I regularly hear agency principals boast of two things. It seems cruel to burst their bubble, so I don’t say anything in the moment, typically. But I’ve now heard these two things said so many times that it’s probably worth a quick discussion. The first one goes like this:
“We’ve built our agency entirely on referrals. We’ve concentrated on doing good work and our reputation has just spread over the years and we can hardly keep up with the opportunities that come our way organically.”
I do understand the sentiment, which seems to be a combination of these things:
There’s more going on behind the scenes, though, and I’ll offer an alternative interpretation of a firm that relies largely on referrals:
Most aspects of your business will run better without you. Your people will thrive when you aren’t lowering prices all the time or blowing up creative two hours before a presentation.
But over the long term, it will be a disaster if you step away. The effects will be insidious and nearly unmeasurable, but here’s what will happen if you don’t show up over long periods of time:
Time to talk about clients. Not specific ones, though, but rather what an ideal client base looks like for a smallish, privately-held firm in the marketing field. I doubt that this would apply outside this field, so use with caution if you are a different type of firm.
Start by listing all your clients in a spreadsheet, from largest to smallest in descending order, like the illustration above. One very important note: if you have the data, list just the fee income from these clients. That’s what’s left after pulling out all the external cost of goods sold like media, printing, and contractors. Don’t pull out internal salaries as those are never properly categorized that way.
I’ve numbered the graphic to direct your eyes to what you might look for.
First, note the relative size of your largest client. If you are working for multiple departments or divisions of the same larger entity, they should be listed as a single source of work. For more on dealing with a client concentration issue, see the position paper here on "Qualifying Clients" (it's free).
You want that largest client to represent 15–25% of your total fee billings. Larger than that and most of the clients that follow will be too small to generate profit and to let you get deeply enough into their situation to move the needle on their behalf. Larger than that and your firm could also suffer harm when that much business is lost as the client moves on. But the larger the better as you nudge up against 25%.
Second, see how many clients....
Our recent analysis of ca. 300 firms found that around 98% of them weren’t getting paid fairly for their work. It comes from some degree of underpricing, defined as intentionally pricing a project at less than what an objective pricing would suggest, or over-servicing, which is intentionally over-delivering what you and the client agreed to.
Underpricing occurs before the project starts and it’s usually motivated by a fear of not getting the work, either because you don’t want people sitting around without enough to do or because you honestly believe that landing this project will open some opportunity for you (that’s a lie that’s easier to tell yourself).
Over-servicing occurs during the project itself and its motivations are more complex. A creative might land on something interesting to explore, and they might be excited enough to pursue it on their own time. Or the client might express some disappointment with your work as it unfolds and so you try to repair the relationship. Or the client begins flirting with a competitive alternative and you stretch to impress them. Or your positioning simply hasn’t created enough power in the relationship and you feel vulnerable. You might even care more about effectiveness than the client does!
Now here’s why underpricing is so dangerous. You follow a certain research method and creative process that cannot easily be compressed. You know this, too, because....
I’ve been wondering about this. Some of you are content to have a job, essentially, where you can be your own boss. That’s so critically important that you’ll take on more risk, make less money, and do many things that you don’t like (managing people?).
It doesn’t have to be that way, though. Nor does one overriding goal have to stomp the life out of the other goals that are important to you. However you express that hope for your business, I’d like to suggest that the hope is best comprised of a healthy balance between multiple things that are important to you. Here’s a stab at how you might phrase this in one single sentence, comprised of multiple themes:
Most entrepreneurial creative firms are busy these days, despite their (lack of) new business efforts. But most wish that they could upgrade their client base. They’ve come to believe, albeit sub-consciously, that it’s the work of new business to convert prospects to clients and the work of account service to turn those clients into great clients.
There is no such distinction. No amount of great account management will convert an average client into a good one, and that’s why new business goals have not been met unless the revenue stems from a price premium based your predictable effectiveness for those new clients.
New business is not about getting more clients–it’s about getting a certain kind of client who will pay a pricing premium and do it gladly. That’s why the new business problem is most applicable to firms who are already busy with average work rather than starving for any work at all.
Your positioning, your lead generation, and your sales expertise deliver on that promise of a pricing premium, and here’s a component checklist that you can run through as a firm at that dreaded next meeting of the new business team.
I’ve been doing some research on the common traits of successful entrepreneurs, trying to understand my clients better so that I can help them build stronger businesses. Here are a few things that you might find interesting–particularly the last item. What’s it like to be in your shoes? How do you understand your world? What would I see following you around for a day? Successful people like you:
Risk-taking is a crazy thing, right? I think you should make a lot of money, but I hate debt. I advocate ruthless positioning, but I don’t think you should grow too fast. I think you should never compromise on culture, but I think you should make some risky hires.
We all have a different tolerance for risk, too. Some of you move from one gorilla client to the next, and others can’t stomach any single client that represents more than ten percent of your business. On the other hand....
I'm struck sometimes by how separate agencies describe the same client so differently. In other words, I'll talk with one agency about their client and they describe them as respectful, appreciative of good work, and fair in their compensation structure. I'll work with another agency who also works for that same client and their experience is very different. From their perspective, the shared client beats them up on pricing, insists on a special process for nearly everything, and is generally difficult to work with.
Let's look at why that might be.
First, the same client sees these two agencies very differently even though they do similar work. Clients believe....
On the face of it, that headline is not a very controversial statement, but if you think about your client base for a minute, chances are good that most of them are using a smaller subset of the services that you provide. Like most of business, things start simple enough and then grow more complex as you position your firm to take advantage of any opportunity that could possibly surface.
I picture some of you with the biggest boat you can afford, patrolling the harbor with the biggest net that’ll fit in the boat, trawling it for anything that wiggles! With that mindset you’re naturally going to allow a client to nibble a little in hopes that you can set the hook later. Agencies that live off that promise, though, keep adding things until eventually it looks like the menu from the Cheescake Factory! It was a one-pager in 1978 and now it has 250+ items on 21 pages. So we might want to avoid....
For the most part, agency principals love the challenge of running an entrepreneurial enterprise. The difficulties are real, but they wouldn’t have it any other way. The only common denominator is their aptitude for risk, and they are very good at leveraging that advantage. Otherwise they are different people who look for different things from their experience.
But their greatest fears–what keeps them up at night–are surprisingly similar. It took me years and hundreds of interviews to see the patterns. I could make a recommendation that was easily supported, only to find an invisible barrier that kept a principal from exercising what otherwise would be good judgment. I’ll list those fears that you’ll bump up against as you manage your own creative firm. Maybe you’ll see yourself in a few of these and then adjust your reactions accordingly. There are five....
Learn how to direct this process at an upcoming event in Nashville on September 23, but let’s look at the timing, first. Things are going well at your firm and for several years a key employee has demonstrated unusual leadership. They’ve taken over some of the roles that you’ve never been able to let go of in the past, and you’d hate to lose them. The team at large already respects their role and they’re functioning as if they owned the place (in a good way) already.
There are keys to help you know when and if you should move forward in making them a partner. You should consider moving forward when these four things are true...