Good client profitability determines your agency’s ultimate fate.
Essentially, it shows you the monetary worth of working with your long-term clients. This, in turn, bumps up your motivation levels by showing you how much doing the client work and maintaining healthy work relationships with them is paying off.
In short, it’s not an overstatement to say that your client profitability determines your business’s success.
But the question remains: how can you determine your client profitability the right way?
To help you understand what metrics to analyze as you estimate your client profitability, we talked to businesses who have been in your shoes. So, in this guide, we’ll only share expertise from companies who identified themselves as development or marketing agencies and stated they are very satisfied with their average client (or project) profitability.
Let’s dive in.
Most Important Metrics for Calculating Client Profitability
We asked our respondents what metrics they consider most important to track in order to calculate client profitability.
Some of the key metrics mentioned were:
- Pass-through expenses
- Labor costs
- Average billable rate
- Net Profit
- Gross Margin
52.38% agree to calculate Pass-through Expenses and Adjusted Gross Income (AGI). Pass-through expenses are mostly operating expenses such as hiring freelancers and paying for stock images, for example. When you subtract these expenses from your revenue, you’ll get your AGI or the project revenue that you’ve earned.
95% also factor in labor costs that go into projects and clients – only 5% say they don’t. These are expenses you bear for getting the project done. One way to do this is to log the time each employee takes to get a specific client’s work done.
What’s more, 57.14% calculate the average billable rate (ABR) on projects and clients and 85.71% agree to calculate Net Profit on projects and clients. Finally, all of our respondents agree to evaluate Gross Margin on projects and clients. This is the total income not excluding labor costs, tax, and other costs.
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5 Ways to Maximize Client Profitability
Now that you know what to pay attention to when calculating client profitability, let’s walk you through how to maximize it:
- Study your competitors and service mix
- Improve the five steps that go into an agency’s profitability
- Focus on your profit margin
- Track the time that goes into the project
- Always review your resource allocation
Related: How to Maximize Profit and Manage Revenue Streams: 8 Strategies for Agencies
1. Study your competitors and service mix
As much as you’d like, there’s no cookie-cutter formula that you can copy to grow your profitability.
Matt Weber from Weber & Co. notes the reason why: “Every agency is different because they have different mixes of services.”
Meaning: “there are dozens of possible combinations for handling revenue vs. expense benchmarks.”
The key, however, is to never make up our own client profitability formula. Doing so means “you’re likely to be disappointed with the results,” warns Weber.
So what helps? Two things:
Evaluate your competition
This is crucial so you can get an idea of what your ideal clients are willing to pay to the best service providers and what others are charging. This, in turn, helps ensure you aren’t under- or over-charging and practically calculating your client profitability.
But it’s important you don’t compare yourself with just about any agency out there. Instead, “Benchmark your agency against those that are similar, and compare yours to theirs.”
Determine your service mix’s net revenue
It’s critical you don’t simply add up your net revenue. Instead, look at each service individually.
Keep in mind: “Net revenue is the amount of money your agency earns after taking out costs associated with the services you provide. It’s usually expressed per project or month, but it can also be shown as an annual total,” explains Weber.
“If your company provides multiple types of services, net revenue can mean different things for each type.
For example, if you offer web design and Internet marketing services, your clients will want results from both so one number for each service isn’t meaningful. Instead, look at how much profit you make on each service before taxes are taken into account to get a realistic picture of working capital needs and profitability targets before the end of year one with quantifiable goals.”
Besides, looking at each service individually, you can also track each client’s work.
At InsureFresno.com, for example, Melanie Musson shares: “We track each individual client and project. Through experience, we’ve learned how different KPIs affect overall profitability, so even if a KPI doesn’t have a direct correlation to profitability, we understand the secondary correlation and its value. By tracking each client and project, we remain intimately up-to-date with progress and successes.”
2. Improve the five essential steps that go into an agency’s profitability
“An agency’s profitability is based on 5 points: “Client acquisition, client advocacy, client retention, project profitability, and how well an agency understands its margins,” points out Kevin Miller.
You need to pay attention to all five of these to improve your client profitability. Let’s look at them one by one:
- Acquisition. “Acquiring profitable clients through advertising campaigns or effective prospecting activities.” The best way to improve here is to create an easily scalable method to acquire clients.
- Advocacy. “Clients are looking for agencies with expertise in their industry who have delivered successful solutions before to have confidence in them again.” Translation: the better the word about your agency, the more your clients are likely going to trust you and stick with working with you. In fact, solid advocacy lets you charge for your experience and the value that expertise delivers to your clients.
- Retention. “Keeping clients for longer periods of time impacts annual revenue due to high brand switching costs or businesses that are not yet self-sufficient enough to do it alone because they lack the knowledge or capability at this stage.” Remember, you can’t gloss over this step as retaining clients is more cost-effective than acquiring new ones.
- Project profitability. “Projects are profitable when our estimate accurately reflects the maximum possible expenses associated with any given work package.” To make sure you’re accurately estimating the work that goes into different projects, start documenting the work that goes into them. It’s also a helpful idea to use a timer to estimate how much time goes into particular projects.
- Margin. “The cost of working at an agency is different from the price it can sell for. Discounts are given on either side depending on how likely a prospect is to become a client, their budget, competitor prices, and many other considerations that need to be studied before suggesting an appropriate fee structure.” Now to measure your client profitability, Miller suggests you “understand your current margin mix across clients and projects in order to determine if you’re meeting revenue targets while still completing work at an acceptable price.” This will help you “identify opportunities for improvement or areas of strength. For example, identifying which types of clients or projects result in higher margins will help firms focus more attention on those specific areas instead of doing more work for less money.”
Summarizing, Miller shares, “Knowing how profit is determined and what can be done to improve it will allow your agency to grow and scale with the right strategies.”
3. Focus on your profit margin
Like Miller, More Local Clients LLC.’s Allen Vaysberg, also suggests you look at your margin.
To begin with, Vaysberg agrees, “An agency business is still just a business where all regular aspects of running it applies. You have costs (acquisition, people, technology, office), and then you have your monthly retainer fees that are being charged to the client.”
“The difference between the two, however, is the margin,” observes Vaysberg. “Your job then is to be aware of your:
- What their clients are willing to pay
There are additional variables that need to be considered too such as:
- How comfortable the end client is with digital marketing concepts
- How much hand holding needs to get done (because that adds to your hours thus costs)
- What % of their marketing budget is being spent with you, etc.”
Explainerd’s Natasha Rei also commends knowing your margin. “This is the basic step to determine your profit.”
Rei lays out the steps that take:
- “Determine the profit margin on the product. Let’s say an app has a profit margin of 15%. The next step is to find out how many apps are sold.
- If your agency sells more than one app with a profit of 15%, you will want to create new methods for promotional advertising or alternative ways to promote the sale of this product(s).
- If your agency doesn’t sell any apps with a profit margin of 15% or higher, it would be best to reduce expenses, including employees, equipment, and office space.
- Assign ownership on each project based on how much work it takes and adjust rates accordingly.”
In a nutshell, to ensure you’re hitting ideal client profit goals, you need to make sure you don’t offer discounts or a price without first estimating the value of that pricing to your agency.
As Vaysberg puts it, “no project should be agreed to and no new client on-boarded unless the agency deems it worthy.” And, remember, “the exact margins that the agencies go for varies but most agencies don’t want to do anything with less than 50% margin.”
Related: Client Onboarding Process: How to Successfully Onboard a New Client
4. Track the time that goes into the project
Having a time estimate of how long projects take is helpful for not only pricing clients but also budgeting time for different clients.
Related: Most Profitable Business Models for Agencies: According to 20 Agencies
To this end, James Thomas from Square Internet suggests you “track how many hours you and your team spend on each client project or retainer, then deduct the cost of those hours from what you charge the client.”
“For example, if you have a retainer for £600 per month for website support, and your developers’ time works out at £35 per hour, you know you can offer your client approximately 8 hours per month of your developers’ time.”
“However, you also need to take into account your own time and the time of anyone else who touches that account,” outlines Thomas. “So it might be you can only actually offer that client 6 hours development time per month, and 2 hours of project management.”
This way, your steps should be to “first work out the hourly rate of everyone in your team, then go from there. Once you know what everyone’s time costs on an hourly basis, it’s just a case of making sure you measure how their time is spent properly.”
“This exercise will also help you a much more profitable agency in the long run, as you can see where time is being wasted or where processes could be implemented to make accounts or more profitable,” adds Thomas.
Sasha Matviienko from Growth360 applauds the hourly rates way too. “We approach pricing from the perspective of strict hourly rates. This way we are able to calculate our margins in a given hour,” Matviienko explains.
“We also watch for the number of hours that we bill compared to the hours that we actually spend. It’s a fairly simple and transparent model. You bill clients for the honest number of hours and you make an honest profit margin.”
5. Always review your resource allocation
And, finally, to make sure your client profitability is good, make sure you look at the amount that’s going out as part of resource allocation to do the client work.
Jordan Brannon from Coalition Technologies shares they use this approach at their agency. “We determine whether or not our clients and projects are truly profitable for us by determining our resource allocation (as used to staff/outfit our projects) and how the costs associated correlate with revenue as allocated to us by our clients.”
“We are flexible in our approach in that we gear our strategies around what we feel will most make our client’s profitable in the short term so that we’re able to help them reach ‘break even’ on services (meaning they mark enough off the service line to in a sense pay for itself) and then profitability (meaning they make more than what they spend off the service line),” Brannon lays out.
Again, by documenting your processes and the time that goes into each project, you can better review the resources that go into getting client work done.
If you already haven’t laid out the work and resources involved in the services you provide, it’s time you get started without further delay. The reason? You don’t want to overspend on the services you provide and reduce your slice of the profit from the project/client.
Grow Your Client Profitability Today
Calculating and maximizing your client profitability is often a challenging, hair-pulling task if you don’t take the time to document your processes and work involved in different project types and/or services you provide.
One more thing that helps: tracking the profit that you’re making from your clients or ongoing projects using centralized dashboards. This gives you an overview of the money you’re earning, the money you’re spending on resource allocation, and other key pointers such as tax deductions from each project.
Fancy a head start? Use Databox to create your profitability dashboards showcasing your net profit, profit, income, and expenses by client/project, and other such valuable metrics.
All dashboards that you create in Databox – either for individual clients or for all your active projects – are automatically updated in real-time. This way, you or your teammates don’t have to worry about updating the profitability board.
Useful, isn’t it? Sign up for Databox for free now.