When agencies first start out, they tend to take on any size project that they can find. As they get larger, they have a tendency to want to keep grabbing larger and larger contracts.
Most of the time, there isn’t a lot of clear thought given to right-sizing the client engagements. It’s all about finding the biggest checks possible — or any check that won’t bounce.
In the beginning, that may work because it is necessary to get the business off the ground.
Over time, a lack of understanding about the right size for client engagements will impede growth, impair profitability, and increase the owner’s stress level.
The 4-20 Rule
There’s a pretty simple solution to make sure that you stay on the right track, however.
I call it the 4-20 rule.
No, I’m not suggesting that you come up with pricing targets by lighting up a joint.
Instead, this 4-20 rule says that most small agencies should be looking for clients that account for somewhere between 4% and 20% of your total revenue for any given time period.
If you have mostly long-term retainer clients, then that might be an annual figure. If you skew more toward short-term projects, that might be a monthly or quarterly figure.
The beauty of this approach is that it naturally scales with your agency over time.
If you have a $500,000 agency, then you would be trying to land clients that pay somewhere between $20,000 and $100,000 per year. A $10 million agency would be looking for ones between $400,000 and $2,000,000.
Why not just have a ceiling?
Sometimes agency owners will tell me that they understand not wanting to have a client concentration issue, so the high-end limit makes sense (even if they may be inclined to go higher than 20%). But they may push back against the lower boundary.
The reason why it is important not to have clients below a certain threshold is that they consume too much leadership time for the revenue they deliver or receive too little attention from the agency to truly be satisfied, thus diminishing the firm’s reputation.
Simply put, the overhead for servicing the smaller clients makes them a drag on the growth of most agencies.
The reality is that this means that most small agencies would have between 5 and 25 clients. That’s about right to maximize the ability of the firm to handle the business well and deliver profitably for the owner.
How do I use the 4-20 rule?
Knowing what your ideal client engagement looks like allows you to more easily qualify or disqualify potential opportunities.
You can confidently say to clients, “we typically work on projects between X and Y value” (where X and Y are the 4% and 20% figures).
It decreases the uncertainty that you or your team have about making decisions on potential work, and it gives you a framework that helps keep you on track.
It’s also helpful to use the 4% figure as a way to figure out how to grow smaller clients with you as your firm grows — or help them find solutions that better fit their needs and help you become what you want to be.
Finally, I find that these internal rules make it easier to handle tough management conversations (or the owner’s tendency to make things up on the fly). It can also help make it easier to explain to prospects why you’re not able to take on certain work — clients tend to understand “rules” better than decisions that they feel may be targeted directly at them.
Are there exceptions?
There is no one-size-fits-all answer to any agency question. There are simply too many firms out there and inevitably there are some that can build a model that works outside of the 4-20 rule.
However, that vast majority of public relations/affairs, communications, marketing, and digital firms can confidently use these guideposts.
Only pure production firms that deliver repeatable productized solutions should consider routinely going below 4%. And firms would be wise not to have any client creep above 20% except for short periods of time as the firm undergoes revenue expansion/contraction.
You can always make one-off exceptions, but you should be reluctant to do so because it is very easy for these decisions to become a bad habit that inhibit growth.
Doesn’t this rule hurt me as my firm grows?
No. If you look at all but the largest of agencies, you will see that most don’t have more than 25 clients. — meaning that they would likely all fall in the range of 4% or greater.
Agencies grow not by increasing the number of projects that they do at the same price as when they got started, but by growing the size and value of the engagements.
It’s a simple dynamic when you think about it. The size of win that excites you when you are a $500,000 agency likely won’t garner much of a glance if you are running a $10 million business.
It can be hard as you grow because you want to keep the clients who were with you in the early days. And I’m not saying that you need to shove them out the door as you get bigger, but you have to be prepared to lose them through attrition and replace them with bigger, more profitable accounts.
Even in larger entities, they are typically broken down into smaller groups for operational purposes (by service line, geography, industry, etc.). You will typically find that within these internal groups, the 4-20 rule will apply.
If you look at your current client list, I bet most of them fall within the 4-20 rule. You probably have a couple of outliers (both higher and lower) but the more you work to bring in new contracts that fall within these parameters, the more it will accelerate your profitable growth.