45 – Maximize Profitability At The Client Level

So you’re charging $1000/mo for Google Ads management and you’ve got 20 clients and 2 employees on the PPC team: an ad manager and an account manager.

The problem is, you’re paying $12k in labor costs and your team is saying they’re tapped out on bandwidth. You can’t really hire another ad manager or account manager, certainly not one of each, when you’re already under 50% margins with your PPC revenue.

But how can they be tapped out? Surely 20 accounts at this level of ad spend aren’t taking up 80/hrs per week… 

Measuring Profitability

You’d be surprised.

Some clients are spending $4k/mo and want weekly meetings. 

Even if they only last 15 minutes, those weekly meetings take prep time, they take time out of account manager’s schedule, and they interrupt workflow. 

A 15 minute every week can easily eat up an hour of productivity, meaning the client paying a $1k/mo retainer is taking 4-5 hours per month from your account manager, who is already spending about half an hour on their report at the end of the month and another 90 minutes on emails and/or slack messages for that client throughout the month. 

That means your $20/hr account manager is spending as many as 7 hours per month on this client, eating $140/mo of your revenue. 

Not terrible, but your $30/hr ad specialist is being asked to try all sorts of new initiatives for the client because of the weekly brainstorming sessions.  

We won’t even talk about the impact of this many changes on the machine learning. 

They’re spending 2 hours per week on this client, on top of biweekly optimizations that take an hour, so you’re looking at 10-12 hours per month or $300-$360/mo.

That’s a conservative $440/mo in costs, plus any tools or subscriptions, which I usually estimate as total cost divided by number of clients. You could conservatively guestimate $100 per client if you’re using paid reporting or optimization tools, project management software, training community subscriptions, licenses, etc.

Add the conservative $100 for other costs and you’re below 50% profit margin. I hope you don’t rent a physical office space or have to pay for workers compensation insurance, 401k matching, or other W2 expenses. 

If you want to measure the profitability of each client, you need to be tracking how much time your team spends serving them. 

If you want to influence the profitability of each client, you need to recognize where boundaries are being crossed and more clearly highlight those boundaries in your scope of work proposals.

If you’ve already let this happen because of ambiguous communication and the desire to serve well (this is very common), you may need to have a hard conversation. If you’re trying your best to serve well, most clients will understand and apologize profusely as they seek to find a middle-ground.

The solutions in these cases are to offer more restricted access to your team’s time and fewer tests (a set number of hours per assigned team member) or to raise their rates to reflect the amount of time they’re requesting.

Both can be a win, but if they’re requesting too many changes, this is where you can explain the negative impact of too many big changes on an account spending $4k/mo. 

Margin & Variables

The easiest way to maintain profit margins in a marketing agency is to identify the amount of hours a client should receive in service based on their retainer and your desired profit margin.

Most of the time, an agency should be aiming at 35-65% profit margins, with 50% being a happy median.

If you want to maintain a 50% profit margin on your $1000/mo client from the scenario above, you’d want to keep your costs at or below $500. If your 2 team members equal a combined $50/hr, they could work 10 hours a month, between the two of them, before it’s eating into your margins.

However, if you have other costs, you’ll want to factor those in. Running a business costs money and you’ll want to factor in a portion of those other costs to account for those additional costs, or you can just use the conservative $100 we mentioned earlier.

Another variable to consider is the unpredictability of working in marketing.

Who knows when your client will come to you with an extra request, a fire to put out, or when Google will change everything and disapprove your dog food ads because it flagged them as weapons (true story).

By planning for 2.5-3 hours per month from each team member, you’d be looking at $250-$300 in labor costs, plus the $100 “other costs” buffer, leaving you with an extra 3.33 hours from your ad specialist or 5 hours from your account manager in case of “emergencies”.

Just as it’s recommended that you have about 5 hours of weekly buffer time when assigning workload to agency employees, it’s a good idea to have a little buffer room in your profitability to cover for the inevitable “the sky is falling” moments clients tend to have. 

Client Profitability Estimator

Because it’s easier to just answer a few questions and let machines do the thinking for you, I created an estimator tool you can use to estimate how many hours you can profitably assign to each client and your current profit margin from that client’s account.

Here’s my tool to estimate your marketing agency’s profit per client.

Needless to say, there are many factors not taken into account in the tool (some of which we’ve talked about above). 

What if your teams are pod-based and you have 5 people on every account instead of 2?
What if the client demands more than the suggested hours allotment?
What if you can’t get your team to track time?
What if your non-labor costs are higher than estimated? 

This is just a tool to get you thinking about how much time to assign to each client based on their retainer and the costs associated with managing their account.

If you’re not assigning an hours cap to each client this tool should help you start doing so profitably to open up bandwidth where you were overserving and step up your game where you’ve been neglecting quiet clients.

And because last week I said I’d write about it, but I haven’t mentioned it yet, raise your rates if you can’t adequately serve your clients with a profit margin of 35% or more.

If you want to serve well, you have to get paid enough to hire help, buy tools and resources, and feed your family.