Understanding the cost of agency business development

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Chip Griffin: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: Today, we’re gonna try to figure out the cost of listening to an episode of the Agency Leadership Podcast, right after this.

So that’s actually not what we’re gonna talk about because…

Gini Dietrich: No, it’s not what we’re talking about.

Chip Griffin: But, but if you do some of the things that we’re going to suggest as part of this episode, you could actually calculate the cost of listening to the Agency Leadership Podcast. What we’re actually gonna talk about though, is how do you calculate the cost of business development? Because…

Gini Dietrich: Now I want to know the cost of listening to this.

Chip Griffin: Well, it will be different for every listener.

Gini Dietrich: Sure, right.

Chip Griffin: Because it comes down to how much does their own time cost. And we’ll talk about that more, a little bit later, but, but this all came about because of a question in the Spin Sucks community, where the question was posed, how do you keep track?

And I don’t have the question in front of me. Maybe you do, Gini, but…

Gini Dietrich: I do actually.

Chip Griffin: Okay. Well then how would you give the actual question? And I won’t just try to make stuff up. I’ll make stuff up later in the show.

Gini Dietrich: Okay, cool. Any thoughts on how to account for the time spent on proposals, calls, and revisions to get a job?

I’m the one who has to do the work when I’m doing that, it’s quote unquote lost time for me. My first thought is to see how many hours I’ve spent in the first half of the year, and then see how that is counted for in my profitability margin. Perhaps I need to consider making that number a little different to make up for it.

Chip Griffin: So, I mean, the first thing I’ll say is, you know, kudos for paying attention to this. Right?

Gini Dietrich: Right, yes.

Chip Griffin: Because a lot of the agencies that you and I talk with don’t in any way, keep track of the amount of time or cost involved with business development. I think it’s a huge issue that agencies have because agencies are willing to do almost anything to try to find revenue.

And so they just say, Hey, if I gotta spend time, if I gotta keep sending these proposals, responding to RFPs and having these meetings and calls and all that, I’m just gonna do it. Because it’s what I need to do. It’s a cost of doing business. And yes, it is a cost of doing business, but just because it’s a cost of doing business doesn’t mean you shouldn’t be smart about how you’re investing particularly your time.

Right. Because that’s the that’s the resource that’s most finite you and, and any team members that you may have working on it.

Gini Dietrich: Right. Yeah. I also – kudos for thinking about this because you’re right. It’s something that most don’t pay attention to. And it’s something that we pay really close attention to and make decisions on based on, on those kinds of things.

And certainly, you know, there’s certain of us, like I spend more time on business development. My leadership team spends more time on business development than our account executives do. So we weigh those kinds of things into it as well.

Chip Griffin: Yeah. And I look, I’ve seen plenty of agencies who have spent more to win a piece of business than they make off of it.

Right. So, I mean, if you think about it, particularly if you’re doing project based work, it is really easy to spend so much time on trying to win the business that you actually exceed your profit margin on that. Right? And this is particularly true if you do small projects, right? Because let’s say you do a small project, let’s say you do a $2,500 project.

And so let’s say you’ve got a great profit margin. You’ve got a $500 profit margin. That’s 20%, right. We would generally consider 20% to be a pretty solid profit margin. So if you’ve generated that $500 in profit off of that $2,500 project, how many hours did you take to win that? Did it take you one hour, two hours, three hours?

How much is your time worth as an agency owner? And you’re probably the one winning the business. You should be at least a hundred dollars an hour. You really should be more than that, but let’s…

Gini Dietrich: You should be more than that.

Chip Griffin: But, but let. Let’s just say for the sake of argument that your time costs your agency a hundred dollars an hour.

So that means that if you spent any more than five hours to win that business, you’ve actually lost money. Right. And what you also haven’t factored in is how many projects did you pitch and not win? Right. Right, because what you have to make up for in that profit margin is not just the amount of time that you spent winning that piece of business, although you should start there, right?

Cause you should never start out behind. If you, if you straight up have spent more on the business development effort than you ever make off of the client or the project, that’s a problem. But you also have to make sure that you’re winning enough that you’re covering all of the costs of the projects that you don’t win.

and this comes into play particularly with RFPs. And this is the thing that people just, they really lose sight of. And it’s why more agencies respond to RFPs than should. It’s because they don’t add up all the wasted time on losing RFPs. Cause the RFPs tend to be very low percentage wins. And so you have to figure out how you’re making up all of that time you spent on the losing ones through the one that you win.

Gini Dietrich: Okay. So let’s do some math. Let’s say because it’s easy…

Chip Griffin: We’ve just lost all our listeners. Gini.

Gini Dietrich: No, we have not. We have to do the math.

Chip Griffin: People are like, stop, delete, taking the ear buds out. Okay.

Gini Dietrich: So a hundred dollars an hour. Let’s say we, as an agency owner, we spend 20 hours a week on biz stuff.

Meetings, networking, coffees, proposal writing, RFPs, pitching, whatever happens to be. 20 hours a week. So that’s two grand a week. Times four is eight grand a month. Okay. If we’re looking at 20% margin, that’s another 1600 bucks. So now we’re at $9,600 a month. What that means we have to win $10,000 worth of business a month just to make up for the time that we’re spending.

Chip Griffin: Yes, but it’s but, but we also need to be careful. We don’t wanna scare people off here because then they’ll do no business development and say it’s all losing, right? It’s – that’s we’re talking total from the project or client.

Gini Dietrich: Right, right, right. Yeah.

Chip Griffin: So, so you don’t have to win it all back in the first 30 days, right?

It is. It can be helpful though to say, okay, how many months does it take before I start actually making a profit? Because in many cases, particularly on more complex sales, it will be a month or two or three before you recoup your business development costs absolutely out of the profit. And that’s fine.

As long as what, what we would call the lifetime value of that client is well in excess of what you’ve spent to win it. And in most cases, particularly if you’re doing retainer work, you’re going to be fine, but you still need to know what it is because otherwise you will spend time chasing low probability business because you just say, well, I might as well take a shot.

Right. But that’s, that’s sort of like the same thing. Well, I might as well just go buy a thousand dollars worth of lottery tickets every week. I might win.

Gini Dietrich: I mean, the person in Illinois that won, that worked for them.

Chip Griffin: It certainly appears to, to have worked quite well in, in that particular case. But, but the reality is there are lots of people who lose tons and tons of money on lottery tickets without winning.

Yeah. And so you, you shouldn’t be buying lottery tickets in business development, you should be looking for those more sure things. In fact, I was just talking with a client about this this morning and, and part of the focus was how many people can we reach? How, how big can we build our email list and all these things?

And it’s not about the quantity, it’s about the quality. Right? And, and I, I know part of, you know, we always say it’s it’s timing and you have to be on the top of someone’s mind at the right point in time, but make those high probability bets. Don’t make them just these long shots where if it pays off, great. Make it ones where, you know, there’s a pretty good chance you’re gonna be able to do business with this person if you continue pursuing the work.

Gini Dietrich: Yeah, absolutely. And you know, we’ve talked a lot about things like what are the red flags and what kinds of questions should you ask and how do you understand what kinds of things you should be looking for? You know, we’ve, we’ve, we’ve looked at all of those sorts of things on, on this podcast to figure it out.

So I it’s really important to understand the entire new business process to be able to get there. And you’re right. Like, I just had a conversation with a friend yesterday and we were talking about you know the red, the red flags and what kinds of things that you look for. And I said, honestly, and truly one of the things that I’ve learned in the last two years is I no longer want to work with executives who don’t value the long term investment of communications.

And certainly we can measure some of it and we can’t measure some of it. And I am now asking questions to help me understand whether or not the executive, the CEO understands what it is that we’re doing and what that investment is. And there are things that I listen for. You know, I listen for things like, well, yeah, I really want to see how it’s translating to sales.

I listen for those kinds of things, because those are the red flags that are gonna help me understand whether or not this is a good client. Which is a long way to say, you have to pursue the clients that are going to be best for you and your agency. And you have to have a really solid process that continues to evolve to help you understand whether or not they’re going to be a good client and whether or not you should continue to put your time into the new business process with them.

Chip Griffin: Right. And, and that’s why it’s so important to be collecting data, both quantitative data, as far as the amount of time and money and the profit margins and all that, but also some of that qualitative data. Are these people that I want to work with? Are, you know, is this, is this an enjoyable experience for me and my team? Do we produce good results? Right? So some of those, those more qualitative descriptions. And so the better that you can understand the clients who fit best for you, you’re off to a great start.

But the other piece is how hard is it to win those particular pieces of business, right? Because sometimes you might find, if you start adding up all of the time and money spent to win particular clients, you may find that there are some really large clients that look great on your creds deck when you have the logo page, but maybe they take so much to win that you’d be better off winning small accounts more regularly.

Right. And, and so you might actually come out ahead if you said, okay, these are the easier sales for us to make. Why don’t I focus on those instead again, using the lottery ticket example, if I could spend $1 and consistently win a hundred dollars, not every time, but on a pretty regular basis. That’s pretty good.

Would I rather do that or would I rather spend tens of thousands of dollars hoping that I get that billion dollar ticket, which I know is a super long shot?

Gini Dietrich: Yeah. Yeah.

Chip Griffin: Right. So, so you need to be thinking about those things and it, it may shift over time, right? I mean, and it doesn’t mean that you have to take only sure bets. I mean, you know, swinging for the fence occasionally you know, isn’t bad and it can help your agency grow, but you need to do it intentionally. And, this is something that I’ve harped on for the four years we’ve been doing this podcast. Everything you do has to be with intent. You cannot just allow inertia to carry you forward, or you just respond to whatever’s incoming and say, oh, they’d like a proposal.

Great. I’ll send them a proposal. Oh, they wanna talk? Great. I’ll talk. You need to say, this is something that makes sense for me, for my business, for my team. And if you do that, you’re gonna be in much better shape and probably turning a lot more profit.

Gini Dietrich: And I will say that when you do that, this is a, it’s a very strange phenomenon, but it goes to human psychology.

When you start to be intentional about it and you, you know, very politely say, thank you, but no, thank you. They start to chase you. And you’re like, what? Like, I really, we really can’t do the work. I just had this very experience where somebody said, we’re, we’re looking for earned media in the states for a product that we’re launching.

And I was like, that sounds great. Congratulations. We’re not the right firm for you. We do a PESO model program, and I explained in a couple of sentences and he responded back with no, that’s what we want. And I was like, you told me you wanted earned media. And he’s like, yes. And I’m like, are you kidding?

So, so, you know, in those situations, because of the Spin Sucks community, I’ll usually find somebody that I can refer the business to.

And that keeps us top of mind too, because people remember that you were, you referred business and that you were helpful. But it’s, it’s kind of this strange thing where you go from being the one that’s supposed to be pursuing to being the one that’s being pursued. Right. And it gives you a lot of leverage.

Chip Griffin: It absolutely does. And it also helps you understand if they really want to work with you or if they’re just trying to tick a box or you know, expecting miracles or whatever. Right. And so, you know, but I think that the other thing about intentionality is it really helps you with your team, because there’s nothing more demoralizing than winning business that you shouldn’t have.

Or losing all the time because you’re not targeting the right stuff. And, and you really need to be thoughtful about that because if you win business and you, you’re not getting it at the right profit margins and so therefore you gotta grind away at your team in order to eek out, at least a bare minimum of profit.

They’re gonna hate you. Yeah, right. It’s one of the reasons why the agency industry as a whole has a horrible reputation from an employment perspective, because so many agencies balance their books on the backs of their employees. And instead of pricing correctly, they just try to get more and more hours out of the team.

And I look I’m, I believe that the employee should work hard. Right? I am not one of these people who think, oh yeah, let’s just create a cushy little environment, bean bags and free candy and all that kind of stuff. And, you know, they should work when they feel like it. Right. I mean, I, that is not my mentality and nobody who knows me would think it is.

But you do need to think about, you know, their wellbeing, their happiness, and how it fits in, because if you just try to grind away at them, they’re going to lower their level of productivity and they’re going to leave, more importantly. And that means you gotta do more hiring and nobody wants to do more hiring.

Gini Dietrich: No one wants to do more hiring. It’s expensive. It’s time consuming. It’s yeah, no one wants to do more hiring.

Chip Griffin: I mean, I’ve never met anybody even really HR people who say, oh gosh, yes. I’d, I’d love to be hiring more people. Right. That’s just, I mean, they may want to have more people, right. But they don’t want to hire more people.

Gini Dietrich: Nobody wants to do that. That’s right. That’s right. You know, I worked in a big agency. As we’ve talked about. And, our, we had to, as account executives, had to bill 40 hours a week, we were required to spend 20 hours a week on new business. And then of course, all the admin stuff, right? Your time sheets, your expense reports, travel, all that kind of stuff had to be included on top of that.

So it’s easily 70 or 80 hours a week just to do your job, to do the bare minimum. And then if you had any… if you’re type A, you worked more than that, you know, to prove your worth. So your, your point is right, that people, that big agencies work their books on the backs of employees, but, – and lots of us that started agencies have come from big agencies and understand that that’s not the right way to do things. Because you’re right – people will burn out. You know, we are not machines as much as I hate to admit that I’m not a machine. Not a machine. You do, you do lose productivity at some point during the day when you’ve continued to work, you use your brain to do the work. So be really careful about that as well, and really think about, okay, what are we trying to achieve?

Who do we want to work with? And what kinds of clients does that look like?

Chip Griffin: Yeah. And, if you do those things and you’re targeting with intentionality and you’ve got a focus, so you’re not just saying we’ll be all things to all people, all of those things help bring down your cost of business development.

Right? Because you’re starting to put yourself in demand. You’re starting to resonate more directly with the prospects that you’re talking to and you don’t have to convince them that you have expertise. They accept it. They know that’s right. Because you have a reputation. They go to your website, they see things from a perspective that they already have. Right. Right. And so if you’re doing those things, you get to short circuit a lot of the business development process. Which means you’re spending less hours, costs less money and therefore your overall profits go up. And so it, it really does come down to making sure that you’re keeping track of these costs. And really make sure that you keep track of your costs as the owner. Because again, we’ve talked about this repeatedly owners do a very bad job of accounting for their own time and the cost that it imparts on the business. You need to know, what is your effective, hourly rate? What are you costing the business?

You can’t tell me, well, I got to do all this business development and it’s free because it’s my time.

Gini Dietrich: No! It’s not free.

Chip Griffin: Your time is not free. If nothing else you have the opportunity cost, which the questioner included in the question, right? You have to understand that anytime you’re spending doing business development or client service or whatever, it’s time you could spend doing something else.

And so you need to make sure you’re making the highest, best use of your time. The best way to do that is by tracking it. And, it’s better to assign a dollar value to it because if, if you say, well, you know, I spent 10 hours a week on biz dev. I spent three hours to win this piece of business.

Those numbers aren’t as meaningful to you as if you assign an actual dollar value and you say, I spent $2,000 of my time. Right. And if you say that to yourself now, all of a sudden it means something right. That’s right. And you start to say, well, that’s pretty dumb. Why did I spend $2,000 to win a $2,500 contract of which I get a $500 profit.

Right. And so you start, it makes it obvious that something is wrong. Yeah. And you need to adjust. You need to adjust your pricing. You need to adjust your targeting. You need to be more efficient in your business development, something. And so the faster that you can do that, the sooner you will end up with the business that you really want to have.

Gini Dietrich: 100%. And I would say also that you get really, really good at saying no to certain things. Like I have one particular client that’s like, Hey, come see us this week. And I’m like, no, it costs me too much money that you are not paying for it. So if I’m at my desk, I can do work for other clients.

If I come to see you, I’m 100% focused on you and that’s not in the budget. And then they get to decide if it’s really important that they’re going to give us a little special project fee to have me come, or, you know what, it’s not that important. Let’s do it on zoom. So you get really good at saying no as well.

Chip Griffin: And you mentioned budget, which is so important, because we think about budgets in terms of client work. You need to have a budget for business development.

Gini Dietrich: Absolutely. Yep.

Chip Griffin: You need to have one for the agency itself, but you should have it for specific projects that you’re working on, particularly RFP related stuff.

Right. Cause those tend to be the, the biggest, thorniest, most time consuming. Yeah. Yeah. Yeah. And so you need to say, I’m gonna set aside a budget of $3,000 to respond to this RFP. And you need to do it consciously, intentionally, and then stick to it. Right. And not say, oh, okay, well, you know, we’re gonna put together, you know, some creative on spec.

We’re gonna ask a graphic designer to do some work, we’re gonna have, you know, we’ll just rewrite this one more time. You know, we’ll come up with a few more ideas. We’ll really polish the deck. We’ll print something out, we’re doing it in person. So we’ll do a poster board, all these things add up. Right. And if you start spending more and more money on it, it doesn’t mean that you’re likely to win the business any more than if you stay within that budget.

Right. Right. You cannot spend your way to success.

Gini Dietrich: No, you cannot.

Chip Griffin: You have to find the right people, pursue the right people, and know what it’s costing you to do it. And then account for that in all of the pricing that you do, because if you do that, then you’ll be okay. Right. So that $2,500 project, if it takes you $3,000 to win it, just make sure that you’re charging at least $5,500.

So now you’ve, now you’ve covered your cost of business development and you’re still coming out ahead, factor it all in to all of your decision making.

Gini Dietrich: 100%. And the last thing that I would say, and you touched on this briefly a few minutes ago, but the last thing I would say is when you get really specific and really intentional and really targeted, the new business process gets easier. Because now you know exactly what companies that in your target market are looking for, what their pains are, what their maturity is from a business perspective. And in that maturity where they are, where they’re located, what they do for certain things, what kind of tech they have, what kind of marketing they have, what kind of team they have. You start to understand all of that, because that’s what you only work in that business.

And it helps the new business process fly by. It’s so much easier when you do those things.

Chip Griffin: And with that, we will let that be the last word today, because we’ve learned that as we do more and more of these, we get more efficient at recording these episodes. And our profit margin is still zero. No, I’m just kidding.

Gini Dietrich: It’s still zero, but yeah. Zero of zero.

Chip Griffin: So with that, that’s another episode of the Agency Leadership Podcast. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich

Chip Griffin: and it depends.