As accountants specialising in creative businesses, we’ve worked with hundreds of agencies over the years, from start-ups to £5m turnover. Here’s a few insights into what the most profitable ones do differently to the rest.
Setting the right pricing is crucial and is probably the easiest way to impact profitability. Therefore, it’s important that you value yourself and your agency properly and set your prices accordingly. The smart agencies are already doing this – Wow’s recent Agency Survey found that 48% of agencies were planning on putting up prices this year. Results from this survey also showed that those that put up prices last year did better than those that didn’t.
So, how do you work out what you should be charging? Finding out what your competitors charge is a useful benchmark, but the danger is you end up pricing yourself somewhere in the middle. And being average certainly won’t help you make above average profits.
Are you selling yourself based around how much time it will take you to complete a project? What happens if another agency pitches a lower price for the same amount of time? You’re worth more than just the time you spend on a project, so your worth should be reflected in the price.
When you’re putting together proposals, make sure you showcase your relevant case studies, detail your methodologies, show the client why you’re worth that higher price. They’ll need reassuring that you’re worth the extra money, so give them plenty of evidence to help build your case. Make the other agencies you’re pitching against look amateur by going to great lengths to demonstrate the value you’re going to add to the client.
Often, pricing is all about confidence. Sometimes the difference between charging £10k and £15k for a project is simply having the confidence to ask for that fee, and being able to justify it. Sometimes, having a low fee can actually put clients off. They start to wonder “why are they so cheap?” and go with a more expensive agency as they’re seen as less risky. Don’t forget, you’re getting better each day, you’re adding new skills, offering new services, becoming more efficient. This additional value needs to be reflected in your pricing to clients.
Here’s a fun game to play. Starting today, increase all your pricing for new clients by 10%. Then see what happens. The chances are that you’ll see no difference in conversion rate. So, next month, do it again, and again… and keep going until you feel you’ve pushed it as far as you can go. If, at the same time, you’re picking up larger clients with bigger budgets, you’ll find that you’ll be able to keep increasing your prices far beyond where you previously could have imagined. We’ve seen agencies double their fees in less than a year with no impact in conversion rate, but a big impact on their profit.
It never works out quite as you imagine – The price you start with in the proposal is the highest your fee will ever be. It assumes there’s no negotiation from the client, no scope creep on the project and that everything goes perfectly to plan. Life doesn’t work like that, so it’s important that you have some resilience built in for when things don’t go to plan.
As well as making sure you’ve got room to maneuver, it’s important to negotiate properly and always get something in return if you have to reduce the fee, e.g. payment up front or an introduction to someone the client knows. Something that will help with negotiations is creating different price points for your offering (that are profitable for you at each level). For example, clearly outlining what the client would get for £10k, £20k, £30k gives them options, and ensures that whatever option they choose will be profitable for you.
The cost of running your agency is rising. Your costs will be gradually creeping up, with probably your biggest cost (your team) expecting pay rises as standard. If your costs are rising and your pricing isn’t, your margins will get squeezed and your profits will start to disappear. If you’re not sure how much your costs have increased by in the past 12 months, do some analysis on your accounts – the results may surprise you. Alternatively, try walking into a shop and buying a penny sweet – it will remind you that there is no point being nostalgic when it comes to your pricing.
Top Tip for More Profit: Ask for it! One agency started their journey on becoming super-profitable by just asking for more – In just one day they increased their fees from £800 to £1,200 per day and their clients……didn’t bat an eyelid.
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