Agency KPIs: Client profitability
| In: Agency management
Tracking client profitability helps you identify who is really boosting your agency's profit margins... and who could be draining them.
It can be tempting to think that clients spending a lot of money with your agency are the most profitable. But if you're underquoting or overservicing, those who seem to spend a lot could actually be sucking profits out of each project.
What does client profitability tell you?
1. If your agency should take on a new client. Acquiring new clients costs money – think marketing, sales, pitches and procurement. If this is going to cost more than the value of the work you’ll receive, essentially you’ll be losing money. So assess all the time and costs for winning work to make sure any new opportunities are worth the effort.
2. If your agency should continue working with the existing clients. Identify ‘vampire clients’ – those who seem to spend a lot but actually suck profits out of each project. Analysing this data can often present some surprises: the clients you think are contributing to your profits are often the ones costing you money.
3. Which clients to focus your efforts on. As well as understanding who is contributing to your profits, understanding the value of your clients can help you prioritise services, time and attention accordingly. It helps you allocate your resources wisely, as well as identify any potential risks or opportunities to make informed decisions about investments and budgeting.
Key questions to ask yourself:
- What is your profit criteria for working with a client?
- Are you working with any clients that are actively costing you money?
- Are there any changes or improvements you could make to attract more profitable clients?
Top tip: Protect your profits from taking a big hit if a client ends a contract by ensuring you don’t derive more than 20% of gross profit from one client.
Example Client Profitability report from Synergist Management dashboard
How to calculate client profitability
To calculate client profitability, use the following formulas:
Client profit = Total revenue - Total cost
Client profit margin = Client profit / Total revenue * 100
To truly understand how much the work has cost you, you want to measure net profit rather than gross profit. (Gross profit = revenue - 3rd party purchase costs. Net profit = revenue - costs (time, purchases and expenses).
To calculate your time cost, you can use an individual's cost rate (‘resource level costing’) or use a rate by role ('blended cost'), such as designer, art director or account manager. Note, a cost rate shouldn’t be based on salary/NI/Pension/benefits alone - it should include all your overhead, including any non-chargeable folks.
You can use spreadsheets to keep track of each project's profit and keep a running total, or Synergist can do it automatically for you.
Synergist's Client Dashboards show each client's financial performance, tracking:
- Financial summary - invoiced, gross and net profit for the past 3 months
- Billings forecast - revenue and profit vs targets for the next 12 months
- Total client Turnover
- Total client Investment - the difference between the recommended charge and how much you've actually billed across all their jobs. A negative number means you've over-recovered your time/cost investment, so you're making additional profit.
You can also dig into project reports to see which projects have gone over.
Example Synergist Client Dashboard
What does good look like?
Every agency will have its own target based on its overall profit and EBIT targets.
You might decide you love working with a client, or you might make the commercial decision to make less profit on a client because they will attract other clients. But having the facts at your fingertips gives you the power to make informed decisions.
How can you improve client profitability?
Quote profitably. Your estimate is your internal assessment of the resources needed and the recommended charge to the client. Your quote is your commercial decision on what you charge the client. Make sure your quote is always equal to or more than the recommended charge.
Stop overservicing. Make sure your clients know exactly what’s in scope and how many amends are in the budget. This makes it much easier to tell them if a request is out of scope, such as an amend or an additional page. It’s harder to say no if you haven’t told them what they can have in the first place.
Track profit in real time. This way, they can spot if things are starting to overrun and adjust timings or quotes to get things back on track. Synergist allows you to set alerts when your budget reaches a certain percentage, giving you advance notice to keep things running smoothly.
Monitor your overall investment. You need to constantly monitor their profitability. This way, if you make a loss on one project, you can recoup on another.
Hopefully, this article has provided some helpful insights into why it's so crucial to keep an eye on client profitability. Ultimately, this data informs strategic decision-making, such as resource allocation, client retention efforts and overall business growth. It's all about making sure you're getting the most out of what you do!
Want to see how Synergist keeps track of client profitability? Book a demo or chat with one of our agency experts