Making your business more profitable
As budgets get tighter and competition becomes more intense, profitability is a challenge for almost all agencies and service businesses. And with the Top 50 agencies in the marketing and communications sector only producing an average profit margin of 9.5% - with only eight of them exceeding 20% - things seem tough both for established businesses and for those that aspire to grow to the top level.
Many businesses have resigned themselves to a lower level of profitability, but it’s dangerous to be content with this position. Businesses with low profitability today can easily become businesses that don’t exist tomorrow. So, as the pressure increases to stay relevant, compete, deliver for clients and retain talent – what can be done to give yourselves that extra edge in delivering the profitability you desire?
Profitability is a complicated subject, both to understand and to deliver, but here we’ve set out a few ideas that we hope will help you to improve your own results.
THE RIGHT MINDSET
If you do good work for good clients, isn’t it reasonable to expect to be profitable? Most people would agree with that. Some would actually make profitability their driving focus, while others accept the idea in principle but don’t really act to deliver it. You’ll need to decide what attitude to take on profitability – what you feel about it, how important it is to you and whether you are prepared to do everything to achieve the level you desire.
It’s down to the business leaders to decide and agree the profit objectives – then truly commit to it everyday. Always aim higher than the outcome you need, knowing that while 9.5% may be the average margin, good performance is at least 20% and very good can be well above 25%. And you’ll need to imbue the same attitude and determination across your team. Help everyone to understand that good profitability is the result of doing many different things well, that it is a just reward for good work rather than something that is in conflict with great creativity. And that it is an essential element to fuel growth and reward everyone properly.
A STRATEGY FOR REVENUE
With any discussion about profitability most people think firstly about cost savings. And in relation to revenue it tends to just be a question of ‘how do we get more?’. But every day you make important profitability decisions with the opportunities you decide to pursue and the projects you take on and commit time to.
To maximise the value your team can generate you’re best to focus mainly on the type of clients you work well with, where you understand their industry and where they can pay the fee rates you need. And similarly, to provide services where you have real expertise, a depth of experience and are confident about efficiency. With a clear understanding of the best type of clients and work for your business you’ll be much more effective and waste less time being distracted by random opportunities or chasing lost causes.
Then if you can also get your approach to pricing right, you’ll be on a winning streak. Pricing has become a hot topic recently with many speakers and new books – but the principles are really pretty straightforward. In our advisory work we help our clients to understanding the difference between costing and pricing, to interpret the client’s view of value, to find the win/win ground and to negotiate with the strong mindset we’ve already discussed above.
With proper analysis and thinking – and greater confidence and determination – you’ll see a significant improvement in profitability even before starting to look at your costs.
MANAGE COSTS FOR PROFITABILITY
While revenue is variable across the year, costs are usually more fixed and more sticky. So, they need careful consideration. Good, rigorous planning is vital but, in our experience, it rarely gets the commitment, challenge and time required to do the job properly.
It’s a very common failing for managers to spend their planning time just focusing on the additional people and expenditure that will be required to support the revenue increase planned for the year ahead. This then makes the business highly dependent on unpredictable growth, it narrows the chance of success and can place the business at risk of failure.
Good planning will test the on-going relevance of the business model, challenge the structure and ways of working, staffing and other expenditure. The objective is to create a cost base geared to the lower estimates of revenue, enabling the business to be profitable in most months of the year.
The smart managers will be very aware of industry benchmarks for all cost categories, staff type budgets and measures such as income per head – not as constraints, but as inspiration to explore how their business could beat the norm.
When the plans are up and running, the inbuilt flexibility will give you more chance of success. But you’ll still need to be clever in controlling costs and avoiding unexpected expenditure. Retaining your best talent and avoiding expensive recruitment will be vital – but while you all know that, the question is whether you’ve been proactive enough and imaginative enough to put the right things in place at the right time.
BE GOOD, BE BOLD
You’ll need to find the time to spend on some business basics. But not the advanced, theoretical stuff - the practical straightforward things that you really can do alongside your client work and business development. Make sure you always keep things simple. Understand your target clients and your people and that profit responsibilities should be shared across your team. Then press on with your well-planned activities, tracking progress and making quick decisions when things aren’t as you’d hoped.
Though it’s no mean feat, it is possible to increase profitability considerably, and by more than many would expect. No matter how tough the market gets, you should never put your head in the sand and accept declining profitability, nor should you continue doing the same old things expecting different results. Instead, be brave, address the issues head-on and commit to the changes you need.
And remember, when your profits increase, make sure there's something in it for everyone. Try to ensure that your team are invested in the continued profitability of the company. Build a winning mentality by engaging everyone in the process and embedding profitability principles into the fabric of your company.