Why is my digital agency not making money?

Does this sound familiar.  You’re sales pipeline is full, you’re busy doing the work but you never have any money left after all the costs are paid.  It’s a really frustrating position to be in and after speaking to lots of small agency owners and solo practitioners, I’ve discovered it’s really not uncommon.

The funny ( not funny ) thing is that this can go on for years.   It’s a little like having a business permanently on life support.  I blamed customers, the tax man, the economy, my team, you name it.  I tried to market my way out of it, to sell better and watch my cash flow better.

Tony Robbins puts it like this.  “If you keep doing what you’ve been doing – you’ll keep getting what you’ve been getting.”

Tinkering doesn’t fix a business.  It’s not your marketing, sales, the taxman or your cashflow.  It’s your business that’s the problem.

Most us radically underestimate the cost of being in business.  As a new business we assume that if we invoice 100,000 then we get to keep a little under that.  Well – try something like 50% as the reality and thats without subcontractor costs.  Work with that and you’ll be safe.

Strip Costs?

You can’t fix a business by stripping costs.  In most small agencies or practices there just aren’t enough costs to make a difference.  You should by all means regularly go through the finances and remove recurring payments for things you don’t need because they do pile up but this won’t make a huge difference.  Not the difference you need to start achieving your gaols instead of falling short.

I do think you should learn to budget in a business the same as you should at home.  Thats just basic finance – and this isn’t a finance post.  If you knew me you’d know that.  This is a post about moving the needle towards the business of your dreams.  Fiddling with costs won’t do that.

Revenue types

Digital marketing practices fall into two main categories.  Those that produce a lot of collateral like websites, and those that mainly work on services such as social or PPC. They both use slightly different revenue models.

Revenue types in agencies fall into these broad categories.

1 – Small ad hoc charges

Small ad hoc charges are typically for quick tasks which need to be done.  These might include graphic design, a website update or some simple consulting.

2 – Project revenue

Project revenue can cover a new website, video or a larger consulting project.

3 – Small retainers

These can include website maintenance contracts, small SEO contracts or help desk type work.

4 – Large retainers

This normally covers a large managed services arrangements such as broad digital marketing delivery.

5 – Product sales

Product sales could be software, internal SASS products, knowledge products, membership sites, coaching products and so forth.  The key characteristic here is that you build it once and sell multiple times.

Charge more

You’ll have heard this a million times – you need to charge more.  It’s said so often in the creative sector that you probably stopped hearing it.  Urgency and getting paid often overshadow our need to charge more.  We charge what we feel will get us the  work rather than what the work is worth.

Overwhelmed by the urgency of poor cash flow a lot of agencies will compromise on building a diverse revenue model using all the components above and just fall into small project and small ad hoc work.  If they are lucky they might build in a few retainers.  It just happens over time and we get locked into a cycle.

Putting it together

If you want to move the dial in your business then you need to aggressively work on building in all five of the revenue types above. To achieve this you need to make it a priority.  You might need to find some new services and start saying no your addiction to small projects and ad-hoc work.

Use the time you free up to find those retainer based clients.  If you want bigger retainer clients then you need to design a service they want.  If you don’t have the team to deliver at that level – then you might need to change that.

Good fit

In order to prevent just taking on anything – but for more money – you’ll need to decide on what a ‘good fit’ looks like.  Things to consider are the client’s attitude ( do you even like them. ), Do they really need it? ( If you don’t think so then it will be hard to deliver ) and can they sustain the budget over time.

In order to deliver for these retainer clients and not lose them as soon as you have them you need to package the services your offering in such a way that they have firm boundaries and service levels attached and that you can meet these service levels.

Most small agencies fail to make money. In fact most big agencies have the same problem.  They cover costs but rarely do more than this.  If you spend some time and effort into diversifying your revenue model you can profoundly change your business.

Once you’ve redesigned your business around a diverse and sustainable revenue model you’re business will start making more money as you grow – instead of just giving you bigger problems.

I’ll remind you again – you CAN’T sell your way out of this problem until you have the products and the revenue models right.

Good hunting.

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