PR Agency Profitability Wisdom From the Pros
I have written many columns on what it takes to make a profit by providing public relations services. However, many of PR firm advisors are on the same bandwagon. This month I will codify some of the best thinking on the subject from advisors.
Art Stevens, a Partner at StevensGouldPincus, wrote a blog for PRSA last month titled “Principles for Profit.” The first thing an agency should do according to Art is to become familiar with the SGP annual benchmarking survey. I agree with his advice. The survey polls about 150 agencies each year. Its principal goal is to evaluate annual agency profitability. The survey compares overhead costs as a percentage of gross revenue. The prevailing profitability ratio for PR agencies according to Art is 20%. This means you need to configure all your costs, including salaries, so that they are 80 percent of revenue.
In order to make your agency profitable, Art suggests the following: Do not overstaff, do not over service clients, and develop metrics to determine the profitability of each account and the billability of your account team.
Al Croft, was the publisher of Management Strategies. The wealth of information he imparted on the agency business is beyond belief. In 2001, he wrote about tracking client profitability. In my humble opinion, many PR agencies do not have a clue if their clients are profitable. First step in tracking client profitability is to purchase software that will do this.
Most software systems that track client profitability consider two major factors: (1) The salaries/benefit cost-to-income- ratio for each client. (How many hours at what salary/benefits cost level were invested in each client?); and (2) a standard percentage of your firm overhead applied to each client. (Overhead percentage is determined by dividing total overhead costs — including non-billable salary costs by total annual salary direct salary costs.)
Depending on client needs, you can control individual client profitability by adjusting salaries/benefit cost-to-income ratio. The lower the salary-to-income ratio percentage, the higher your profits will be. According to Al, you earn the most profit when the most highly competent, least costly professionals do most of the work. I agree! Ratios below 30-33 percent usually will ensure good profitability.
To summarize Al’s advice over the years, in order to manage your business most profitably, you minimally need these five pieces of information:
- Cash Flow;
- Individual staff productivity;
- Overall agency profitability;
- Individual client profitability; and
- Overall agency operating profit.
A Bit or Two From Me
Should you lower prices to attract more revenue? After many years in recession, the U.S. economy continues to plod along, leaving thousands of business owners in a quandary as to how to continue running their business profitably. They face a delicate balancing act: Should they implement higher prices for their product or services in order to become more (or stay) profitable? Or should they stand behind their clientele and keep prices as low as possible?
It is a difficult choice indeed. If you are in this situation you understand how just one wrong move could eventually make you regret your decision. Here is what you need to consider to make the right decision.
Develop a Strategy
When developing a pricing strategy, consider a number of distinct situational factors such as:
- Costs. Factor in your fixed costs such as rent, utilities and salaries, plus variable costs such as freelance.
- Economics. Research what the market will bear relative to supply and demand, price elasticity and other conditions, such as economic expansion or recession.
- Customers/clients. Know what your customers expect when it comes to capabilities and features. For example, do they value quality service. How do they define quality service? You can easily ask them this: What will you need to see six months from now to know that you made the right decision to hire us? You are really asking what their expectations of a quality service relationship are.
- Uniqueness. Do you fully understand how your service addresses your customers’ expectations and values? If you don’t, you are likely not meeting their needs, which in turn means it might be easy for them to align with another agency.
- Competitors. Research your competition by understanding the services they offer. Also look at their strengths and weaknesses, pricing strategies, discounts and special incentives. This can help you better understand how your company stacks up with similar agencies. An intangible factor in the decision-making process is customer (yes your clients are your customers so I use this instead of client) perception. As an example, a customer may perceive an underpriced service as lower quality — even if it is not —and sign on with another agency.
Pricing is Key
While pricing strategies depend on your situation, you essentially have two choices: raise or drop price. Although dropping prices in a lackluster economy may make sense in order to keep customers, more often it is best to maintain current pricing or even price your service a bit higher than your competition, as this conveys higher quality and allows negotiating room without jeopardizing profits. Relying on low prices to differentiate your service is risky. This strategy may escalate to a price war where, eventually, your larger gun competitors will be the only ones firing. Large agencies with greater resources and operating efficiencies can quickly take out smaller ones.
Finally, you may need to hike prices to remain profitable when, for example, the salary scale for talent rises. In such cases, a graduated price increase is less noticeable and more palatable for customers.
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