How to know if your client retainers are truly profitable
Read time: 6 minutes
Every agency owner faces the challenge of how to achieve a reliable, consistent revenue stream to improve profitability. Revenue is directly linked to clients. And clients can be unpredictable. Sometimes clients don’t pay invoices on time. Sometimes projects go dark while clients deal with other priorities. Sometimes sales cycles are long and, while you’re investing important time into winning the pitch, it means time away from earning income through other clients.
Client unpredictability can cause surges in agency profitability. Some months are exciting banner periods where cash is flowing. Other months are less exciting and more stressful when the cash inflows slow down but the fixed outflows still need to be met.
The answer? Client retainers.
What are client retainers?
Client retainers are amounts of money paid in advance by a client to purchase designated services from your agency during an agreed time period. Retainers can be paid as an upfront lump sum payment or as recurring monthly payments. Time periods for client retainers can span weeks, months or, in the perfect world, years!
Client retainers are ideal when the services your agency offers are broad and not necessarily linked to a definite project timeline. An example of services covered by a client retainer is a start-up needing content production services. At the beginning of the engagement the start-up might need help writing copy for their website. As their business grows, the content need shifts from web copy towards blog development and, later, towards social media management.
There are two types of client retainers for agency owners to consider: cost-based and value-based.
Cost-based retainers are based on a maximum number of hours delivered during the designated retainer time period. In the case of the start-up, they retained agency help for 40 hours a month to help with content development which included help with web copy, blog development and social media posting.
Value-based retainers are defined by the agency delivering specific value to the client, instead of a number of cost-based hours. For example, a commitment to deliver a certain number of net new leads each month. In the start-up example, the client engaged an agency on a value-based retainer to deliver a five percent uplift in conversions from a landing page on their website promoting a free demo.
Whether in the form of lump sum cash payments or recurring payments, client retainers bring cash flow to an agency. Retainers give agency owners some predictability over revenue. Knowing what monies are coming into your business each month helps you plan for profitability.
How to tell if retainers are profitable?
Once you’ve sold your client on moving to a retainer model and you’ve documented which services will be delivered for the agreed fees, there are some simple techniques to use to ensure the retainer remains profitable:
Time management. To monitor how much work your agency does for a client each month, it’s critical to estimate how much time will be allocated to each client. Using that estimate, you can track how much time was actually spent, what it was used to deliver and the cost of that time. These insights give you hard data on team utilization and output, taking the guesswork out of capacity planning.
Function Point software integrates time management workflows to an agency billing software. This integration lets agency owners easily map utilized time to standardized job types and costs. This gives agencies a consistent, real-time view into time spent against each client and the associated margin. Function Point delivers built-in time management tools, including a timer, manual time entry field and standard fifteen-minute increment time slots to help ensure accurate, consistent time tracking by the team. Effective time management is the starting point to identify over-ages, shortfalls and real-time visibility into retainer profitability.
Alerts. Day-to-day agency life is a fast-paced blur of work delivered to meet different client needs. To achieve retainer profitability, it is essential to know when the estimated number of hours assigned to each client are getting close to being used up. Unless negotiated in advance, any work performed by an agency using time not paid for by the retainer is a cost to the agency.
Many agencies manage utilization of hours for client retainers by doing a reconciliation of time every two weeks. Yet manual efforts are slow and subject to human error.
Automated alerts linked to time management monitoring systems are a highly effective method to notify agency owners when time covered by a retainer is close to running out. Automated alerts are fast, accurate and available on-demand. With this insight, agency owners have the data they need to either have a conversation with the client to extend the hours, and cost, for the month; or to let the client know that work needs to move into the next time period covered by the next retainer payment.
Function Point offers a wide variety of system-based alerts to help you manage retainer profitability and much, much more. Easy to configure, monitor and adjust, automated alerts ensure you will never run over, or under, time on a client retainer unless its planned.
Reporting. Real-time, customizable reporting offers data-based insights into many areas where agency owners can improve client retainer profitability. Using business intelligence software, reporting can be easily configured to let you monitor the profitability of every client and every job. Reporting visualizations enable agency owners to see at-a-glance meaningful realities to action, for example, which clients are being regularly over-serviced and where non-billable time, such as internal meetings, is eroding profitability. Trends needing attention, including services which consistently exceed allocated hours, are identified quickly and can be actioned before they become an unexpected cost.
Function Point transforms profitability management with real-time centralized views into the data agency owners need to manage client retainers effectively. Spreadsheets and manual timesheet matching will become a distant memory as business intelligence takes over to deliver meaningful insights through pre-configured dashboards. As your agency grows, Function Points provides options to create new reporting views with intuitive advanced filters and ways to keep sensitive information hidden with customizable permissions. Best of all, you’ll have instant access to team efficiency and utilization rates to help make your client retainers profitable.
Out-of-the-box, Function Point software helps ensure your client retainers are profitable from Day One. Discover how easy our creative agency management software is to help improve client retainer profitability by requesting a demo.