ALP 30: Agency profit margin basics

Chip and Gini tackle an issue at the heart of the success of all PR and marketing agencies: making money.

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Chip and Gini tackle an issue at the heart of the success of all PR and marketing agencies: profit margins.

During this episode, the pair examine:

  • Tracking profit at the project level
  • Monitoring overall agency profitability
  • Getting the profit percentage by using the right data
  • Finding ways to improve profitability

The Spin Sucks Community contributed greatly to this discussion and their feedback is at the heart of this episode. In particular, Greg Brooks of West Third Group shared a number of key points that Chip and Gini explore in-depth.

Gini and her team talk to a lot of agency owners. “One of the questions we ask is: what was your profit last year? And I would venture to guess 90% can’t answer that question,” she says.

Meanwhile, Chip warns against assuming that big invoices are always a good idea. “A mistake that I see a lot of agencies make is that they assume because it’s a big project, that means lots of profit for the bottom line. But quite often, it’s just the opposite.”

Transcript

The following is an automated transcript with only light editing. Please listen to the audio to verify accuracy.

CHIP: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin

GINI: and I’m Gini Dietrich.

CHIP: And we’re here today to talk about profit margins and how you look at those as an agency owner.

GINI: Money, money, money, money, I love money, money, it makes me happy.

CHIP: It makes me happy too. And it’s something that’s very important. Agencies are not around very long if they don’t turn a profit, as it turns out.

GINI: That is true. Although I have learned some interesting lessons in my 14 year career of owning an agency. And that – those – among those lessons are, you can have in the red years, where you’re not making any money and still survive. Also, you can go bankrupt, not that we did that, I watched your friend do it and still survive. So very interesting lessons, I think in agency ownership overall, but not what we’re here to talk about today.

CHIP: Not what we’re here to talk about, because we want to help folks have higher profit margins. And so that that really comes down to thinking about profit. And this a question that we put to the Spin Sucks community to, to see what they thought, how they are taking a look at profits in their own agencies, how they think about it. And I think we got some really good advice out of that conversation. And probably you and I have a few other things to add to it as well.

GINI: Yeah, I think you know, there’s a few things that people are doing. In general, everybody has it in a spreadsheet, which I find fascinating. And I will tell you that I went two years ago, I went through a process of trying to find something that would connect with QuickBooks that would give cash flow projections and allow you to easily look at profit margins by client, QuickBooks does not do it very well. And there really isn’t anything out there. So every pretty much everybody said, they’re they’re tracking in spreadsheets, which I found fascinating. But, you know, there’s a couple of things that people are doing, they’re looking at it as a company overall. And they’re looking at it by client or by project. So you know, where you’re over servicing, where you’re giving time away, and where you’re actually making money.

CHIP: And I think that’s absolutely essential to do it on the client and project level.

GINI: Yeah, I agree.

CHIP: It’s a real mistake to do it simply at the the full company, the full agency level, because that doesn’t really give you visibility into what kinds of projects you should be seeking, it doesn’t give you insight into what changes you can actually make to improve profit. Because if you look at it from a business wide perspective, depending on the size of your business, you may make some sweeping generalizations that that may help you on some projects that hurt you and others, you know, you say, well, geez, you know, my, and I’ve worked with agencies that have that have had this challenge before they’ve looked and said, Wow, look at how much we’re spending on freelancers. This is crazy. We need to spend less on freelancers. Well, why? I mean, you know, what, what are you spending the money for? What are you getting for it? How would you get it otherwise, right? You need to really ask why and think through all of those things in order to do it, which means that you have to have this client by client and project by project, profit statement, profit tracking so that you understand what those things are.

GINI: And if you have employees, I would do it by employee as well.

CHIP: Yes, yeah, absolutely. Or at least understanding what their utilization is, and what revenue you’re assigning to them. Yes, absolutely. And I think that can be very helpful. But if you’re, if you’re not slicing and dicing this data, if you’re just looking at aggregate, if you’re just looking at how much you have in your checking account. And and and, you know, we laugh, but this is this is something a lot of agencies do.

GINI: Oh, yeah, I know.

CHIP: And it is, it is not the path to success. In most cases, if if you succeed, it’s in spite of yourself, not because of what you’re doing.

GINI: Right. And, you know, it’s I’m laughing, because we talked to a lot, a lot, a lot, a lot of agency owners. And one of the questions we asked is, what was your profit last year? And I would venture to guess 90% can’t answer that question.

CHIP: And I would say, of the final 10%, at least of the ones I’m talking to at least half of that 10%, so 5%, overall, don’t give you an accurate number. Yeah, they think they know it. But then when you start when you start drilling into it, you realize that they’re not actually looking at it correctly. Because when you look at profit, particularly as an agency owner, you need to look at it after you’ve assigned some level of compensation for yourself, because otherwise, you’re not really looking at what your profitability is. Because you’re just looking at, you know, how is this cash flow working for me? And not, am I actually building a profitable business? In fact, I was I was talking with an agency owner recently, who said, basically, all of the income was profit, because they were a solo.

GINI: No, no,

CHIP: No, that’s, that’s not how it works.

GINI: That’s not how that works.

CHIP: Now, the end, and this person was doing quite well. So there would actually be a substantial profit margin. Yeah, if you look at it correctly, but you do need to actually understand that you need to assign some sort of compensation, particularly if you’re, if you’re looking to grow or sell or do any of those things. Because otherwise, you don’t really understand your business, you just understand how it’s making you support your lifestyle.

GINI: Sure. And I mean, I’m willing to admit that in the very beginning, that’s how I was. I had, I didn’t know, I had no idea.

CHIP: I think almost every agency owner is like that, at the start. It’s It is, it is more uncommon for someone to come in and start building systems right out of the gate. Typically, as we’ve talked about, many, many times on this show, most agency owners are accidental agency owners. So it really is, you know, just how do they make ends meet. And then all of a sudden, they figure out they can do it well, and it becomes a business. And only at some point after that, usually well after that, do they think about putting the right systems in place. And, you know, certainly I know, I waited too long to do that, in my early businesses, and have tried to correct for that error over time.

GINI: So I thought what Greg Brooke said in here, he has several, several bullet points, but he has, I’ll outline them all. So number one, he says the big problems are more profitable than small problems. So really looking toward you know, big strategic type projects, crisis communication would be a good one, reputation management’s another one. He – I know, just because I know him while he does a lot of launch type things that are at a really high level. So big problems are more profitable than small ones. So think about that, as you’re thinking about where you want to spend your time. Having a process is more profitable than bespoke work. So of course, every client thinks that they’re unique. But we all know that that’s not exactly the truth. And that there’s, there is something it’s similar to the challenges that they’re having in other work that you’re doing. So create process, so that you can replicate it over and over again, it’s just like, I use the example of you can go to McDonald’s in Europe, or Asia, and the Big Mac tastes the same as it does in the United States. And that’s because they have a process, a recipe and they follow it to the tee. So think about that, from your perspective. Good enough, is more profitable than breakthrough, which I thought was interesting, because I’m a perfectionist. So it’s, that’s a real challenge for me just as a human being. And he says, we like awards, and so called breakthrough creative too much in our industry, clients really just want a solution that will solve their problem. They don’t care if it’s creative, or breakthrough or innovative, they just want to solve the problem. So that’s another one and then captured labor is always more profitable than subs. Which, yes, so in having employees is more profitable than outsourcing it – totally agree with that. And then risk mitigation drives profit more than you think. So the client who bails and didn’t pay what they owed, the project that went sideways, and you took it in the shorts, both could likely have been mitigated at the contract and scope stage. So really think that through, we actually just had a conversation right before you and I jumped on to record this, I had a conversation with a client. And she talked about how important it is to create that really detailed scope of work and have triggers inside the contract that allow you to look at it and make sure that A, you’re doing the work that the client expects and B, that you’re not over servicing, that you are doing what they need, but you’re not you’re you’re doing it at a level that you’re actually making profit.

CHIP: I think Greg makes some really great points here. And I think it’s worth drilling in a little bit on each of them just a little bit more just to make sure that listeners are understanding. And also, you know, I would add a couple of small caveats to it. But so let’s let’s take a look at the first one. So the big problems are more profitable than small problems. And I think it’s the important takeaway here is it’s big problems, not big projects. Right? Right. And, and that’s the mistake that I see a lot of agencies make is that they assume because it’s a big project, that means lots of profit for the bottom line. But quite often, it’s just the opposite. So you want to make sure that the problem itself is significant, that it’s that it’s really important to the client, and that you can make a real difference by helping them on it. It’s not necessarily, you know, this is going to take hundreds of hours of manpower, I get to bill lots of money, because quite often, particularly for smaller agencies, they may find that there, they don’t have the economies of scale to service that kind of work well. So it may actually be less profitable, which is why it’s important to be tracking project by project so that you don’t go by your gut feel and instead you’ve actually got data to back it up.

Well, and I think it really good, but extreme case of this is the digital company that worked with the Fyre festival. And it was a gigantic project it put them on the map, they were able to do some really cool work. They ended up taking it in the shorts because the founder of the Fyre festival was a criminal. So yeah, I totally agree that it’s a big problem, not a big project that you should be focused on.

Yeah, and that and the Fyre project actually leads into what the last point that Greg made about risk mitigation. And so you need to make sure that you’re not taking on undue risk, whether that’s reputational risk or financial risk, right. But you know, those are all critically important to making sure that you’re running a profitable business, because the sooner that you spot those and walk away from them, the better. And it may not be at the prospect stage, it may be not until you’ve already started work with the client that you realize, Oh, this isn’t, this isn’t right, or they’re not paying on time, address those very quickly, either by changing behavior, getting paid, or whatever, or walk away, don’t don’t assume that they’re going to get better, just because more time passes.

GINI: Or in their case, it might be when they show up for the festival and don’t have a ride to the actual location because they can’t afford to hire cars to come pick people up from the airport.

CHIP: Yeah, that might be a good time just to turn around and go right back…I guess they were still at the airport. They haven’t been picked up. Yeah. So just just walk back into the terminal back on a plane. Say thanks but no thanks.

GINI: It’s easy for us to say. I certainly wouldn’t have gotten back on a plane I would have there would have been morbid curiosity I think.

CHIP: Well, you’re sort of pot committed at that point. Right. So, you know, once you’re on site, and I think we’ve all been there, you know, with various client projects where you feel it’s going sideways, but you’re already at the event and you just kind of have to go with it, you know that there is a right and a wrong time to bail. And that would probably be the wrong time to bail because you’d be assuring yourself of no financial reward out of it. Whereas sticking around for another day or two, it’s probably worth it to see if they could collect and obviously, they didn’t in the end, at least it doesn’t seem that they did.

GINI: Well, they didn’t from that perspective, but they did collect on creating a documentary.

CHIP: Right. Yeah, they, you know, hopefully, they’ve made themselves at least more whole, if not fully whole, out of the whole process. But the next point that Greg made was the, to focus on process and, you know, not not make things cookie cutter, but, you know, reuse process over and over. Yeah, and I think, you know, the key differentiator there is to make sure that you’re not saying it’s one size fits all, but instead you’re repurposing a lot of the process. So I think, you know, some agencies do take this to extremes, where they sort of try to fit everybody into that single mold. And there are slight differences from client to client. So you want to have an overall process checklists, etc, that govern it so that you can be efficient, but at the same time, recognize that, you know, there may be subtle differences that you do need to make along the way, that shouldn’t require a lot of additional time if you’ve got a good process in place.

GINI: Yeah, and I agree with you, I mean, there, we have a very distinct process in that this is how we do – this is how we work. But it also allows us to customize and create something that’s strategically aligned with the client’s organization versus, well, we do social media and content marketing and media relations for every client. That’s not the case at all.

CHIP: Right. And I think the the piece that, that is easy to replicate is the how you do it, the what you do is what’s going to need to vary from client to client.

GINI: Totally agree with that, that’s great, a great way to look at it,

CHIP: You want to make sure you know if you’re a web design firm, for example, that every website doesn’t look exactly the same. But you can still go through the same process with the client to get to that end, and that will make it more efficient and hopefully, more profitable. I think this next piece is interesting. And you talk about being a perfectionist, I think a lot of people in the agency space are perfectionist, or at least skewed in that direction. And again, this is this is like everything else, it depends. It’s a balancing act, all those things, you know, you you can’t go so far towards, you know, being just barely good enough that, you know, people start to say Geez, this guy’s phoning it in, but at the same time, it is very easy to to go chasing something that is more for our personal pride than for our client’s benefit. And, and that’s really where you have to be very careful about it. Because, you know, yes, you can do something that’s really cool. And it looks really great. And maybe your client will be thrilled that you did it. But if they’re thrilled with 80% of that, you wasted 20% of your time. So, you know, do find the right balance there.

GINI: Absolutely. And I mean, I think it is I, I think it’s I want to I’m going I’m going to attribute this to Sheryl Sandberg, and I may have it wrong. But I think on the walls at Facebook, they have a quote up that says, Don’t let perfection get in the way of being finished. And I think that’s something that we all need to remember is they clients need a problem solved, we can solve the problem, we don’t have to sometimes it’s not sexy. I mean, we do B2B manufacturing work, it’s not sexy work. But man alive, do we do some good work because we solve the problem. And we get clients on to the next level. So you know, we’re not out, you know, doing anything breakthrough. And we’re not winning all sorts of awards, but we have very, very happy clients.

CHIP: And I love that quote, you know, whether it’s Cheryl or someone else, but the anyone who’s ever worked for me knows that one of the things that I say over and over again to my own team is never let the perfect be the enemy of the good, which is very similar. And it’s, you know, you really need to have a good sense, whether you’re an agency owner, or just an executive in any business, or even a line employee, you need to understand, you know, what the what the marginal benefit of additional work additional time on a particular project is and make sure that it truly is worthwhile. And a lot of that comes down to tracking, you know, if you’re tracking well, how much time you’re putting into projects, you’ll be able to start spot the ones where your margins are lower. And then as you dig into it, you’ll say, Oh, well, that’s that’s because, you know, we had to try to make this, this particular icon just perfect or this particular op-ed… And, you know, we just just another hour or two and it was going to be, you know, the actual opus that would win the Pulitzer, if it were only written by a journalist. There’s …. And so you need to be realistic about those.

GINI: Yes. I’m laughing because I may have been guilty of some of those things in the past.

CHIP: But that has not really been one of my challenges. Very few people, I think would call me a perfectionist. I am, I’m not quite just an MVP guy, minimum viable product for those of you who are not in the product development space. But you know, I very much am, you know, ship it fast and and see what happens type as opposed to… you know, I do a lot of ghost writing have over the years. And I tend to to be a first draft kind of guy, I will usually write the first draft, if I get a particularly picky client, I’ll reread it before I send it. Once. If there are certain clients I’ve had over the years that I know, I don’t even need to give it that one, I can just literally write it and ship it. Without even rereading it myself, you know, you start to get to know clients well enough that you you understand what you can do and what – how they’ll perceive it, you know, you need to have that same level of understanding, your team needs to have that same level of understanding of each individual client so that they’re meeting expectations, exceeding expectations, but not so much that they are eroding profit.

And speaking of team, that leads us into I think one of the most challenging pieces of advice that Greg has, and he’s absolutely correct that captured labor ior n house staff is more profitable, at least when you look at them on a per unit per hour per day basis, than freelancers or contract work, or those kinds of things. But it’s it’s really, really important to understand that there are trade offs. And so if you have like for like, then yes, if you’ve got someone in house, it’s almost certainly going to be a more profitable endeavor. But if you’re dealing with specialties, and you don’t have enough to fill that employee to capacity, if you are, you know, doing things that ebb and flow, so it’s not, you know, you may have enough to fuel two people full time for two weeks, but then you’ve got two weeks off, you know, there’s, you need to make sure that you’ve got the flow of work if you’re going to have in house employees, otherwise, that actually starts to turn upside down quite quickly. So striking the right balance, particularly in an environment where it’s become easier and easier to use freelancers is a critical part to managing the profitability of your agency.

GINI: Yeah, and, you know, I think there’s also the challenge of when they’re not part of the team, that there’s the lack of collaboration and the lack of teamwork, and you can try to replicate that with somebody who doesn’t necessarily – isn’t part of your W2 staff. But it’s, it’s challenging, it’s difficult not to say that there aren’t, to your point, there aren’t opportunities or places that you should if you don’t have the revenue to support employees, if you’re just starting out, and there’s a lot of different scenarios where you would outsource. We outsource, I think we have four or five freelancers, but their specialties we just don’t – wouldn’t bring in house because it would cost us too much money and time to to do that when we know we can. So I mean, you you weigh the pros and cons on that from that perspective as well.

CHIP: Right. And I think again, this you know, it all circles back to the tracking, if you’re if you’re tracking well, you’ll figure out, you know, what are the things that you are spending too much on outsourcing, versus what you could do it for in house, you’ll have a better sense for what the the peaks and valleys of utilization are, so that you can see, you know, there’s you know, some agencies, depending on the work they do may have tremendous amounts of seasonality in their business. A lot of agencies are consistent over the course of the year. But if you’re in tourism and specialize in a particular region, you may well have some, some significant seasonality to your business, if you are doing a lot of retail work, you may have some particular seasonality to your business. These are all things that you need to understand for your own agency. And going back to to what we talked about as far as doing things from a process standpoint, with your projects, you need to be able to understand that the What may change even when the How is the same. So we’re giving you the How but the What needs to to vary based on your own individual agency circumstances.

GINI: Absolutely. And you’re exactly right. When you track it at the project level, you’ll know. You know exactly. And you can make those decisions pretty quickly.

CHIP: And now what the the last thing that came up in the Spin Sucks community conversation was specific margins. And a couple of people I think throughout some particular margins that they were seeing and what they were happy with. And I guess that that leads to the question that we’ve touched on in the past, but you know, whether there is a standard, that agencies should be seeking both at a project and an agency level for profit margins, and, you know, it is it is something I have said previously, I am not a huge fan of these rules of thumb, I think you can start somewhere with them. But I think you really need to look at the individual business and understand what is working for you. You know, obviously, if you’re at zero percent profit margin, that is a bad thing.

GINI: That’s a problem.

CHIP: But you know, depending on the you know, the actual work that you’re doing, because I know we have listeners who are in what I would call traditional PR, we’ve got people who are in digital design agencies, we’ve got people who are in performance marketing company, that there’s a whole wide variety. And so to say that there is a single margin percentage that you should be looking for would be wrong. But what you should be doing is looking at, you know, is the margin that you have, is it working for you? And even if it is working for you, how can you improve it? So I would say worry more about how do you improve your own margins, as opposed to saying, you know, I want to keep up with the Joneses. And I heard so and so’s got a 50% margin. So I want to have that too, you know, figure out what is working for your business, particularly because when you hear that the Joneses have a 50% margin, they may not be calculating it just correctly, you know…

GINI: Well it might be on gross and not net. Yeah, I mean, there’s a lot of…Yes.

CHIP: Yeah, so so so so be careful about, you know, fixating on a particular number because you may be either selling yourself short or be setting an unrealistic standard for your business. So just work to continuously improve it and make sure that the profits you’re throwing off, are are what you need to meet your own ambition, your own needs.

GINI: And I think the apps answer to what it is what your profit margin should be, is, it depends.

CHIP: And I think that’s a perfect way to end Episode 30 of the Agency Leadership Podcast, or should it be Episode 29 for the rest of the podcast life? Should we stop at 29…do podcasts move on beyond 29? I guess probably they should. It would be confusing to people if we just made everything episode 29.

GINI: Everything 29.

CHIP: Yeah. So that will bring to an end Episode 30. Hopefully, you’ve learned a few things that will help you to improve your own agency’s profit margins. And so I wish all of you a profitable week until we come back to you with our next topic on episode 31. See, that’s how it works 30, 31. And with that, I’m Chip Griffin

GINI: and I’m Gini Dietrich.

CHIP: And it does depend.

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