PROFITABILITY OF A PR AGENCY
Running a successful PR agency can be quite the balancing act. You need to find and secure new business whilst managing the expectations and needs of your existing clients as well as manage your team. As if that wasn’t enough you also need to spend sufficient time running the business itself to ensure it’s profitable! With all of this going on it’s often the last thing – spending time on your business – that falls by the road side.
What follows are some common problems affecting the profitablity of PR agencies as well as some strategies you can employ to counter them and get yourself back in black.
I’m not really sure of which jobs are profitable and which are costing me money.
You have a good stable of clients and a team to service them. Projects come in and go out. All looks well on the surface, but you’re not making any profit at the end of the year. Assuming that there are no obvious profit leaks (e.g. there is no new ‘company boat’ moored in the harbour) then you’re going to want to look at the profitability of the individual jobs and clients being worked on within the agency.
In order to do this you need to do the following:
- Have properly calculated and set hourly rates for your team
- Use a job management system that allocates the hours via timesheets and can report on job performance
- Report on the profitability of jobs and clients on a regular basis
Once you’re doing the above you’ll be able to identify which clients and jobs are making you money and which aren’t. For the ones that aren’t profitable you can peform an analysis on why that might be – is the client making changes to the job part way through that aren’t being charged? Is a particular staff member inefficient with the time being spent? Is a particular type of job poorly scoped and being underquoted everytime? Find the problem and solve it.
I’m not really sure how to set my hourly rates, I’m just going off what the other guys are charging.
Setting your hourly rates correctly is hugely important for any service business that charges using hourly rates. Failing to do so means that the rates you’re charging might not actually reflect the underlying costs and profit goals of the business meaning it’s very difficult to plan with any accuracy and very difficult to turn a profit except by fluke. Even if you’re charging fixed fees, you’ll still want to know that the hourly rate calculations are correct to give you a stable base from which to set your fixed prices (fixed prices should increase your profit, not reduce it!).
Hourly rates should reflect the following:
- The hourly cost of the employee
- An allocation for overheads
- An allocation for profits
Many firms use the old ‘rule of three’. They’ll take the hourly cost of the employee after allowing for leave and productive down-time and multiply it by three. This is a crude, albeit effective, way to calculate the hourly rates for your team.
Many PR agencies simply charge a blended rate rather than specific rates for each team member. I’d encourage you to take a look at charging rates based on seniority rather than a blended rate. Why? The blended rate gets affected by so many things and as a result can effect your profitability, for example:
- Change in the demands of a client means more senior time is needed than expected
- Junior staff member leaves and senior staff ends up delivering work
- Junior does all the work and client gets annoyed at paying a higher rate than they otherwise would
Take a good look at your rates. If you’re keen to make the change, but wary of telling existing clients, you could simply roll it out for all new clients to test it out. Once that’s done you can also run some reports for the old clients to see what you’re losing out – might give you the inspiration you need to make the change with your existing clients!
My biggest client represents a huge percentage of my total sales.
This is a really common issue facing owners of small-to-medium sized agencies. You’ve got a handful of smaller clients and then you finally land a big kahuna of a client. The early days are brilliant – huge retainers, exciting work, fancy lunches – but soon the gloss starts to fade and the client realises they have all the power in the relationship. Typically this leads to you and your team over-servicing the client as well as bending over backwards to meet unreasonable demands, all of which has a huge impact upon your bottom line. Time spent that cannot be charged is a direct cost to your bottom line and unreasonable demands lead to upset staff which leads to staff leaving – also something which has a negative, and significant, impact upon your bottom line.
Solution? This is a tough one. You really need to get yourself into a position where no client represents more than 20% of your sales, ideally it’d be even less than this, at say no more than 10%. To achieve this, let’s look at the goal and work backwards.
Say you’re currently turning over $500,000 and your big kahuna client represents $300,000 of that. If we want to aim for a 20% target for the big client that means our total turnover for the agency needs to be $1,500,000. Whilst this may seem like the impossible dream, it really does need to become part of your planning process. Your new business goals over the coming years should be to acquire sufficient clients so that your turnover gives you the cushion you need to avoid being taken advantage of by your big kahuna.
There are myriad other issues affecting the profitability of agencies including:
- Cashflow problems
- Staff turnover
- Client turnover
- Lack of new business pipeline
We’ll be covering some of these in future posts, so keep an eye out! In the meantime if you’d like to discuss how to improve profitability in your agency, get in touch today. We’d love to help.