Profits: A Strategic View for Your Creative Agency

All creative agencies know the basic financial equation (basic common sense tells us this):

Profits = Revenues – Costs

In our latest blog post “Advertising – It’s an Easy Business!”, Tony Mikes explained the accounting terms necessary to manage your agency and guarantee its financial healthy.
The focus of this blog is on how to focus your energy on THE major factor for the sustainable success of your business: TIME.

To succeed in a competitive market, (there are approximately 32,000 advertising agencies in the United States generating $171.7 billion in revenue (MagnaGlobal; May 2011)), you have to sustain your competitive advantage.

The equation for profits earned during a certain period of time (let’s say a year), that is aligned to your agency’s strategy, is:

PROFITS = Margin x Volume x Time.

I will explain each of these variables:

Margin = The price minus the cost spread. In other words, how much your next project will generate in profits is the price charged taken off the costs to produce this project (e.g. human capital, internal and external expenses such as printing, trips, etc.). You earn margins capturing what the market wants and creating solutions for it.

Volume = The quantity of projects you can produce during a specified period of time. This is the main cause of the difference in the amount of profits earned by big and small agencies, since the former have larger teams and larger capacity. Increasing volume means expanding share of current markets or entering new markets, for example: providing services to clients in other cities or countries, or expanding your agency’s portfolio.

Time = Sustainability is key. It does not make long-term sense to attract clients and close deals at a good margin diring your first year only. You want to build a buisiness that will give you a solid base, helping you sustain the required flow of clients for future years. You have to defend the position you have built and grow from there.

The question is: how can you create a strategic plan and build a solid base?

This third factor is usually forgotten when dealing with numbers, but it needs to be part of the core of your strategy (and without a good strategy, the numbers will not be appealing).

Sustainability, for the creative industry, relies upon:

• Relationship with your clients: Brian Fetherstonhaugh, chairman and CEO of OgilvyOne Worldwide, recently affirmed that an agency’s CEO must destinated at least 25 % of his/her time to clients, especially new/fragile accounts. It is a big time commitment if you think about everything that a CEO has to take care, but it is worthwhile.
• Brand loyalty: satisfy the needs of clients and adds value to them, so they will trust your brand, say good things about you and be back for future projects.
• Adaptability: keep yourself up to date on the major trends in your industry and the industries of your clients. It is incredible how advances in techonology and the way we consume/interact/work/behave has changed in the Internet/social media era. Advertising is not the combo commercial on TV and ad in printing media anymore – forget “Mad Men”!
• Innovation: not only do you need to adapt to the changes, you also want to be responsible for changes – create new trends, be a leader, be where the ball is going to be, not where has been. People love what is NEW, and there are advantages on being the “first mover”.

Quality of your projects: being part of a “fashion” trend that turns out to be a fail is a big problem. So, be selective and analyze the industry. If the risks are too high, forget it – remember that the first thing your client is looking for is quality – which means effective solutions in the time stipulated, that adds value and impacts their business in a positive manner.

In summary, the message for you and your creative agency is:

Strategy is the search for new sources of profit (you can do it creating value for your clients and being innovative), opportunities to increase the volume of projects with a good margin (exploring the market) and opportunities to extend the period over which your margins can be sustained (defend what you have already built).

Do you want know more about how to leverage your competencies and sustain your business? Check out our past blog posts, download our eBook (“How creative agencies can accuretaly manage your resources and time”) or contact us! The Function Point team will be happy to help you find alternatives and achieve business success.