Lately I've been doing some hard thinking about profitability. In the web development/branding/marketing/advertising/design business it can be difficult to figure out how much money you make on a job without instituting controls that make projects less profitable, the company a less fun place to work at, and your agency a less agreeable agency to do business with. That is, detailed tracking can stifle innovation, risk taking, creativity, customer service, and response time. Large agencies generally suffer from these maladies, but they can get away with it because they've already "made it" and their reputation keeps them going. Smaller agencies like MWI have to be careful to track enough to have an idea of what's going on, but not so much that it hampers our ability to deliver.

Over time, the combination of experience and limited data have helped me to figure out some ways to improve profitability. One of our practices is to not go after clients that have budgets below a certain threshold. Why?

For most of the time I've run MWI we have tried to get any project we could. The logic was that it was better to have something to work on, even if it wasn't much money, than to have employees sitting around doing nothing. But this created a flood of other problems. For one, we came across as desperate, which probably kept us from landing the larger, more profitable projects we really wanted. After all, a company that has a large budget is going after the best quality, not the lowest price, and when you're looking for quality an agency that reeks of desperation isn't an attractive option. Second, the type of clients we were landing were the smaller ones, and the smaller clients are generally less knowledgeable about what we do. That meant there were increased levels of misunderstandings, miscommunications, etc. That meant we would get into situations where we could either pull out of a project and have an angry client and lose money, or we could do whatever it took to make the client happy. This often meant doing 2-3 times as much work as we had been planning on doing. And often the client would still be unhappy because the project took longer than expected.

Over time, we realized that we did about as much work on a $20K website as we did on a $5K website. In fact, it seemed the $5K websites took more effort than the $20K websites. Quite the opposite of what you would expect, since you would think that if one client is paying you more than another you would do more work for them than the other.

It was one of the hardest things for us to start turning clients away, and we still give in to the temptation to take on projects we probably shouldn't. It's difficult for someone who went through the down economy to turn away anything that puts money in the bank and gets payroll paid on time. But what I had to learn was that in the long run I would get more money in the bank faster if I concentrated on the larger, more profitable clientele. But I had to take a leap of faith and trust that the business would come.

Perhaps it was a stroke of luck that circumstances put me in a situation about a year and a half ago where I didn't have much to lose. I figured that was as good a time as any to raise prices, turn business away, and see what would happen. So I did. At first, we bumped our prices for a basic website up to the $7-9K range. Then it was $10-12K. Then $12-15K, and most recently it's gone to $15-20K.

We now turn away a lot of business. We've received something like 260 requests for proposals so far this year, and I would guess that at least of half of those we haven't even considered. We have partners we refer them to, and if they land the deal then they pay us a finder's fee. We don't really make much money off the finder's fee, but we certainly have had an easier time growing revenue since then. Our average deal size has increased quite a bit, our client satisfaction rating is higher than it was before, and our team is less stressed out.

Should we take our minimum to the $20-30K range? Hard to say. There are agencies here in SLC that charge $100K minimum for a basic corporate site, but they also have a track record, reputation, and connections we don't. I think MWI can probably land basic website deals in the $20-30K range (we do "fancier" websites in the $50-60K range already, but I'm talking about your basic corporate site), but like before, it's a leap of faith.

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When I was working for an agency, I discovered that the services business was rarely very profitable, especially with small clients. You are essentially trading your time for the client's money. The only time it is profitable, is when (as you mentioned) you're a big agency with a reputation that allows you to charge a lot and your clients are paying more money for your time. A better strategy for services-oriented businesses is to supplement your revenue stream with a marketable product. Especially the type of products that provide residual income. Then you get in a situation where you can make money outside of billable hours.

Take 37signals. They started out as a service-oriented web design agency. Then one day they realized that they needed a tool to solve their problems with project management. They couldn't find one they liked, so they built their own. Thus Basecamp was born. (Not to mention Ruby on Rails, TaDa Lists, Backpack, Writeboard, Campfire, and next: Sunrise.) Now, they've gotten to a point where they don't even do client work anymore, because their products are so much more profitable. And since they are their own client, they can use all of their expertise to make the product very high quality without getting pushback from an uneducated client.
For more on being your own client, see Jim Coudal's ALA article When You Are Your Own Client, Who Are You Going To Make Fun Of At The Bar?.

Pricing has always caused the most questioning for me as it sounds like it has for you, Josh. Nice read.

This post sounds exactly like my current situation. We were at an all time low as far as workload is concerned yet I turned down my first client last week. It was an amazing feeling. My question is...how did you start attracting these larger customers?

I've recently raised my rates dramatically and the first couple proposals have not gone through because the clients couldn’t afford our services. We are usually really swamped but things have slowed down unexpectedly. After my recent epiphany that I was working way to hard, I realized that we have outgrown many of our current customers. We don't do much marketing because most of our business comes from word of mouth. The problem is that the referrals I get can’t afford our new rates. Any pointers on how I can take that leap to the next class of customer?

you know, you seem less stressed . . .

Good work.

Regarding the question about leaping to the next class of customer, I think it comes in one of three ways:

1. Luck - Right place, right time, etc.
2. Connections - Relatives, friends, golf buddies, etc.
3. A ton of hard work - You just concentrate on doing good work until you get noticed.

#3 is the most respectable way, but who cares? #1 isn't so much in your control, so I'd go for #2 while not neglecting #3. If you don't know the right people, get to know them.

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