How To Measure & Increase Profitability

Happy Black Friday! 

 

I’m going to keep this as short and tactical as possible so you can take this process step-by-step, execute, and see results in your agency.
 

I don’t have to explain to you how important profit margin is, but I should point out that you need to be intentional if you want to increase it for yourself. Having 35-50% of your revenue put back to cover emergencies, buffer slow seasons, or pay for that new hire when you’re growing like crazy is a lifesaver.

 

Compare that to the “I’d love to hire another team member, but I need to close more clients first” scenario that leads to overwhelmed and burnt-out account managers and specialists and I can guess which scenario you’d rather have.

 

So let’s dive into how to increase your profit margins in 3 steps (spoiler: step 3 is “Profit”).

 

Step 1: Measure your profitability

If you want to increase profits, you’ll need to know what your profit margin actually is. You’ll want to identify this on a client-by-client basis, rather than just knowing your total agency numbers. This approach will let you actually do something about it if you identify lower-than-desired margins.
 

Here’s what you want to do:
 

Implement time tracking
This is tough for a lot of reasons. The hardest part is getting your employees to do it, followed closely by remembering to do it yourself.

However, if you want to know how much it costs you to fulfill for each of your clients, you’ll need to track time. It’s great if you can track each task or at least category of tasks so you can determine the efficiency of your processes and look for ways to speed things up with AI or similar time-saving solutions. 

However, the bare minimum we’re looking for here is to track time for a client whenever doing work for that client.
 

Choose a time frame
You’re going to need to pick a sample size for this. You’re collecting data, and you should never make big decisions on small data. 

You may not get a concrete picture of how long it takes to fulfill for each client after a month of time tracking, but if you see a huge amount of time going to a smaller client one month, you can definitely talk to your team to see if it’s an anomaly. If they say it’s normal, keep a close eye on them the next month. 

You’ll generally have a good idea of the average time spent on each client at the end of your third month of time tracking.
 

Note in each client’s project management project/folder when a red flag is identified

As mentioned above, if a client is a known time-suck you should note that in their file. If you don’t have a project or folder for each client in a project management software like Teamwork.com (my personal favorite), I would highly recommend getting one to track and stay organized.

You may also have the side benefit of noticing that you’re under-serving some clients. This practice will let you balance things out in either direction.
 

Step 2: Manage your profitability

Compile data & determine cost per hour for each client 
After your control period, you should have enough data to make decisions. Figure up your average cost per hour for each client. This is a lot easier if you have Teamwork.com (the link above is totally an affiliate link, but I really am a fanboy for good reason) because it has built-in time tracking and you can assign your team members a cost per hour. This lets saves you the math later, at which point you can add the cost of any client-specific licenses and other costs. Last, divide your company-wide expenses by the number of clients and give each client their equal share of the cost.

With all of your costs allocated per-client, you can subtract them from the rate each client is paying you. This leaves you with your profit-per-client. Divide your expenses by your revenue and you get your profit margin.
 

Identify problem clients (or problem employees)
You may notice that some clients have a negative profit while others have huge margins. This indicates imbalance and can highlight when and where to make some changes.

Having a huge profit margin from some clients is a nice thing if they’re happy with the service, but if your profit margin is 80%+ you may be undeserving these clients enough that a little extra work could get them noticeable results and move them from satisfied to referral-driving brand evangelists.

Conversely, having slim margins or no margins from other clients is an obvious problem we want to solve. We’re not looking to balance low-margin clients with high-margin clients, we’re looking for a consistent profit margin per client so you can predict how much profit a client will bring you from their proposal alone.
 

Standardize rates/create package prices
This is possibly redundant at this point, but if you want to profitably scale in volume of clients, you’ll need to have set rates and/or packages. You can have scalable rate charts, but you need to have something that lets you say no when a prospect asks if you can go lower.

It doesn’t really matter how you do this, as long as you take into account how much you’re currently making per client and what your target profit margin is. Depending on your agency size, I’d say you should aim for 35-50%. If your agency is smaller (fewer than 30 employees), you should have a higher margin. If you’re a larger agency (30-50+ employees), you probably have higher overhead and need to aim for 35% or so.
 

Set time targets for each client/price point
Now for the real management part of this. Based on how much you want to charge per hour and each client’s rate, set a service time target for each client. You may set 3 hours a month for a $1,000/mo client (~$165/hr at 50% profit margins) or 16 hours per month (4 hrs/wk) for a $5,000/mo client (~$150/hr at 50% margin). 

You may not need all of this time to fulfill each client’s services, but you may find you should be spending more time on strategy, experiments, research, etc. Or you may just find that your profit margins are 65-70% and your clients are thrilled with their results and your level fo communication. Unlikely, but props if it works out that way!

Make sure you communicate the time your team members should be spending 
on each client so they know what they’re working with and can schedule their weeks accordingly (and so they know what you expect of them).
 

Select your possible responses & take action
Lastly, you need to choose how to respond when you’re not profitable on a client. There are two possible reasons why you may not be profitable on a particular client:
 

1. Internal reasons
   You may have quoted the client to low. Maybe the employee(s) working on the client may not be focused or may be doing things in an inefficient way. Alternatively (or very related), your processes may have room for improvement.
    
2. External reasons
   The client is too needy and/or has no concept of boundaries or respect for your agency. Alternatively, they may be a legacy client that has been with you for a long time and you haven’t had the heart to increase their rates to keep up with inflation and your growing expenses.

With internal reasons, unless blatantly obvious, you should assume it’s your fault. Look at your pricing and processes first. Price raises can be uncomfortable to bring up to clients, but it’s worth it and most are willing to pay if you’re getting them results and if they’ve been happy with your communication.

Finding inefficiencies in your processes can be done (as mentioned earlier) by tracking time at the process-level (which may take some work and accountability with your team), or by having your team help create new processes. Offer an incentive (gift card, plane tickets, team party, $100-$500, whatever) for anyone that documents a more efficient process or finds cool ways to save time without sacrificing quality. 
 

If you’ve got a slow employee, chat with them about the time limits and why they’re there. See if you can co-create a solution to speeding them up or helping them maintain focus. Maybe they need help learning to say no to the client. If you try to help them and they still don’t improve, give them a performance improvement plan with an ultimatum. You can’t have employees that cost you more than they make for you.

 

If it’s an external problem, you may just need to plan out some boundary-setting emails, review your terms and renegotiate, increase rates for select clients, or even fire some.

 

This is largely going to be dependent on the client and why they’re taking so much time. A price increase will solve most of your issues, but if you have to 3x your price to make a client profitable and your team hates working with them, it may be time to have a talk with them about the scope of your agreement or to just let them go.
 

Monitor & compare
After making changes (hopefully month 3 or 4 after starting to measure profitability), measure the same amount of time you chose for your control period and compare.

The hope is that you increased your margins by a healthy amount. Party with the team to celebrate! 

If things went in the right direction, keep it up! You’re doing great. If things didn’t change, you’re probably having time tracking issue or need to see a counselor about self-respect and boundary issues (not kidding, this is a serious issue that can hurt your team and your business). If you went backwards, you may have tried to go too hard for huge price increases and lost clients. This isn’t the opportunity to squeeze your clients for all they’re worth, it’s the opportunity to see whether your rates are reasonable for your goals and the level of service you’re providing.
 

Step 3: Profit

That’s all. Have fun running a more profitable agency!

 

Next week, we’ll piggy-back on this issue and show you how to schedule time for your employees and measure their bandwidth! This will help you figure out when to hire more team members and when an employee can take on another client. 

 

 

All the best,

 

-Ryan Baker

Founder, Kingly Consulting

Kingly Consulting

405 N. Jefferson Ave Ste 1008, 65806, Springfield

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