Running a successful agency is more than just delivering great work for your clients; it’s about ensuring your business is consistently profitable, enabling you to invest in growth, hire great talent, and sustain a thriving company culture. Understanding the key levers that drive profitability is essential for every size of agency, whether you’re small and boutique or a multi-million-pound operation.
At Wow, we’ve spent over 20 years working with agencies (and specialising in those with over £1m turnover). We help agency leaders to navigate the financial landscape and achieve sustainable growth in their business. Here’s a guide to some of the most impactful strategies we advise using to boost your agency’s profitability. We also run the Agency Profit Programme every year, designed to supercharge the profitability of £1m-£3m agencies.
Strategic planning: Start with profit in mind
Highly profitable agencies don’t leave profit to chance. Instead of simply targeting revenue growth, start by defining the profit you want to achieve and work backwards from there. Your accountant can help to determine this profit target.
The process then involves detailed planning, including understanding your overheads, setting gross profit targets, and determining the necessary fee income.
Key questions to ask:
- What is your target gross profit percentage?
- Which services and clients are most profitable?
- How will you balance new business with upselling to existing clients?
By starting with profit as your focal point, you can align your agency’s activities with clear financial goals.
Pricing strategies: Beyond the hourly rate
Pricing is directly correlated with profitability, yet many agencies fail to optimise their pricing strategies. Moving away from a flat hourly rate to tiered pricing or value-based pricing can make a significant difference. Agencies that use tiered pricing, for example, often see higher gross profits compared to those that use a single blended rate.
Tips for pricing success:
- Provide clients with three pricing options to help them understand the value you offer.
- Understand and communicate effectively the value you bring to clients, not just the hours worked.
- Regularly review and adjust your pricing to reflect the value you deliver, especially with long-term clients.
- Consider regular fee increases, potentially annually.
Mastering retainers: The power of predictable income
Retainers provide a steady stream of income that allows for better resource allocation and long-term planning. However, the key to making retainers work is to manage them effectively to avoid scope creep and ensure they remain profitable over time.
Strategies for retainer success:
- Establish who in your agency is responsible for your retainer strategy, and converting new clients to repeat business.
- Include regular reviews and renegotiations in your retainer agreements to adjust for scope and pricing.
- Charge for project management and scoping work separately to ensure all work is adequately compensated.
- Build strong relationships with multiple contacts at client organisations to safeguard against losing retainers due to personnel changes.
Efficient project management: Plug the profit leaks
Even with good planning and pricing, poor project management can eat into your profits. Agencies that excel in project management have clear processes for scoping, executing an agreed project, managing scope changes, and charging for out-of-scope work.
Best practices:
- Invest time in creating a detailed scope for every project to set clear expectations and avoid underestimating complexity.
- Use an agile approach to manage large projects, breaking them into smaller, more manageable phases.
- Set and enforce clear boundaries around scope changes, with contingency budgets to cover unexpected extras.
Leveraging existing clients: The goldmine you’re sitting on
One of the easiest and most profitable ways to grow is by generating more revenue from your existing clients. Upselling and cross-selling to clients who already trust you is often quicker, cheaper, and more effective than winning new business. The sales cycle is shorter, acquisition costs are lower, and with a strategic approach to account management, you can identify opportunities for longer-term retainers, additional services, or proactive solutions that add value while boosting your bottom line.
Actionable steps:
- Assign someone to focus on growing existing accounts and set clear profit targets.
- Develop account plans that map out opportunities for expansion over the next few years.
- Regularly remind clients of all the services you offer to avoid losing out to competitors.
- Identify which services clients are buying and locate opportunities.
Building a profit culture: Engage your team
Sustaining profitability is not just about processes and strategies; it’s also about culture. Engaging your entire team in the pursuit of profitability can lead to better decision-making at all levels of your agency.
Creating a profit-driven culture:
- Regularly discuss profitability with your team, explaining how it supports growth, investment in talent, and company perks.
- Set clear expectations for target billable hours to ensure your team is optimally utilised. Educate your team on the importance of high utilisation rates by explaining how they directly contribute to the agency’s financial health.
- Foster a mindset where no work is done for free, and all projects are scoped and priced correctly from the outset.
- Turn profitability into a habit by equipping your team with the tools, training, and technology they need to work efficiently.
Profit analysis: Digging deep into the numbers
To truly optimise your agency’s profitability, you need to go beyond just tracking overall revenue and expenses. Detailed profit analysis at the service line, team, and project level is essential to uncovering where your business is thriving and where it’s losing money.
Advanced metrics to consider:
- Profit by service line: Break down your profitability by each service offering. Which services are driving the most profit, and which are underperforming? This granular analysis will help you focus on high-margin services while refining or eliminating less profitable ones.
- Profit by team: Understanding how each team contributes to your bottom line is crucial. Are some teams more efficient and profitable than others? Identifying disparities allows you to allocate resources more effectively and address any inefficiencies.
- Project profitability: Regularly reviewing the profitability of individual projects helps ensure that each one contributes positively to your overall financial health. This includes analysing scope creep, client demands, and the accuracy of your initial project scoping.
- Client profitability: Not all clients are created equal. By calculating profit margins for each client, you can identify those who are most beneficial to your agency’s financial health and potentially renegotiate terms with less profitable clients.
- Real-time and predictive analytics: Utilise real-time data to monitor ongoing projects and make adjustments on the fly. Predictive analytics can also forecast future profitability based on current trends, helping you make proactive decisions.
Conducting this level of analysis is a significant undertaking, requiring the right tools and expertise to interpret the data effectively. However, the insights gained can be transformative, revealing opportunities for cost-saving, efficiency improvements, and targeted growth.
If this sounds like a daunting task, you’re not alone. Many agencies struggle to find the time and expertise to carry out such detailed analysis, which is where we come in. At Wow, we specialise in helping agencies like yours dig deep into their numbers to uncover actionable insights and unlock hidden profits. Talk to us if you'd like support building a more profitable agency.
By focusing on these key levers and making profitability a priority, you can ensure your agency not only survives but thrives in the years to come.
