Category: Profit

I attended a conference on Monday where an agency owner presented on how they had completed a profit analysis by service line. They discovered that the digital marketing service they offered had been creating a loss and eating the profit of the web development service they offered.

This amused me because I’ve often looked across the fence at digital marketing agencies and thought, “that’s a better business model.”

And I still believe it’s a better model than project based web development work, despite what the presenter found.

“I know these huge agencies that scrape buy with a 6 or 7 percent margin. My friend has 160 contractors on his team and has designed his business so that his margin is well over the normal range,” Kent told me.

Kent’s a former agency owner that I met with for drinks last night. We talked about a lot of things, but one of the topics we dove into was the ideal agency business model. His perspective was to reverse engineer backwards from the margin you’re looking to achieve (“begin with the end in mind”- see yesterday’s blog.)

“Do you even know where you’re going,” my cousin’s kid, Alejandro, asked me from his car seat in the back.

“More or less,” I told him.

We came to a stop sign and I searched the flat swathes of farmland beneath the dark clouds of spring storms. In the distance, I spotted a cluster of indigo grain silos. “That’s it,” I pointed. “That’s your mom’s cousin’s business.”

As we approached, I could see that my cousin Andy had expanded beyond when I had last seen it. Along with the grain silos, there was a large shop, and several metal conveyor belts and towers. The periphery was filled with a variety of steel shipping containers.

Several years ago, I was trying to gain a deeper understanding of the business model I run. In support of this, I began to network with other agency owners. One of the things that surprised me was how much other agencies charged. I came across several agency owners that billed hundreds of thousands of dollars for the same kinds of projects I had billed thousands of dollars for.

This leap in pricing fascinated me.

“How do you do bill for those kinds of amounts?” I wondered.

In the reality TV show, The Profit, entrepreneur Marcus Lemonis turns around small businesses in exchange for equity. It’s entrepreneur porn, where situations are dramatized, rough edges are obscured, and complex choices simplified. With that caveat, it’s still fun and useful to watch another entrepreneur make choices in 40 minute case studies.

One of Lemonis’s go-to tasks is to seek out, “the numbers.” As in, revenue, profit, and expenses for the business. Then he drills down looking for opportunity in products that are highly profitable or expenses that don’t provide much value to the business.

Imagine that you were an investor in your business.   You agreed to invest with the caveat that you wanted to dictate where your cash went.

What would you need to know to make that investment productive?

A key data point that you’d probably want to know is what produced and what cost.

There’s an 80/20 analysis you can do where you reduce your business to line items and estimate the contribution to production.  It’s 80/20 because you’re looking for spikes in productivity and spikes in losses.

There is a consultant in the agency industry, Blair Enns, that trains agencies to sell high-priced projects. An idea Blair promotes is to have your team stop tracking their time.

Blair believes that an agency should innovate in creating value for their clients. They should be discovering solutions to difficult, valuable, problems. That sort of thinking doesn’t work well when you’re watching the clock.

Innovation is massively wasteful. But when you’re highly profitable, you have room to be wasteful.

That assumes that you can still convert enough of your demand while charging a premium.

“They charge too much and it’s making it hard for them to grow,” my friend told me.

We were discussing a small creative agency we both know as we sipped scotch on the bank of the Lewis River in southwest Washington. We were backpacking and had just finished a long hike through the summer heat.

My friend gave me some example projects that the creative agency had sold in the $30 – 60,000 range and related it to the feast and famine cycle that many agencies experience. He theorized that the team kept growing and shrinking because the creative agency couldn’t maintain demand at the current pricing.

Pricing is a lever you can pull to power growth.