If there’s one thing that gets everyone out of bed in the morning, it’s our work, and the prospects for contributing to the growth of our personal and national economy. That’s a pretty lofty statement.
But you get the point: Companies go into business to make profit.
Profit mistakes are common among agencies growing too fast to put resources into making the bottom line as efficient as possible. Times are already good. You’re growing, and everyone appears to be busy.
So how much better could they be?
Let’s take a step back and look at what is actually happening to growing agencies today. Often, you’re operating in so many different lanes, offering such a diverse range of products and services, that it’s hard to quantify the margins on each of the projects that make up your client work.
It didn’t used to be that way.
In the past, agencies were inclined to focus on one area of work. It would have been common, not so long ago, to find a PR agency that just did media relations or an ad agency that specialized in delivering terrific advertisements, for instance.
Today, lines are blurred. There’s a blending of services agencies will offer, because everyone is competing for a bigger piece of the pie.
This can lead to what we call the “profit mistakes.”
Mistake 4: Introducing New Services
If you can make profit by introducing a new service, you should! This is a great way to please clients and distinguish yourself from a competitor.
So how do you know if you’ll make money by introducing a new service?
Your natural reaction to a client need will be to say, “Yes!” and then ask, “How high?” The truth is, you should consider if providing the service will really be more valuable to you than turning down the extra work. When adding a new service costs you more than the revenue covers, you’re no longer operating at a profit. You won the battle, but you lost the war.
Add services when you can bill them for a higher cost than will cost you. We mentioned a little earlier that human resources tend to be your highest cost. This makes it easy to understand the cost of adding a new service.
Is someone on your team equipped with the skills and time to provide this new service? If not, what will it cost to get a contractor to fill the need? If a bunch of your clients are starting to ask for this service, what would be the cost of hiring a full-time employee to fill the need?
Mistake 5: Taking On Non-Profitable Work
Which of your projects tend to deliver the most profit? Do you constantly get huge margins on digital assets? Or is your niche for profits event marketing? Maybe you make the most money on strategic counsel.
The key here is understanding all your projects are not equally profitable. Two projects generating $100,000 in revenue can have very different outcomes for your bottom line.
Mistake 6: Bulk Resource Scheduling
Most resources think about their agency contribution in terms of billable hours and utilization rates. This works great in theory, but systematically it can fall through.
Here's an example: Your account manager assigns a resource 40 hours. The resource is asked to enter her time at the end of the month, typically into a time-tracking system or spreadsheet. Your resource tries to recall what she did, and sure, 40 hours seems right.
What if she did 25 hours, though? Or, what if she did 60 hours?
These inconsistencies seperate well-scoped, profitable projects from the blunders.
Mistake 7: Accepting Projects You Can’t Deliver
It’s so common to feel pressure to say, “Yes!” to every project. You’ve built a client relationship and you don’t want them going elsewhere.
It’s even more common to be overconfident in your ability to take on new services. But the truth is, your agency can’t — and shouldn’t — say yes to every single project.
You have to know your limits.
This means knowing your core competencies. Your agency delivers great work in the XYZ services. Great! Deliver work in those areas. This will foster organic growth.
However, many agencies eagerly accept new projects without really considering if they really have the resources to deliver great work. Maybe they don’t have the right people. Maybe they don’t have the right capacity to meet deadlines.
You get what’s coming. The project isn’t delivered right! Or it isn’t delivered on time. Or less good, it isn’t delivered at all! This really happens.
The Fix: Close Deals That Serve Your Strategic Growth
That’s right: You heard it here first. We’re giving you permission to say, “No,” to deals. You’re moving fast and chasing growth. Great! Revenue means a lot!
Just don’t chase revenue at the expense of margins. It often doesn’t turn out right.
We tend to hear a lot of agencies saying that their revenue is rocketing! And yet they just can’t seem to make any money.
Profits just aren’t growing. There’s more money coming in, so why isn’t the black bar moving?
That’s because the projects are costing more to deliver. Don’t take on projects that don’t make you profitable.
If You Only Remember a Few Takeaways:
- Identify your core offerings
- Don’t say, “Yes,” to every project “just because”
- Revenue is great! But do know that profit is better
- Assess if you have the right people, with the right amount of time, to deliver projects
- Stay focused on why you close deals, so you close the right ones
Take the Next Step:
Now that you know the profit mistakes, let’s tackle the process mistakes.