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Let’s face it – the business world can be a real jungle and while it’s full of excitement and adventure, you can also run into dangerous pitfalls…and the odd snake.
The services that agencies are expected to deliver are expanding, yet their project margins are shrinking. Many brands have brought work in-house, making long-term relationships a thing of the past, and to top all this off, many agencies are struggling to attract and keep talent.
In today’s competitive market, every single dollar you make must count, which is why profitability has to be one of your top priorities. If you can focus some of your agency’s energy on increasing profitability then you’ll improve relationships with your clients and run a more stable company.
So who better to navigate this perilous landscape than a profitability hero who can swing a business from vine to vine without falling into the red? Don’t worry, you won’t have to swap your shirt for a loincloth (unless you want to – see HR for confirmation) but you can emerge as a chest-beating, hollering Tarzan of productivity, provided you follow a few simple rules.
Here are some tips to help you take your agency’s profits from zero to hero.
Net Income Versus Gross Income: Are You Being Misled?
Net income and gross income – can you see the forest for the trees? You’re probably thinking that you pay accountants to do this stuff for you, so why do you need to know the difference, right? Well, simply put, understanding your gross profit margin can help you to understand and measure how efficiently your agency is functioning. In other words, it’s how you track your profitability.
Gross profits show you how much money is available to you after taking your revenue and subtracting how much it costs your company to produce its services. Net profits show what cash you have left over from your gross profits after you subtract your expenses.
If you want to know how profitable your agency is and work to improve this margin, your net profit can help lead you in the right direction. You can increase your net profit margin (and profitability) by reducing costs and increasing revenue. When you calculate your net profits, a fuller picture of your agency’s profitability is revealed – letting you know what you need to do to work toward your goals.
Remember, increasing your revenue doesn’t always mean you’re increasing your profitability at the same time. The net profit number helps to reveal what percentage of each dollar your company is making as pure profit, so don’t get thrown off-track by looking at your gross income and thinking that things are A-OK.
Leader Of The Pack Or Lone Wolf – What Kind Of Business Do You Want To Be?
If you want to increase your agency’s profitability, you need the right pricing strategy.
There are several models you can use for pricing to increase your profitability. You can be a large agency that charges low prices, making your money through sheer volume, or you can be a smaller agency that charges higher prices, valuing quality over quantity. Or you could fall somewhere in between the two – the choice is up to you.
To get your pricing strategy right, you must think about the type of clients you want to attract. Ask yourself:
What is your customer’s underlying need and are they willing to pay for it?
What do the different market segments have in common? What differences do they have that will impact their willingness to pay?
How do different price points impact your bottom line?
Knowing your target customer is just one piece of the profitability pie. You also have to think about your own agency. Take a look at your cost-volume profit. It can help you to calculate how much work you need to do to compensate for a lower price and vice versa.
A deep dive into cost-volume can help you to understand that big projections don’t mean a lot if you can’t deliver. So, don’t get distracted. Instead, focus on the money you’re actually bringing in at the end of the day so you can pay your bills and increase your profits.
Remember, an effective pricing strategy is an area of business where seemingly small changes can really set your agency apart from the competition. Your pricing is your road map to results, setting your agency on the path toward providing a better experience for both your customers and employees.
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Be A Good Employer
It’s nice feeling like a top-tier predator in the business world; however, get too greedy with your profits and the whole ecosystem will collapse. It can be tempting to increase profits by cutting corners with regards to your employees, but that’s not a great long-term strategy. If you focus too much on profit and leave your people out of the equation, you won’t deliver a quality product. Remember, the best investment you’ll make in your agency is the people you hire.
Seek out talent and keep them with you by paying them a fair wage. High turnover rates will only cost you money. It’s also important to optimize your utilization rate, which is the amount of time spent on billable work. The best way to optimize your utilization rate? Track your employees’ time.
Tracking the time of your employees can help to weed out those who aren’t contributing as much as they could to the team – it’s those employees who are eating into your profits, not your staff as a whole.
Productive can help you with tools to track the time of your employees more effectively – even those who aren’t great at always keeping track of their own time on projects. This is important information you need in order to help you calculate your profitability and ensure that employees are being as effective as possible.
Are You Ready?
Do you want your agency to be the king of the business jungle? Yes? Thought so. Then you need a strategy to help make your agency more profitable. If you can find that sweet spot between profitability, pricing, and paying your employees well enough to attract and keep top talent then you’re on the road to profitability victory.