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.