Dealing with inflation challenges for agencies and services businesses

If you’ve never experienced this type of inflationary pressure when I’m working for an agency, and there is a real problem. So we’re going to talk about why what inflation means to an agency, what we can do, and most importantly, what I think we can do about it, because we do talk about why it matters.

Now, this is a purely theoretical example, because no agency would sit still, as this was happening. But if revenue was flat, and your costs, were rising at 10%, which is possible, then you could go from a well run agency making a 20% margin in two years to an agency struggling to break even. Now, obviously, it’s it’s theoretical, because no agency would stand still. And we will adapt. And that how we adapt is part of what we’re talking about in a few minutes time. If you start off, slightly worse position, it could take a year, if your margin is just making it into double digits, that can be wiped out within a year.

So this is a real problem. It’s also a perfect storm. I mean, it means there’s always a chance to put a dark and brooding pitcher in and I’ll take it. But the perfect storm is we’ve got inflation, but we’ve also got a talent shortage as well.

If we don’t respond to the fact that a 6.2% pay increase just keeps people level with inflation, they’re going to be looking for what more than that for a pay increase. And let’s say an 8% pay increase is effectively at the moment, a 1.8%. pay increase or not, not a huge amount in terms of real terms.

If you don’t get that there is the real chance that some will leave to your competitors who who will pay 8% or 10%, and more to recruit people so that they can they can grow. So perfect storm, talent, shortage, inflation.

So what can we do?

We we’re not going to shrug our shoulders and, and fatalistically get into inflation? No. Because the things that we can do.

The obvious one, the easy one, in many ways is that we increase our rate card for new business for you. For pitch wins for negotiations, we increase the rate card, if you also got a blended rate.

If you have a blended rate, then think about having a slightly more nuanced or slightly more detailed rate card. I think the stats show I think it was a year ago that the Wow, bench press survey showed that agencies with blended rate cards had lower margins than agencies with a more detailed rate cut.

If you have a blend, you won’t think about putting a senior rate rating for your senior team possibly want for your junior team as well. If you want to have that flexibility for different types of work, I think we’ve got to be a little bit more nimble if you just have the one right guard. But if you do, increase it tricky one, and very easy to write down, much harder to do. I

Increasing fees and rich all reducing scope for existing clients.

I think the basis for this comes from a review of clients of all of your clients. So performance, and then think about the problems. And this is specifically for clients which are underperforming and not as profitable as we’d like them to be. And then let’s have an honest assessment of why that is it has a scope creep change over time, more and more little bits being pushed into scope. Now’s the time to push back on those. Have we underestimated this in the first place and we’re struggling and under this. What can we do about that? Are we over servicing is that conscious because we want to invest? Or we just happen over servicing and we can pull back so we could do already producing good results for our client. And obviously if we are that person is in a stronger position to have negotiation client says, what’s the relationship like is a new client? Are they a blocker? Are they a supporter and then other, and this could be, it could be an efficiency, it could be a junior member of the team work on this. So we need an honest warts and all assessment of each client before we think about bending back. To ask for more money, we need to shift the targets for our clients. So that this this is done on revenue per head, all goal clients will form a bell, a bell curve to certain extent of clients who are profitable, clients who are less profitable in the middle and clients who are not as profitable as we need them to be. So prior to this inflation, we might have been looking at the red clients as underperforming, adding 10% to that 10% of that, and we’ve captured a whole lot more clients where we are not where we need to be. So we need to think about cost control, it could be that we use more or less freelance resource, we could have a smaller team and more freelance which will pull in as and when we may even decide to pull in extra team member and have reduced freelance cost to develop that remote part time working always be flexible in terms of staff, where they are and and where their full time or not be wary of committed costs. So don’t take on any large commitments. And always maintain a balance sheet buffer. So they’ve got enough cash in there in the in the agency to as a safeguard against hard times. But also look at service lines, look at cool down client services and project management possibly should include some strategy in there as well, where historically agencies haven’t been as good at charging for our time and ideas. Think about additional service lines that we could we could do we could add in. So these are, these are things that we can do. And obviously, some are easier than others. Make it here for the agency basics. Yeah. Whether inflation is 1%, or 10% times of good or hard, we should always be doing some revenue forecasting and budgeting. So we know what’s coming up. You know, the sizes, don’t do not switch, Don’t bury your head, face this problem head on. And look, look at forecasts and extra minutes, every agency is going to have a drop off in three months or six months to what’s the pipeline? What’s the CRM? What’s the marketing solution for that? Think about capacity, what capacity we we have with the existing team when we can what revenue? And by capacity, I mean revenue? What revenue can we generate? That’s what we can do. In terms of communication to our clients, I think this is a nice line to start with is how can we make this work for both of us, the clients are going to be under pressure as well, they’re going to be facing increased costs, you will just be one of probably many suppliers. So it’s not gonna be an easy sell. So but we’re not, as I said, we’re not a mobile or utility company, we can’t just send a letter saying your cost, your costs are going up. By 8%, your heating has gone up by 52%, whatever it is, we have to negotiate. And that approach will be dictated by our inefficiencies, we got to sort those out first, before we approach our clients quality by results. As I said, if you’ve got good results we’ve been producing for our clients, then I think we’re far stronger position and obviously the nature of the quality of the client relationship. And obviously, how can we make this work for both of us is one approach. Another another approach, which might be useful is to think about talking to your clients in terms of sharing this and not passing on for 8% or 10%, but maybe 4% 5%. So you’re sharing the burden? How can we make How could make this work for both those both take a bit of bank. And I think whatever you do, I think don’t ignore this. This is a bit hyperbolic for me. But this is this could be a tsunami tsunami going to agencies and there will be agencies who will not survive over the next year or two, because this will tip them over the edge. So we need to act we need to act now. First thing I would do and I will be advising my clients to do is the client review. Right called Client review. These can be done relatively quickly. Rate carpet can be put up today anything any new proposal, which goes out can be at the new rate. Obviously, it still has to be competitive. So it’s not a panacea. We need to address the underperforming clients, possibly all of our clients and to see where we have got the opportunity. And it won’t be for all clients, some doors will be closed rather firmly in your face.

For some, there’ll be a conversation and whether it’s collaboratively pain sharing, you will be able to pass on some of the increased costs that you will be facing. So 10% inflation challenge, it’s going to be tough.

I think if you bear this in mind and start taking steps now until it becomes more of a problem, then I think those agencies that do that will survive.

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