Why Profits Dip

I recently read Hampton’s Community Agency report, and it wasn’t pretty

of all the 30 agencies they surveyed doing anywhere from $1-$10M+ in revenue

only 5 had profit margins over 30%

Why is that?

From my experience, as agencies grow past $3M in annual revenue, operational inefficiencies begin to manifest.

The core issues arise from:
• business model (profit design and billing models)
• team leadership & management constraints
• projects time and costs increasing

Let’s dive into a few issues I’ve come across the agencies I’ve supported:

1 – Hourly billing begins to break down

First off, you already know that if you charge by the hour, you will always be time poor.

This is what business influencers mean when they say “the agency model is broken”.

The only agency I saw this work well for was a fully automated agency leveraging AI tools, low-code/no-code automation, and an offshore team to calculate their hourly rate and ensure their production team made at least 50-70% profit per output.

Hourly rates can work well for internal costs for productized services, but if you do custom work, especially work involving tech or web dev – hourly billing will not scale well.

Plus I have yet to meet a manager who loves tracking their team’s hours.

2 – Pricing model thresholds

One of the ingenious ideas I have when scaling agencies is to:

Increase pricing 🙂

But this can only take you so far, and there’s a natural threshold the market is willing to pay regardless of your clout.

One of my guys is an industry juggernaut and found the threshold – even with value based positioning.

Lesson: Ensure you price all special projects according to your profit model and test where the price threshold is in your industry, but don’t depend on that 1 lever to save your profitability.

3 – OpEx increases

Let’s face it, as you grow, so do your expenses.

It’s critical, however, to decouple your OpEx from your revenue by
• Leveraging tech and automation
• Hire top-tier talent (yes, pay for a superstar, don’t cheapen out)
• Move your retainer contractors from project work to salary – if possible

These are just a few top level ideas you can leverage to increase your profit and set yourself up for strong profits as you scale your services.

Remember:

Profitability is not an outcome of circumstance

being profitable, and at the number you choose to be profitable

is a choice.

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