Five areas where creative agencies lose profit and how to prevent it
Read time: 7 minutes
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 agencies struggle to perform this delicate balancing act. And though they may not realize they’re doing it, they are chipping away at their hard-earned profits.
In this blog we’ll point out five 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 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 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. All too quickly, those costs can mount up and spiral beyond what was forecast due to them coming in from a range of sources. To preserve profit margin, 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.
4. High Client Turnover
The world’s most successful, profitable 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. 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 underservicing our clients?
– Are we delivering high quality work under budget and on time?
Clients don’t want to feel underappreciated, nor do they want a working relationship where projects are consistently delivered later than expected or cost more than they were originally 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 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.
What creative agencies can do to avoid profit loss
The biggest 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 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 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.
Explore how your creative agency can start turning losses into profits with agency management software by contacting Function Point to request a demo.