How the Magpie Effect is holding agencies back
There’s nothing like a nice shiny new business win to boost agency morale. But are all new business wins as commercially attractive as they might initially seem?
As Kingston Smith reportthat whilst agency growth is up, translating this to profit still remains a struggle. Many agency chiefs will be looking at ways to address the underlying causes of sinking profits.
Yet while fingers may point to staff-cost ratios or procurement (not always without justification), there’s one agency cost that is often more of a waste of money than it seems: The new business budget.
But how can this be so? Surely new business is one of the best investments an agency can make?
Not always. Starting with the blindingly obvious, it depends on your win rate. Secondly, it depends on your client retention rate. If you are just topping up a leaky bucket, the cost of new business can be a frightening drain on an agency’s cash.
You do the maths:
On average a pitch costs £180,000 in time, plus third-party costs*.
Let’s assume that your agency wins one in three pitches.
And to be generous, your average client lifetime is 6 years.
Finally, let’s assume that your agency is making the industry average operating profit of 7.8% of revenue.
* Source: IPA ** Source: Kingston Smith
These are frightening figures when the IPA report average client lifetime of little more than 2 years.
So, what’s the one thing you could do to improve your pitch cost ROI?
The obvious answer is ‘reduce the level of client turnover’ so that you are not just topping up the proverbial leaky bucket. Yet how many agencies have a client retention budget that matches their new business budget? Come to think about it, how many agencies have any client retention budget at all?
The loyalty effect.
We’re not the first to point out the value of client loyalty. Harvard Business School Professor Frederic Reichheld did so years ago in his book The Loyalty Effect, demonstrating that the value of client loyalty was greater in advertising agencies than any other service industry showing that a 5% increase in client retention can deliver an astonishing 95% increase in Net Present Value.
Can you fix it? Yes, you can!
You’ll only get to keep more clients if you invest as much time and effort in client lifetime as you do pitching for new business. So here’s some suggestions for what you should do about it.
- Know your client lifetime figures (they may well not be what you think)
- Calculate the annual cost of replacing lost business
- Recognise that most often, agencies are hired for their skills but fired for their behaviour
- Identify the relationships that are most at risk
- Put a clear action plan in place to address the clients at risk and stop the others becoming at risk
- Make sure everyone at the coalface is engaged in the action plan (not just the people who’ve authored it)
- Generate an agency culture that values client retention at least as highly as client acquisition
- And last but not least, to help your shiny wins stay shiny, talk to us about building a client retention programme to not just satisfy your client’s but delight them.