge the impact of billable and non-billable time on revenue and profit.

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4. High Client Turnover

The world’s most successful, profitable creative and digital agencies have a laser focus on client retention. DDB once reported having a ’98 or 99 percent’ retention rate year-over-year. Why the focus on retention? Because finding new clients is expensive and takes time. Time, money and agency resources are taken offline to build a target database, run lead generation campaigns, prepare pitches and, if all goes well, onboard new clients.

Agencies that have healthy relationships with their existing clients build up a better understanding of their client’s business, which helps improve deliverables and identify opportunities to build more work. Digital agencies that burn through their client database each year invariably find themselves losing profits.

There are many reasons why an agency may have issues with client turnover. Two questions that should immediately spring to mind are:
– Are we under-servicing our clients?
– Are we delivering high quality work under budget and on time?

Clients don’t want to feel underappreciated or want a working relationship where projects are consistently delivered later than expected or cost more than initially billed.

If your agency struggles to retain clients, pull up reports on projects and retainers of old clients. Honestly ask yourself whether you were providing good value for the price and if the work was completed properly. If either of those answers is no, then it’s time to dig deeper to unearth the root cause.

5. High Staff Turnover

Staff turnover is a harsh reality of agency life, which significantly impacts digital agency profitability and profit margins. Hiring and onboarding new staff to replace team members is expensive and time-consuming. There are tangible costs to managing staff turnover, including severance payments and recruitment fees. There are intangible costs too, including lost productivity, training time, lost customers, loss of focus on the strategic vision of the agency and sometimes low morale across the remaining team.

Agencies that recruit and retain good teams are almost always more successful and profitable than their competitors.

There are many ingredients to the recipe for retaining employees. The more important ingredients include managing capacity so you don’t burn people out, engaging employees through nurturing a healthy culture that engenders trust, rewarding effort and outcomes, supporting teams with training and introducing tools and processes to help teams do their jobs more easily.

6. Scalability 

Scalability is a significant challenge that many agency owners and CEOs face when their businesses grow. Many agency owners are surprised to learn that their revenue doesn’t increase proportionately with their business’s size, even when they are doing great work. As your agency wins more projects, your workload increases, leading to a bigger team, higher overhead costs, and more effort required to manage jobs. 

However, it’s important to understand that more clients don’t necessarily equal more income. If your digital agency has profit margin issues, adding more clients, expanding to new markets, and taking on more projects will only amplify the problems. 

To successfully scale your business, it is essential to analyze how your agency handles costs and revenue across all departments. This will help you identify the areas that need improvement and determine whether to make any necessary changes. Furthermore, you need to track the current profit margin of your services to ensure they are cost-effective. Evaluate whether you should hire external collaborators or freelancers or if it’s better to train in-house teams. Review and revise your pricing strategy to adapt to your new business’s size and market. Finally, leveraging automation tools can help you reduce overhead costs and increase efficiency. By monitoring digital agency profitability and efficiency performance and making proper changes, you can maintain your earning growth along with the agency’s size.

7. Changing Pricing Strategies

Many agencies have moved away from billable hours and chosen flat rates or value-based pricing as their primary pricing strategy. While these models can create higher fees for the same amount of work, they also introduce new types of risks. With the traditional billable hours, you can charge clients any additional work or reworks, ensuring a healthy margin for the agency. However, with a flat fee or value-based approach, if you don’t scope a project correctly or don’t take the reworks into a contractual agreement, you’re exposed to lost revenue.

To determine a suitable flat fee pricing structure, you must conduct a deeper analysis of your internal workflow, cost of goods sold (COGS), gross profit, overhead expenditures, and employee utilization rates. It’s crucial to measure every aspect of costs and revenue and take a more nuanced approach when using a flat fee or value-based pricing model. Understanding all the costs involved and measuring the value of your services allows you to set fair and profitable fees. By making a data-driven pricing decision, you can avoid declining sales performance and ensure the sustainability of your operation.

8. Not Having Clear Payment Terms

Properly invoicing and getting paid for your work is one of the most critical aspects of your business. Unclear payment terms can lead to payment delays, which negatively impacts your cash flow. To prevent this, it’s important to set clear payment terms with your clients from the beginning.

When setting payment terms, negotiate with your clients on the following matters: 

  • Payment schedule: Define when payments are due and how they will be made, such as in installments or one lump sum. Decide if you require a deposit before beginning work.
  • Late payment policy: Make sure you have a clear policy in place for overdue payments. Define the penalties for late payments, such as a monthly interest rate, and you can enforce this.
  • Payment method: Agree with your client on which payment methods can be accepted, such as credit card, check, or electronic transfer.
  • Payment processing fees: If you use a credit card or digital payment method, identify the party responsible for processing fees.

Once you have established your payment terms, include them in your contract. Ensure your clients understand and agree to the terms before starting your work. Be consistent in invoicing and follow-up procedures to ensure timely payment and avoid misunderstandings.

9. Not Staying Up-to-Date with Industry Trends

Working in a fast-paced environment, agencies must stay up-to-date with the latest trends and technologies. Failure to do so can cause you to lose clients to more innovative competitors. As an agency owner, investing in continuous training and education is essential to equip your team with the latest skill sets in the industry.

Here are some tips for staying current with market changes:

  • Attend industry events: These conferences and summits provide you with not only valuable updates but also great opportunities to network with other professionals in your field.
  • Read industry publications: Subscribe to relevant publications and blogs to keep you up-to-date on the latest news and trends.
  • Organize training programs: Hold regular internal training to ensure your team has the right skills and knowledge to stay competitive.
  • Experiment with new technologies: Embrace new technologies to stay ahead of the curve and improve your working efficiency. Adopting the right tool can help you manage your agency better and speed up workflows.
  • Collaborate with other agencies: Collaborate with other agencies and professionals in your field to share ideas and learn from each other.

You can improve your agency’s capabilities and competitive advantages by keeping up-to-date with field trends. 

What creative agencies can do to avoid profit loss

With various challenges in the agency world, agency owners must proactively identify the root causes of digital agency profitability problems and find strategies to offset the difficulties and maintain sustainable digital agency profit margins. With the right mindset, tools, and processes, you can prevent the profit loss of a digital agency and improve your bottom line for long-term success.

The most significant improvement creative agencies can make to secure profitability is to use agency management software to run their business operations. Function Point’s cloud-based agency management software is an all-in-one solution that helps transform digital agency losses into profits.

Function Point has agency management software with easy-to-use sophisticated time management tools for creative agencies. Timesheets integrated with job types, costs and margin give agencies actionable insights to proactively manage profit by understanding client servicing trends, accurately mapping time to cost and providing a history of past work to reference when quoting new projects.

Our built-in work calendar features four simple steps to calculate, or edit, utilization rates for every employee. The resource allocation view enables agencies to identify over-allocation in real-time and easily re-allocate tasks to team members with spare capacity. With Function Point’s agency management software, your days of under or over-utilization will soon be over.

Function Point’s best-in-class QuickBooks® integration as part of our agency management solution also provides complete, straightforward accounting with fast, easy invoice preparation, expense management and payment tracking. No more losing track of costs or inaccurately charging clients.

Business intelligence capabilities that turn data into actionable insights are core to keeping creative agencies profitable. Function Point’s business intelligence solution within our agency management software pulls data from across your agency and converts it into real-time visual dashboards to help you understand just about every factor influencing profitability and profit margins in your digital agency. With 26 pre-built reports to choose from, or the option to customize your own views, Function Point delivers the insights you need to understand your client accounts inside and out and spot challenges, opportunities and trends at the earliest possible moment.

Function Point’s agency management software is flexible, powerful and secure to help creative agency teams do their jobs more easily.

Getting started

Explore how your creative agency can start turning losses into profits with agency management software by contacting Function Point to request a demo.

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