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Have you heard about the Pareto principle? It is also known as the 80/20 rule. This principle says that 80% of effects come from 20% of causes.
This is something we can apply to agency business as well.
Probably 80% of agency profits come from 20% of their clients. Do you know which ones are the most profitable for your agency? How do you identify your most profitable clients?
#1 Analyze your client data
The reason why you should determine who your most profitable clients are is that, often, 20% of your customer base makes up for 80% of your profit. It is important to understand this so that you know where your focus should lie.
Analyze your client database and find out where your profit is coming from. Finding out who the most profitable clients are is as equally important as is tracking your least profitable clients.
You may think that the most profitable clients are the ones who are paying the most money for your services. They may pay a lot, but it is possible that they consume the majority of your resources too. With big contracts comes even greater responsibility. Agencies usually assign their best people to work for the biggest clients in order to make a good impression and keep the money coming.
However, the best people usually come with the biggest salaries, and for every hour they work with the client, that cost needs to be taken into account. If the clients are extremely demanding, your team may spend too much time micromanaging the relationship. Instead, they could be working with clients who pay a bit less but bring the agency a way bigger margin, because they don’t require so much daily maintenance.
The point is, you don’t know any of this until you start measuring client profitability.
#2 Use tools that can help you predict the future revenue
Most agencies implement at least some kind of a tool to manage their projects. The problem is, they often do it to satisfy the needs of their clients while ignoring their own needs. Time tracking is the most common example.
Clients demand time sheets, which is fine, but capturing just the billable rate of every hour logged is not very useful if you are forgetting the cost every hour generates for your business.
People’s cost rates are not the only factor that affects agency profitability. For the most accurate profitability report, overhead costs have to be taken into account.
Calculating revenue is easy but figuring out profitability per client is not exactly child’s play. That’s why most time tracking tools are also accompanied by a bundle of cumbersome spreadsheets that nobody really wants to manage.
Let’s recap, to calculate profitability you need the following:
Employee cost rates
Tools like Productive help with that as they have the right mechanisms that can help you analyze profitability without ever touching a spreadsheet again.
#3 Change your focus
You will probably end up with three types of clients: profitable, average and non-profitable. With this insight you can easily align a strategy to focus on specific types of clients, to maximize profit. Look for common themes among your most profitable clients and focus on attracting similar ones.
Look at your least profitable clients. If a few of them are negatively impacting your revenue, you should consider to let them go or raise your prices to more profitable levels. Another solution is to reduce the cost of additional services like support. This may increase your profit without raising rates.
Shift your focus on your most profitable clients. Try to think if you can sell them some extra services. Look carefully what makes this group useful and try to apply what you learn to your other clients. Keeping track of your most profitable clients will help you prioritize strategic relationships.
After all, figuring out how profitable your clients are, can help you grow your business.