How to tackle shrinking client budgets

Written by Jonathan Ross
05 Feb 2023

Agencies need to be paid more while clients are now only committing to less.

Creative agencies are becoming more expensive for clients at the same time the economic outlook is increasingly uncertain. Various experts are still predicting that in the UK even if a technical recession is avoided only zero growth can be realistically expected prior to 2026.

Many clients and prospects are now skittish about committing to their normal annual programs. Many agencies are no longer getting annual or even six-month client commitments.

Why is this happening?

In 2022, most agencies’ costs increased significantly due to the industry battle for talent, employee benefits and the general U.K. inflation rate turbocharged by the ‘inept madness’ of neoliberal ‘Trussonomics’.

With such highly inflated “people costs”, it was inevitable that agencies had to raise their rates.

Fast forwarding to 2023, inflation appears to be slowing but there are increasing layoffs at many Fortune 500 companies, especially in high tech. Uncertainty is spreading rapidly among clients in general and the Bank of  England continue to edge up interest rates in an attempt to keep inflation under control.

The result? Many renewing and newly won clients are now only committing to quarterly budgets (not annual) until the economic picture is clearer and more stable.

Here’s what you can do about it.

Where needed, owners should consider the implications of moving to fewer full-time staff

First, get into the right frame of mind.

The fact that clients are willing to take a quarter-by-quarter approach may be more appealing than their phone call saying “We can’t commit to anything right now. Let’s talk in a few months.”

Try to view the quarterly budget as an opportunity instead of a challenge.

Build risk into the agency’s pricing.

Given the increased uncertainty, it seems reasonable to build at least a 10% premium for shorter-term projects into the agency pricing model to help offset the added risk the agency has with full-time staff.

Turning quarter-by-quarter commitments into opportunities.

First, the agency is far less likely to fall into the lull of a “good enough” mindset for client service and will now have an even greater sense of urgency for delivering exceptional performance. Each quarter can build on the momentum created during the preceding one.

Second, a client now unwilling to commit to £1,000,000 for the year but might still approve £300,000 for the next quarter. This is far better than clients putting spending decisions on hold until an unknown future date.

Third, clients’ quarterly approach to budget approvals will force more agencies to quickly adopt a methodical process for generating organic growth from existing accounts.

Consider moving to a more flexible staff structure.

Where needed, owners should consider the implications of moving to fewer full-time staff by not replacing staff attrition until future revenues are better known. This may require shifting to more part-time or freelance staff as part of the mix.

Last, protect your agency as well as you can.

Push as hard as possible to have at least a 90-day termination period with your clients.

The termination clause must also specify how much money will be due to the firm during the termination period and when it will be paid.

Preparation should start with your client relationships. Stay close to the decision-makers.

Eight additional steps you should be taking now in case a recession is in fact approaching.

If a recession is indeed on the way, here are eight things agency owners should be doing:

  1. Preparation should start with your client relationships. Stay close to the decision-makers.
  2. Sharpen your brand proposition so that it’s competitive and clearly differentiated.
  3. Ramp up marketing to generate more leads and increase market share.
  4. Ensure the agency delivers its best effort to every new business opportunity.
  5. A recession can be the best time to upgrade talent. Even highly talented people will be let go and searching for new jobs.
  6. Protect your profit, people and future with a strong Client Engagement Letter and clearly defined Scopes of Work.
  7. Manage your agency for maximum profitability. Driving higher profits now will put you into a better position for paying the bills later.
  8. Make sure you have a strong relationship with your bank (and an adequate line of credit just in case).