A guide for profitable business growth

Written by Jonathan Ross
21 Jul 2023

Why it’s so important for agencies to have an aggressive pricing model.

Strong, consistent profits are essential to the long-term viability of your agency (as well as its market value).

Unfortunately, there are always pressures on profitability including:

  1. Clients who wish to negotiate/reduce your pricing.
  2. Overservicing accounts which reduces profits.
  3. Relentless increases in salaries, benefits, and operating costs.
  4. Economic downturns….

Financial guidelines for running your agency for profit.

Staff costs should not exceed 50-55% of net revenue. Agencies with the greatest pricing leverage will be below 50%.

Space costs should be 6% or less of net revenue. Selling costs should be 3% or less. Keep overservice to 5% or less of the fee.

Recover subscription services and IT investments via a 4-10% surcharge on the fee budget.

Agree a mark-up rate on third-party costs in advance of a job commencing.

Profitability goals: For strategy-led, niche-focused firms, your goal is an operating margin of 25-35%. Advertising agencies are closer to 15% (due to having many specialty roles and also low pricing for media buying). Generalist firms are in the 15-20% range.

Recommendations for pricing and improving profitability.

Have an aggressive starting point in constructing your financial model in order to place the firm in the best negotiating position with clients. (Niche agencies usually have more pricing leverage than generalist agencies.)

As just two examples:

Increase your rates annually to keep up with increases in salaries. If you don’t, profits will decrease.

Implement your rate increases each September for all new budgets. Don’t get stuck with old rates for the upcoming year with clients won in Q4 of the previous year.

Avoid retainer billing if possible unless you have mastered managing retainers

The importance of billable targets and multiples.

 Set targets for annual billable hours as high as you think can be achieved while keeping staff motivated and energised. A higher target will result in greater profit and lower cost per client hour since salaries are fixed.

Then carefully set the multiple for each level of staff. (Multiples are applied to the cost per client hour for each role in the agency to create the billing rate for that hour. The multiple must take into consideration people costs, agency overhead and desired contribution to profit.)

Best practices for protecting your pricing.

  1. Avoid retainer billing if possible unless you have mastered managing retainers.

For most agencies, fixed monthly retainers make it all too easy for mission creep to occur and for the agency not to recognise that as it’s happening. Many client teams assume that all agency work falls under the retainer.

  1. Ensure that you have a highly effective process for client budget assembly and approval.

Your budget assembly and approval process should always include:

Zero-based budgeting.

Being built tactic by tactic, role by role, hours times rates.

Adequate time provided for strategic counselling and reporting.

Footnotes for major budget assumptions.

Total fees and expenses (and a comparison to client budget guidelines).

Crystal-clear Scopes of Work.

  1. Make it clear that budgets are informed predictions.

When presenting budgets to clients or prospects, make it clear that these budgets are informed predictions of the future, but no one can predict the future with 100% accuracy. Therefore, a reasonable degree of flexibility should be acceptable. Accordingly, always present budgets in ranges and not fixed amounts.

  1. Instil and maintain rigor throughout the billing process.

The account lead should review and approve all activity with a careful eye directed in particular towards:

– Identifying and minimizing mission creep.

– Seeking incremental billing opportunities.