Profitability Growth
How’s Your Profitability Growth?
Profitability Growth is a constant challenge for all agencies especially given ongoing price competition. All agencies struggle with how best to preserve their margins.
Why? Because of the constant tendency to exceed estimated budget hours.
Why? Because aligning expectations between the agency and the client is difficult. Most clients aren’t sure what they want. This makes project scoping almost impossible and the task of time tracking and billing a bear.
Revenue growth is nice, BUT what really matters in Net Income. That’s the real key to profitability growth. With a cost-based model you limit your potential – there are only so many hours available and resource planning becomes tricky.
The two models in practice today are project-based (which puts incentive on efficiency) and time & materials (which puts incentive on inefficiency).
Does it make any sense to you that the more efficient you are the less money you make? Unfortunately the paradigm is the problem – Value vs. Cost. The current models are based on hours sold not the real Value your team is providing – a production mentality. And production is not a vision-based spirit.
What do you do now? Walk around and ask for estimated hours or anticipated costs? Is this really pricing? What should be happening is monitoring outcomes and delivering value!
What is really unfortunate is that there has been the evolution of procurement offices who try to buy services for as low as possible or commoditize strategy and creative.
The most viable model for pricing (and profitability growth) should be ROI or RESULTS not hours – BUT how many agencies are willing to adapt to a performance marketing model? If you really want to be considered a Partner not a Vendor, then you need to align your incentives and share risks/rewards with your client.
Needless to say, a value based approach requires a certain kind of client or target account. It requires you are able to identify key indicators and you track outcomes not hours. Your pricing model and subsequently you profitability is enhanced.
