Creative agency profit margins 9.9%
According to Sarah Golding, Institute of Practitioners in Advertising’s Chairman at a 2017 Business Growth conference in London, the average profit margin for the top 50 creative agencies in the UK is 9.9%.
Yes you read that correctly.
And that’s the lowest it’s been since 2003.
What you can do about your agency’s lack of profit?
If you’re in charge of a creative agency and that didn’t come as a surprise to you then maybe now would be a good time to review where your agency is spending and earning money with a focus on profit.
Three things a creative agency needs to survive
A creative agency survives because of three things; getting, keeping and growing client accounts.
Keeping and growing is infinitely cheaper but agencies tend to focus much of their time and budget on getting new clients in the door; hiring a dedicated new business person, networking, self-promotion and probably the most time-sucking of all new biz activities, pitching.
And how we love pitching!
Qualify the pitch offer before you accept
Most pitches go like this.
You take your entire senior management team out of the day to day business for a week and dedicate them to a new business ‘opportunity’ where you stand a one in four chance of winning.
Sadly, often you grab the chance to pitch for the new shiny client business without asking qualifying questions.
(If you don’t currently have a list of qualifying questions, grab your template here).
Is it time to take a closer look at the impact pitching is having?
And how frequently does your agency pitch?
Are you lucky enough to be invited frequently but often find you ‘come second’ more often than you’d like?
If so maybe it’s time to work out what impact pitching is having on your bottom line and how you position your agency to clients and maximise the value you add?
Is it time to grow accounts rather than pitch?
Maybe it’s better to direct some of your time getting your account managers up to speed on how they grow their accounts and how they add the most value to their clients?
Show them a step by step model to follow so the agency systemises the whole process and makes the process more predictable.
(If you’d like a free 5 step growth model, download it here).
Industry thought leaders help agencies with profitability
Thankfully advertising industry thought leaders such as Tim Williams from Ignition Consulting Group are helping agencies address the lack of profit by changing the way agencies position the value they bring to their clients and getting them to re-think their pricing.
Tim Williams addresses agency leaders on agency value
In his speech to the IPA’s Business Growth Conference, Williams said “Not understanding our value and how we create value is the cornerstone of our profit challenges”.
If you didn’t attend, you can catch the highlights here.
He invited audience members, mostly agency leaders, to consider whether they ‘cost’ or ‘price’ their services.
He pointed out that unlike most other industries creative agencies have a costing strategy rather than a pricing strategy.
What’s the difference between a pricing and costing strategy?
What’s the difference?
A pricing strategy starts by looking at the value to the customer before considering the cost of the product/service.
A costing strategy starts with the cost to produce the product/service and then considers pricing it for the customer.
How to generate a pricing strategy
He goes on to suggest ways to effectively developing and implement a pricing strategy in the agency with the help of a pricing panel – members of the agency team from all areas of the business bound by a common goal to price services more strategically.
Besides, clients will invest if the agency is bringing them true value.
Some agencies focus on ‘upstream’ work (greater value work such as concepts and strategy) and others focus on delivering mostly ‘downstream’ work (repeatable, low value tasks).
Pricing is a strategic judgement and not a tactical calculation.
Agencies need to take a serious look at how they manage existing client accounts
But even Tim’s great work with agencies on pricing strategies won’t completely plug the profit hole.
And that’s why agencies need to take a serious look at how they are managing their existing client business and systematically seek up sell and cross sell opportunities.
Take action to address lack of profitability now
Creative agency account managers don’t usually have a lot of sales training and are very much left to their own devices.
If you’re in any doubt that’s the case, check out the comments and shares from my post on Linked-in.
The article caused much discussion and I was quite overwhelmed at the account managers who wrote to me telling me how the piece had resonated with them.
Take action to improve your profitability
So if 9.9% isn’t your idea of a healthy profit margin for your agency, consider contacting Tim Williams to help you with a pricing strategy and transform how you position the value you bring to clients.
And download my 5 step client development model, a step by step approach for your account managers to follow to grow existing business.
How profitable is your agency and what are you doing to increase it?