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Thank you for joining me for today’s SAGA webinar where we’ll talk about how you can raise your prices on existing clients, something that I’m sure most of you are interested in doing. Many of you have some concerns about it, and we will try to address those today. I’m Chip Griffin. I’m the founder of SAGA the Small Agency Growth Alliance, and I am delighted to have you here with me today.
We’re gonna be covering a variety of topics related to raising prices on your existing clients, and we’ll talk about everything from how you should figure out, how much you should charge, when you should go about raising prices, how you can test your pricing strategies and rates, why profits are much more important than your actual price and why there are other ways that you can think about this pricing challenge.
And finally, how to overcome client objections when you’re communicating any price increase that you have to them. Before we dive into the substance of today’s conversation, I do wanna go over a couple of housekeeping items. The first is that, of course, this webinar is free to attend for anybody live, but the replays are exclusively for SAGA Pro members.
You can learn more about SAGA Pro membership on the SAGA website at smallagencygrowth.com. There’s a q and a function on the screen. It should be at the, the bottom of your screen, I believe, in most cases, depending on the browser or platform that you’re using to watch this, and you can use that to submit questions.
At any point during the presentation. I will try to handle all of the questions at the end after my presentation. The presentation usually lasts somewhere between 25 to 30 minutes, and then we’ll dive into questions for the remaining time that we have available. If you’d like to ask me something after this webinar is over, you have a question perhaps that you don’t want to share publicly, feel free to email me firstname.lastname@example.org, and I will do my best to respond to you personally.
Finally, if you are interested in tweeting or otherwise sharing this on social media, feel free to do so. Just use the #agencyleadership so we can see all that you’re writing about it. So with that, let’s go ahead and start diving into the substance. And it starts with knowing how much you should be charging.
Because if you don’t know how much to charge, it’s really hard to go about raising prices. You don’t wanna do so randomly. You want to do so because you actually have a strategy behind your pricing structure. And some of you may have seen some of the presentations that I’ve done before on floor to ceiling pricing.
If you haven’t there’s lots of resources on the SAGA website that talk about pricing and all of its different forms and some of the different options and models that you have. Because it’s not just how much you charge, it’s how you structure it. Do you bill by the hour? Do you put together fixed price packages?
Do you do monthly retainers? Is it all project based and short term? There’s a lot of different things that you can do. And the pricing terms matter as well. And we’ll talk about that as part of today’s discussion. . So with floor to ceiling pricing, the idea is that you establish a floor. In other words, the price below which you cannot operate profitably, or at least not as profitably as you are trying to do as a business, and so you should have your target profit margins for all of your client work and all of the projects that you’re doing for them. And a lot of this comes together by creating project budgets. Again, lots of resources on the SAGA website on how to create these, including some free templates for SAGA Pro members that will help you to understand how you can piece these togethers, piece these together quite easily.
Probably more easily than I’m able to speak at the moment. And so as you are taking all of this information in, and as you are compiling what it actually costs to service the account, you need to remember to include the total cost of service. So that’s all of the staff time, all of the contractors, any of the overhead expenses that you may have in maintaining that account, any software that you subscribe to specifically for a project, for example.
Those are the kinds of things you want in your project budget. Perhaps most importantly though, and the thing that a lot of small agencies omit is the time of the owner that is spent on client service. And keep in mind that when you’re doing project budgets, it’s not just direct client service, it’s the indirect client service managing your team.
And so if you’re having a behind the scenes conversation with an account executive who’s running a particular client project, that should be recorded as time, that counts towards the cost of servicing that client. Because if you didn’t have that client, you wouldn’t be having the substance of that conversation and it wouldn’t be taking your time.
So if you’re factoring in the time that you spend on it, you’ve now got the whole picture of the amount of money that you’re spending. You then factor in your agency’s administrative expenses, a little bit of a cushion, and finally you end up with your target profit. In most cases, agencies that are really healthier are shooting for somewhere around a 20% profit margin.
And so you should be thinking the same way. And so what this does is this helps you get to that floor, that price below, which you just simply cannot operate. You cannot do good quality work for the client and give them the results that they expect and still produce the profit that you need to be a surviving and even thriving agency business. With this floor, you know where you can’t go below, but it doesn’t tell you how high you can go, and there’s a lot of opportunity for most agencies to move above that floor by talking more about the value that you’re creating, the results that you’re producing.
Unfortunately, there’s no magic formula and I can’t sit here and tell you that that should be by targeting a 30% margin instead of a 20% margin. All of these things you need to test and part of it depends on who you’re servicing and the results that you’re producing and the kind of work that you’re doing.
And so what you wanna do is you wanna start with that floor, but then start with your prospects, testing out some of these additional or some of these pricing opportunities, these new prices in order to figure out how you can generate the profits that you want. And we’ll talk more about specifically how you do that.
The other thing that you need to think about when you are setting your pricing though, and part of this should be included in that cost. Part of it’s included in how you price it over the long term. And that is, particularly if you’re a small agency where you as the owner or you’re trying to extract yourself from the day to day work, which is generally a good idea, and I’m not saying you shouldn’t do any client service, but you in most cases probably want to reduce the amount that you’re doing so you can spend it on other higher value products, services, business development, et cetera.
So you need to plan for what does it cost to replace you. You ought to be the most expensive resource in your agency, but I know many of you are not treating yourselves that way or compensating yourselves that way. So when you’re doing this pricing and when you’re doing the project budgeting, you need to factor in what would it cost to have someone else do the work that you’re doing, and make sure that that’s included in your floor calculation.
Because if you box yourself in, where the only way you can eek out a profit is if you do the work yourself, then you’re trapped and you’ll never have the opportunity to scale because you won’t be able to have someone else do the work. And even if you’re paying them a lower hourly rate, it may actually cost them more because you’re more experienced, you’ve been around the block a few times, you’re able to do things efficiently.
You know exactly what you want, so it’s going to take less time in all likelihood for you to execute a task than someone else you’re paying. So there can be that additional cost. Think that through. Make sure you’re including that in your project budgets if you want to escape that daily grind and work on growing the business rather than simply keeping it afloat.
So those are the factors that need to go into figuring out how much you ought to be charging. And so that then leads to the question, okay, I know what I’m charging. I know that I should be charging probably more than I am now. So when should I raise my rates? And my simple answer to almost every agency owner who comes to me and says, you know, I’m thinking about increasing my prices.
What, what should I do? I always say, if you’re even thinking about it, you’ve probably already reached the the point where you should be actually raising prices. There are very, very few agencies out there who are underpricing their services, and if you are concerned about it, if you’re thinking about it, you’ve probably already gone down the path where you know your profit margins aren’t where they need to be.
You know that your team and you are having to work harder to grind out the results and not increase your out of pocket costs in order to get the work done in a reasonable fashion, and still leaving some money left over at the end of the day. So, apart from the glib answer that you should be raising rates now, you certainly want to be looking at that project budget that you put together. You want to be doing time tracking and making sure that you are keeping an eye on what your actual expenses are, because sometimes we estimate poorly or we get too optimistic when we’re pricing out a new client and we say, well, it’s only gonna take us 10 hours a week, and then it turns out to take 12 or 15 hours a week.
All of a sudden that’s coming straight out of your margin. And so if you notice that you are going below the floor that you’ve established and say that I need a minimum of 20% profit on each project, this one’s going below that, that’s when you need to start addressing things immediately. And a lot of times we let it go too long.
We let these situations with clients fester. We allow it to go to a point where we are no longer able to continue to produce the profits that we want. Because we’ve allowed for scope creep, we’ve allowed for over servicing. And if you do that, then it becomes more challenging to fix it six years down the road than it does six months down the road.
Try to address it as soon as you notice it, and keep an eye on on your cost reports so that you notice that these things are happening. Of course, right now, we’re in an environment where there’s inflation. It’s in the news every day. All of us are getting emails from service providers, whether that’s a lot of the software subscriptions that we have or some of the other services that we have, energy costs, all those kinds of things.
Everything is going up. The cost of everything is increasing, so that means even if you’re not over servicing, even if you are not suffering from scope creep, you probably are in a position where your margins are shrinking. And so it’s another reason why now is the time to be thinking about raising rates.
You also need to make sure that you are tracking the trends. So it’s not just knowing that you violated the floor for a particular project. It’s also keeping an eye on the overall trends for your agency’s profitability. And is it slowly ticking down? Because the sooner, again, that you can address that, the easier it is to fix that and send it back in the right direction, as opposed to waiting till you’ve gone from 20% profit to five or 10% profit, and now you have a much bigger gap that you need to close.
And the risk is much higher. And everything that I wanted to convey to you today is about decreasing the risk in these rate increased conversations. The other thing that you need to keep in mind, and I alluded to this earlier, is that the, the way that you can raise prices is not always by directly raising prices.
You want to try to make sure that you’re finding efficiencies in your process, and the more work that you do for an individual client, the more efficient you should become at it. Your team should begin to understand exactly what the client is looking for. So there should be less rewrites, less time spent on feedback and revisions.
There should be less research that your team has to do in order to figure out who should you be reaching out to, what kind of ads should you be running, what kind of content works best? All of these things should become easier over time, and so you can increase your cushion by becoming more efficient, which should at least temporarily grow that profit margin.
So make sure that you’re looking for these opportunities to increase efficiencies so that the way that you’re balancing your project budgets and your client budgets is not solely by increasing the amount that shows on the invoice. So how can you figure out how to actually apply this data that you’re collecting, these ideas that you have over what you should be charging?
And my advice is always start with prospects first. If you figured out that you have a new rate that you need to have in order to generally be successful, or you want to have, try a new pricing model. Perhaps you want to go from hourly billing to project billing, or perhaps you want to go from project to retainer.
If you want to do those kinds of things, test it on new clients first. There’s a real advantage to having a clean slate with somebody who hasn’t seen your existing pricing and they haven’t become accustomed to paying you a certain amount for a certain output. These clean slate opportunities give you the chance to test your ideas and figure out can you convey the value appropriately and can you, as importantly, can you estimate the amount of work correctly against what you’re charging to make sure that you actually are achieving your target profit margins.
It helps you to minimize the risk if you’re able to test it, because if you don’t sign a new client, if they, if they reject your pricing model, that’s a lot lower risk than losing an established client that you’re already producing great results for and is contributing to your bottom line. It’s these new clients, these prospects that will also allow you to do that testing that helps you find your ceiling in the floor to ceiling a pricing model, it’s very hard to find a ceiling with an existing client because you’re always either consciously or unconsciously going to be discounting the additional work that you’re doing for them, even when you’re doing a rate increase, and it’s a lot harder to go to an existing client and ask for a substantial rate increase.
Whereas with a prospect, again, you can test out that much higher pricing model and see if you’ve discovered a real ceiling for the work that you’re doing, and that will help you figure out All of this information together now gives you the information that you need in order to start talking to your individual current clients.
As I mentioned before, part of this is by either looking for efficiencies or having a conversation with a client that isn’t first and foremost about, I’m going to raise your price. It could be about coming to the client and saying, look, everything is becoming more expensive. We started going out of scope with the work based on that we’re doing for you versus what we had originally specked out a couple of years ago when we started working together.
And so maybe it’s an opportunity to sit with them and figure out these weekly reports that we’ve been producing. Are you actually looking at them? Is your team using them? Could we reduce the number of reports? Could we perhaps channel our energies into different projects? It is very typical for most agencies to simply continue adding on new things without ever pruning.
This is a great opportunity to sit with your client and figure out what can we prune, what can we adjust in the work that we’re doing? Because that may help you to alleviate the need for an actual price increase, but it may be an effective price increase by being able to do less work for the same amount of money.
And as I mentioned earlier, all of this over servicing this scope creep. It doesn’t happen overnight. It takes time to get there. And so if you’ve had a client and you haven’t addressed this, you might have a lot of opportunities to sit with them. I know I’ve had a number of occasions where I’ve sat with clients and said, look, this is, we’re, we’re doing 20 hours a week of work and we had only estimated 10 hours a week when we first started working together.
We need to figure out how to fix this. Sometimes the client will simply say, I need all of that. I’m happy to pay for it. So sometimes you can turn this around in this conversation if you’re starting by talking about scope creep and over servicing and all of that, and, and they can be the first one to mention the idea of a price increase, which then takes some of the burden and some of the risk away from you.
I’m not saying they’re always going to do that, but it does happen. I’ve seen it happen. You can then have a conversation around how the scope would look different in the future. And the more that you can adjust some of this conversation so that it’s not simply about the price, and you can talk about over servicing or something like that, or you can talk about something new that you, a new opportunity that you see an upsell opportunity, if you will all, you should never call it that with a client.
You simply talk about the new opportunities, the new value that can be created, and perhaps as part of that, you’re able to, to take advantage of the situation to reprice the overall project. And so instead of coming to them and saying, I want to charge you $10,000 on January 1st, the same thing that I charged you $7,500 for on December 31st, right?
People don’t want to pay the exact same amount. For the, or, sorry, they don’t wanna pay more for the exact same amount of work. It’s just a natural human instinct. It’s why we all hate the cable company, right? When we see our bill come out and it’s, you know, we’re, we’re still getting the same number of channels or sometimes even less, we’re being charged more.
So, avoid being in that position by talking about the total scope of work that you’re doing for a client. And if you are able to increase the amount of work that you’re doing for the client, you may be able to rebalance it in such a way that you’re getting an effective price increase, even on the existing work without anyone really having that kind of a direct conversation.
Now, as, as I talk about this, this all sounds fine and dandy, and so you’re sitting there saying, okay, I, I now have an idea of roughly how I can go about figuring out what I should charge, and I can figure out that I probably ought to do it now. And you’ve told me a little bit about how I can tweak the conversation with a client.
But what happens when they balk and absolutely clients do have a tendency to not like to pay more for all sorts of reasons. And a lot of it comes down to how you’re communicating it. Some of it is what we’ve talked about already, which is having that conversation about all of the, the great work that you’re doing and how you can do even better work going forward, or how you can avoid continuing to, to engage in scope creep, how you can bring it back to that original contract conversation.
But I think the other thing that you want to be thinking about here is just having candid conversations with your clients. We have to remember our clients, our people just like we are. And so they have a lot of concerns themselves. And so they’re sitting there saying, you know, well, why isn’t Chip just having a candid conversation with me and saying that my costs are going up?
We’re working out of scope and all of that. So be open in your conversations with your clients and make sure that you’re communicating the great work that you’re doing, the amount of time that it takes to do it, but also the fact that we all know we’re in an environment where costs are going up.
Now, of course, that does create a challenge as well for your clients because their costs are going up all over the place, but their budgets may not be going up. And so you need to think about how you fit into that conversation. And you always want to think about how you can give your client enough lead time to plan.
So I wouldn’t be, as we record this today on December 7th, I would not be going to a client and saying, I’m going to raise your rates on January 1st. I think that’s too short a notice. It may not be impermissible under your contract, depending upon the kind of contract that you’ve signed with them. But it’s not the best way to engage with your clients.
And instead, I would be looking further out, as far out as you can to communicate that these things need to be changed and adjusted. Scope can change more quickly. So again, if we’re going to try to rebalance by reducing the workload, that is something that can oftentimes take effect immediately. And you’ll be surprised how often you, you’ll go to a client and say, do you really still need this report?
Do we really still need to be doing this weekly post that nobody’s actually looking at? Those are the kinds of things that you can perhaps address even more quickly. And so a combination of a rate increase. Followed by, accompanied by a scope adjustment can get you to a really strong place where you’re back to achieving the level of profitability that you need for that client.
So give as much lead time as possible, and the lead time is particularly important for clients whom you know are on a particular type budget themselves, and you ought to be. One of the things that that I always talk about is the importance of really understanding the other things that your clients are doing, because what they’re working with you on, on a day to day basis is probably a very small percentage of their day to day responsibilities.
Understand as much as you can about the pressures and responsibilities and concerns that they may have outside of the work that you are doing for them. It will allow you and your team to contribute more effectively with the work you’re doing, but it also sets you up so that you can have a more intelligent conversation and better time your conversation with them about things like rate increases.
Of course this is a good time to be communicating with your client about what their plans are for the year ahead. If you haven’t already done a 2023 strategic planning exercise with your client, there’s no better time than today to try to get that on the calendar. And if you start to anchor your conversations with the client into the future and into the work that you’re doing, that puts you in a stronger position to go to them and ask for more money, more budget to spend to help them get more results.
So take advantage of that process and that timing of the calendar so that you can structure it that way and start moving in that direction. And people are much more open to having a conversation about a strategic plan for the year ahead than they are about having a conversation straight up about pricing.
So start using the calendar to your advantage for that. And maybe, maybe you sit here and say, well, we’ve already done some rough 2023 planning, so that’s not gonna work for me. Okay, well what other avenues might there be. One of the things that Gini Dietrich and I talked about recently on our Agency Leadership Podcast is perhaps thinking about going to some sort of a quarterly planning structure.
Obviously not as broad and in depth as you would for an annual plan, but if you do a quarterly planning structure that can put you in a position where you can make course corrections in a reasonable period of time to control how much scope creep or over servicing may take place in the future. And if you get in this routine of consistently sitting down with your client on a quarterly basis, it allows you to modulate your workload so that even if you are not able to increase the actual size of the invoice, you can get to where you need to be as a business.
Of course when a client objects and says, look, I, I have no budget available, you’re then in a position where you have to figure out what to do. And so before you even entertain the idea of having this conversation with a client, you need to understand what your non-negotiables are. In other words, what are your red lines?
What are your lines in the sand that you will not go below. It could be that you say, look, I can’t keep working for this client unless I can get a 20% increase in what we’re paying. I once had a client where I had to go to them and say, look for the work that we’re doing. It’s so far out of scope compared to what we had originally agreed that we would have to be paid double in order to continue moving forward.
I thought that was the end of the relationship. I thought on my books, in my mind, that was a terminating the client conversation and that’s where I thought it would wind up. The client actually ended up saying, that sounds totally fair. And so ended up doubling that contract through just a simple 10, 15 minute conversation where we talked about scope creep and how the business had changed in the years since we wrote the original contract.
So, but you need to understand if they’re not willing, if they don’t say, Hey, yeah, we’re happy to pay twice or 20%, or whatever your number is, what’s your recourse? Are you going to say, that’s okay, I understand. I will help you find another option, but we’re not gonna be able to continue forward because we simply can’t do this work profitably.
And there needs to be that point with some of your clients where you just understand that this is your red line and you cannot cross it and it’s uncomfortable, it doesn’t feel good. But we also need to understand that anytime we’re having a pricing or scope conversation with a client, we are forcing them to reconsider the relationship.
So I also would encourage you as you’re thinking about when to do these things and how to communicate, , don’t go to a client when there’s already some shakiness in the relationship. So if you’ve already had, you know, a couple of missteps in the last month or two, it may not be the time to go with a pricing conversation unless you really have no choice.
Maybe it’s a contract renewal period, and so that’s the only time that you have a chance to have a bite at that apple. It is what it is, but if you can pick and choose your timing, you want to pick it when they’re on a high and not when they have concerns. Because if I come to you and I say, I need you to have us do less work or pay us more, it’s immediately gonna cause me to say, well, should I even be working with Chip in the first place?
So really think about that timing and try to get it right, because that’s where you can help to mitigate your risk even further. For example, if you’ve just done a great annual event for a client, you know, while they’re still on that high, that might be the time to go in and have a conversation about what are our plans for the year ahead.
We just, we knocked this one outta the park. We did some great work together. Let’s figure out how we can rescope, reprice going forward. Understand though that there are other things that you may need to say as part of your non-negotiables. It may not, again, be just about price. You may have to go and say, look, we have an either/or situation here.
We can either charge you 20% more or we can do 20% less work, and we just need to figure out where to pare that back. And, and so you’ve heard a consistent theme from me today that one of the things we need to think about is pricing, not simply in terms of what’s showing up on that invoice. Because we, we all fixate on that.
We fixate on what’s in the, the contract and on the invoice and how much is going into our bank account. And we fixate it not just at a client level, but at an agency level. How many times does someone ask you about your business and you immediately start thinking about it in revenue terms? You think about their business in those revenue terms.
For those of you who are in the PR agency space, I’m sure you all saw that not too long ago edelman crossed the billion dollar revenue threshold. And so we all talk about how they’re a billion dollar agency and that sounds great. How many of you know what the profit margin is for Edelman? You don’t. But at the end of the day, it’s the profit margin that is what matters.
And particularly for those of us as we’re running small businesses and small agencies, the amount of money that we actually have left over at the end of the year is what matters. Everything else is just bragging rights. and the total top line revenue, that’s not a great sign of health. It’s not the real indicator of things because there are plenty of high revenue agencies out there that have awful profit margins.
There are lots of mid to large size agencies where I guarantee you the agency owners are making less than some of you are. And so that’s, that’s not how you want to be thinking. You don’t wanna be focused just on the top line for the agency or the, the actual price that the client pays. You really want to find that right balance where you’re able to produce great results for the client.
You’re able to set a price that they’re happy to pay. You’re able to do the work for a reasonable amount, and that’s able to contribute to your bottom line with the kind of profit that you’re looking for. And so that’s sort of gonna bring us to the, the wrapping up point of the presentation portion. And as I said, I will jump to the Q and A here in a moment.
So if you do have questions, feel free to drop them in the box. But I really do encourage you to take this broader view of raising prices for your clients. I would encourage you to be looking at that sooner rather than later because you want to make sure that you have your ducks in a row and that you’re actually strategically thinking about how you are pricing, how you’re going to adjust the specific prices for your each, for each of the individual clients that need to be addressed.
And if you do that, then you will de-risk a lot of this process and you will get yourself to a place where you’re a much healthier from a financial standpoint. And the healthier we are on our P&L, the better our balance sheet looks, the more comfortable we are and the, the more we can make reasonable decisions that will help us continue to grow our businesses instead of just struggling to make sure that we don’t lose ground. And as we’re in an environment where all of our costs are increasing, where it’s continues to be difficult to find new talent where clients are being a little bit stingier with their new business opportunities that they’re giving us because they’re slowing down their proposal reviews and all that as they’re looking at the economic uncertainty around them.
And so they’re trying to be cautious. We need to be really thoughtful about these things today and taking advantage of all of the lessons that we can learn, not just from our own books and our own experience, but also from those around us. So that will take us to the Q and A portion here. I’m gonna grab a quick sip of water and as I take a look here at some of the questions, and we’ll start rolling through them here in just a moment.
Okay. Let’s see. It looks like we did have a few come in here while I was talking, so let me do my best here to read from the screen and sound halfway intelligent as, as I read through them. I know hourly pricing isn’t trending these days, so can you give some suggestions for how to charge clients when they ask for a quick and sometimes not so quick add on here or there?
So this goes to the scope creep question. That is what gets us into some of these pricing predicaments that we have. And so, you know, one of the things that we need to do, whether we are being the, the direct manager of the client work or we have an account executive or account manager who’s handling the day to day, is to make sure that we are being very clear about what is in scope and what is out of scope.
And it doesn’t mean that we should never agree to doing out scope work. We want to be in a position where we are being helpful to our clients. We are producing good results. And frankly, when we’re putting together our project budgets, we would assume we should assume a certain degree of over delivery because we all like that when we get that little bit extra, it’s sort of like when you sit at a bar and the bartender pours a little bit more than the shot into your glass.
It makes you feel good. But the business has, has, generally speaking, accounted for that in their pricing and they know that that’s going to happen. They, budget for things like the birthday cake that you get at the restaurant, you know, the, the free dessert that you get. Those all make us feel good, but they are actually incorporated in the pricing if the business is running well.
We need to be thinking the same way when we’re putting together our project budgets so that we don’t have to nickel and dime our clients. And, and I think the, the nickel and diming is where a lot of agencies and other businesses get into trouble. And, and I often tell the story that when I first started working for an agency back some 30 plus years ago now, we would sit down and, and we would charge the client for individual pages of faxes or copies or those kinds of things.
Fortunately, we’ve gotten away from a lot of that today, and so we’re not billing a lot of those day to day expenses directly to clients. But those things can feel painful when you do. So you need to, to think about as this question goes to those quick or sometimes not.so quick turnaround things.
How much of this do you want to account for in that initial project budget? And how much are you willing to actually agree to, if you are in a position where you’re getting these kinds of requests from clients, from a client on a regular basis, you need to call it out. And in your weekly calls with them or other communications that you may be having, you can say, Hey, look, you know, we, we agree to do one or two things out of scope, but this is happening consistently.
We need to address that. And if we’re going to be getting a lot of out scope requests, then we need to look at either charging for them individually or perhaps increasing the overall scope of the retainer or project budget or what have you in order to account for it. Of course, in some cases you may be doing hourly billing, in which case you can just account for it that way, but you still, even when you’re doing hourly billing, the client usually has a certain expectation for how many hours you’re going to be spending and so therefore, how much it is going to cost them.
All right, so let’s go onto the next question that I have in the queue here. Let’s actually got a whole bunch in here, so let me try to pick out some good ones. So you know, I, I have said on other podcasts that inflation is, it’s certainly a factor, but it’s not what we should hang our hat on. And so this question is why, why shouldn’t I blame inflation? When that’s really the truth? And why should or should I use an annual increase as cost of living goes up every year?
So an annual increase. I, I guess in the actual contract itself, which I, I know some of you do have automatic escalators in your contracts. I will be honest with you, I am not a fan of automatic escalators. I think that it, that goes into the category of coming close to nickel and diming, and it puts you in a position where you’re gonna be getting, in many cases, a couple of hundred bucks more from a client because you put in a one, two, 3% escalator and it doesn’t really serve the purpose.
I, I always think that it’s better to have a conversation with a client about the value that you’re creating and anchor those conversations into the future as opposed to, you know, getting that that meter rate increase, if you will, that you get from the electric company or the gas company or those kinds of things.
It’s just, it, it, it leaves a sour taste in the mouths of many of your clients when you do that. And so the more that you can deal from a position of strength, you can actually get meaningful price increases as opposed to these, these little ones. And, and frankly, you know, we’re looking at a situation now where even if you have, say a 3% escalator in your contract, if inflation is, you know, at 8%, you’re still coming out behind.
So and once you’ve got that escalator in your contract, it now makes it a little bit more challenging to come in and have a separate price increase conversation. So for me, I wouldn’t be putting in annual increases automatically by contract. I would be having substantive conversations with clients instead.
You say that quarterly planning provides more flexibility than annual planning, but won’t that eat up a lot of time negotiating with the client four times a year instead of one? So when, when Gini and I on our podcast talked about quarterly planning, when I mentioned it today, it’s not about renegotiating the contract four times a year.
Obviously that would be a nightmare if you were doing that. It’s really about saying, okay, let’s assume that we’re spending X number of dollars over the course of the year and we’re allocating one quarter to each quarter of the year. So let’s say, you know, we’re spending a hundred thousand dollars for the year, that means we’ve got a $25,000 budget for each quarter.
And so what we’re sitting down and doing on a quarterly basis is simply deciding, you know, where we’re gonna put our pieces on the board for that quarter. And so it’s not about renegotiating. It’s not about setting a new price for each quarter as you might on an annual basis. Instead, it’s figuring out how to allocate those resources intelligently and forcing both sides to have a candid conversation about how this would work.
And, you know, making the trade off conversation. Because anytime you say yes to something, you should be saying no to something else. And you need to understand that. And the more that you help your clients to understand that, you can say, look, whether, and this is whether you’re doing quarterly or not, it’s very easy if a client asks you to do something out of scope, you can always go to them and say, look, happy to do that.
Can we, can we perhaps, you know, get rid of this or postpone this in order to do that? Because a lot of times clients are perfectly happy to rearrange the pieces on the puzzle, even if you don’t have a quarterly process that you’ve put in place. That we often assume that that, that a client just always wants everything that they’ve ever asked for.
A lot of times clients forget about things. They may ask you to do one thing and you’re still charging ahead with something else that was a priority two weeks ago. But maybe that priority has changed. Have that conversation and spot it as quickly as possible. And one of the things you all need to do is you really need to empower your account managers, your account executives to raise these issues, if not with the client, at least with you, so that they can be raised with the client.
You want to spot these things because there are opportunities to handle them in the moment that are much, much easier than when you have to go back and fix it after the fact. What if a client insists that they don’t have enough budget to pay for my increase? Well, as I alluded to, there are, or not alluded to, I said it straight up.
There are situations where clients don’t have the budget, maybe. They’re in a situation where they’re having just as much trouble as you are, and so they, they need to hold fast. That’s where you need to have the conversation about reducing the, the amount of work that you do. In all likelihood, because again, if you can get to the, the profit place either by increasing prices or reducing work, then you need to make sure that you’re going there.
And it’s, this is consistent with what I always argue with you when you’re putting together proposals for clients and you’re talking to them about work before they come, a client become a client. If they want to reduce the, the price, if they want to reduce the contract value, then you need to make sure that you’re reducing the work as well.
Because if you simply give them a, a normal discount and say, okay, well sure, you know, we, we can do that for 10% less, and you haven’t reduced anything, you haven’t changed any of the criteria in the in the proposal, in the scope of work, then you’re in a position where, A, they feel like they were overcharged to begin with, and B, they come to expect that they can just, you know shaving back on your costs.
The other thing to keep in mind here, and this is true for someone who doesn’t have the budget, perhaps when they’re getting started, but it also has to do with, with clients now who you may go to and say, we need to charge you more. And they say they don’t have the budget. You can always look at terms.
And I think a lot of times in the agency world, we overlook the importance of terms. And we just saw recently in the news that there’s a major brand that’s trying to get a PR agency to accept a 360 day payment term structure, which is just bonkers. And we, we have seen in recent years the number of clients who are asking for more than 30 or 60 days to pay an invoice.
It’s now not uncommon to see 90, 120. I had seen 180 as, as the one that sort of blew my mind before, but, you know, we’re now at 360, which is just, i, I, I can’t even wrap my mind around that because anything over 30 days is really turning an agency into a bank. And you all are not set up to do banks, nor should you be.
And it, it’s, the irony is it’s mostly large well financed businesses that are the ones that are the, the most guilty of applying these kinds of just awful payment terms. And so for them to be taking advantage of small businesses who are really looking for the opportunity to work for these kinds of brands, I, I just, I, I don’t understand it, but think about terms when you’re working with clients to resolve some of these pricing issues because, you know, it would be perfectly reasonable to discount the total cost if they were to prepay all or part of the amount.
And so, particularly for those of you who are working with clients who may have use it or lose it budgets that that expire here in the next few weeks, it might be an opportunity to see if they, they can prepay for part of their service for next year. And that can serve you. As well, or almost as well as a price increase because it gives you more cash flow to work with, which gives you more breathing room and more flexibility in some of the decisions that you have to make.
It might, if they, if you had one or more clients prepay for all or part of their 2023 work, it could give you an opportunity to invest in that new hire that you’re looking for to get stuff off of your plate. It could give you an opportunity to perhaps invest more in some business development work in the first quarter of next year so that you can accelerate your growth that way.
There are lots of things that you can do with payment terms that can be very beneficial. And so make sure that you’re not overlooking payment terms when you’re thinking about pricing and profitability. I have a client that has been with me for many years, and I know that they aren’t paying me enough, but I’m afraid that I will lose them if I charge them my current rates. How can I fix that and not upset them in the process? So we all have these clients, or most of us do. I, I know when I was running my own agencies, I would have clients that have been with me for seven or eight years.
My business had evolved a lot in seven or eight years, but a lot of times those clients hadn’t. And so one of the things that, that you need to be thinking about is are you still a good fit for them? And it, it’s, this is difficult because there are often personal relationships involved. If it’s someone that you got early on as an agency, it was probably a personal relationship that won it.
If it’s not that, it’s probably you’ve developed a personal relationship in the amount of time that you’ve had a client like this with you, I’m assuming. When, when this person says many years, it’s probably, you know, 5, 6, 7 years or more. And so when you are. In that kind of position, emotion comes into the picture more than it probably should.
And so you need to be thinking about whether you just want to continue to do it because you enjoy the relationship with that person, you just enjoy the work that you do for that client. And you’re, you, you accept that you are doing so at a loss or at least at a lower profit margin than you would normally want to.
But at least do so consciously. Don’t, don’t do it. You know, just because inertia took you there. I think many of you know that, that I rant about inertia all the time because I think that too many agencies are, are operating on inertia. And it’s because we always did things this way. And when I go in and talk to a new agency client and they say it’s always been done that way, that it’s the most frustrating thing that I can hear because it, it means that there’s not a thoughtful process behind why we’re continuing to do it.
And I’m very much into making intentional decisions about the direction of the agency and, and how we’re working with our client. So if it’s an intentional decision to, to to work at a lower margin for a client, a long-term client cuz you like working with them, that’s great. If, as it sounds like in this case it, it, this owner it sounds like wants to fix that and without upsetting them, look, you, you might upset them.
My experience most of the time though is that clients they understand and, and a lot of times they’ll say, yeah, I know we’ve been sort of getting away with this one that. , you know, you’ve gone on to working for the Fortune 500 and, you know, we’re just a, a small local mom and pop shop, so, you know, I appreciate that you stuck with us this long.
You know, we understand. The reality is in, in most cases, those kinds of clients, if there’s that much of a discrepancy in what they’re paying, the odds that they’re gonna true up and, and get you know, to where they really need to be. It’s pretty small. You may wanna look at is there an opportunity to get at least a token increase so that you feel a little bit better about working at, at a lower margin.
But it’s, it’s not as small as before. You know, this is really one of those ones where you just need to figure out how it fits into your big picture. It is a place where I would say that you should be thinking, generally speaking, though, about whether you’re delivering results for that client in the way that you really ought to be though.
Because my, my experience both personally and with the agencies that I work for is when you start having clients that are much, much smaller than the vast majority of the current client base, you often find yourself in a position where you’re ignoring them. Not intentionally, but because if I get a call from a client that pays me almost nothing and my biggest client on the same day, who am I gonna jump up and help first?
And if that happens too often, then you really start neglecting those small clients. It’s why I have what I call the 4-20 rule. And, and basically what it says is that you, all of your clients should account for somewhere between 4 and 20% of your agency’s total revenue. If you keep it to 20% on the top end, you won’t have these giant whale clients that have material risk to the business if they go away.
And if you keep it above 4% on the, the bottom side, you have ’em where they’re generating enough revenue for you that, that it’s interesting and, and, and not something that you’re just gonna totally neglect at, at the, the first opportunity to, to go work for one of your other clients that’s paying you a lot more.
All right. We can probably get to one or two more questions.
People tell me all the time that I’m expensive, but my numbers still aren’t where they need to be, so I feel stuck. Okay. No question there, but I I, I, I’m gonna tackle the comment anyway. So it’s not uncommon for agencies to feel like they’re being told that they’re too expensive or even to be directly told that they’re too expensive.
Here’s the thing, it may be that you’re not talking to the right people, the right prospects. And the reason why I say that is because most agencies that I’ve worked with have very reasonable pricing structures bordering on too inexpensive. So if, if you’re being told that you’re too expensive, you may not be targeting clients who have the right kind of challenges that you can solve and create the value that justifies what you’re charging.
It also could be that you’re working with prospects who are not as serious about the, the work that they want to do, and, and they’re sort of tire kickers. In order to figure out if you actually are too expensive in, in other words, how to find your ceiling in the floor to ceiling pricing model. You need to be out there and, and not just hearing that you’re too expensive.
What you need to be is observing that the prospects that you’re talking to end up hiring someone to do something similar at a lower price. Obviously this is fairly difficult to know for certain, but most of us, when we’ve worked with prospects and they say no to us, you know, certainly we should ask, you know, who did you go with?
A lot of times they won’t tell us, but a lot of the work that we do in the PR and marketing communication space, you can see the work that’s being done and so you can tell at least they’ve hired somebody. You can’t tell necessarily what they’re paying for it, but you know, to me, unless you have a situation where someone is willing who, who finds someone who is willing to do comparable work for less money, you don’t know that you are priced incorrectly.
You may feel like you’re priced incorrectly for the prospects that you’re talking to, but that doesn’t mean that your pricing model is bad. But let’s assume for a moment, let’s assume for a moment that you’re consistently losing similar work to folks who are willing to charge less. Well then you need to look at the work that you’re doing and figure out does it simply cost you too much to produce the results that you’re promising?
And there are certainly circumstances where we haven’t built enough efficiencies into our own system, and so we cannot do the work that others can. And there are certain kinds of agencies where volume is really how they get the work done efficiently and profitably. Most of you who are part of the SAGA community, and most of you probably who are on this webinar today, are watching the replay on the SAGA website are not high volume agencies where you’re simply churning out lots of cookie cutter work.
And so if, if the work that you’re doing is primarily competing with those cookie cutter agencies, then you need to, to shake up what your offering is, what your value proposition is, and what your target market is so that you’re not competing head to head with the high volume cookie cutter agencies. Or I tend to think of them more as service providers rather than agencies.
That’s a whole debate we can have another day. What, what those kinds of businesses really are when they’re you know, going through that level of churn and that number of, of clients on a consistent basis. So think about those things and, and don’t, don’t overreact when you’re told that you’re too expensive and understand that too expensive is a relative term. It’s sort of like, you know, Ferrari being told that they’re too expensive. Well sure they are for the vast majority of the market. They just need to be, the Ferrari dealers need to talk to the right clientele and, and then they do just fine. Or at least, so I hear I can’t even drive a stick shift, so a Ferrari’s no good to me.
Anyway. Alright let’s try to do one more question here and then we will wrap up for the day. I do a lot of work with nonprofits and they are always asking for discounts. I want to help them, but I need to make money also. How do other agencies handle that? So I think. A while back, a long while ago, probably now, I, I wrote an article about how to handle non-profit discount requests.
So you can find that in the search engine on the SAGA website. But in a nutshell, here’s how I think about non-profit discounts. And, and in this case, if you’re an agency that’s doing work primarily with nonprofits, you just need to factor that in that thinking into your pricing structure overall.
Because at that point, it’s not really a discount per se. It’s, that’s just the business that you do. If you are a business that primarily works with, with other kinds of, you know, for profit organizations when you get the occasional non-profit, they may well ask for a discount. And you may well consider it. What you need to be thinking about when you’re doing non-profit discounts is essentially if, if those, well, there’s two ways to go about it.
The first is you can sort of follow the Joseph A. Bank model. And for those of you who have never bought men’s suits or such from Joseph A. Bank I used to, back in the day when I wore a lot of suits they are always offering these crazy three for one kind of specials and that sort of thing. So they have really high list prices for anything that you buy normally, but everything’s always on sale in one shape or form.
And so you can do the same thing. So you can have your pricing that, you know, you’re gonna end up discounting. I personally don’t love this because to me I find it a little bit deceptive, but it, it works for a lot of people. So that’s, that’s one way that you can handle non-profit discounts. The other way is if you actually are, you know, if you say, look, this is my true pricing for this work, but because you do good work, I’m willing to to, to give you a, a non-profit discount.
You shouldn’t think about it just in sort of, terms of, oh, sure, I’ll give you a five tip percent, 10% discount. You should think about it in terms of whatever kind of discount you’re giving is, is effectively a contribution to that organization. And so what that means is, as an agency owner, you need to think about what the amount of that is.
So, you know, if let’s say it’s a hundred thousand dollars contract, you give a 10% discount, that’s effectively like giving a $10,000 donation to that organization. Is that something that you would feel happy doing? And I, I mean that in terms of not just the dollar amount, but is this an organization that, that you feel strongly enough about that you would want to support them in that way, in which case absolutely.
Go for it. Right. It’s one of the benefits that we have in having our own businesses is we can make decisions about what kind of nonprofits we want to do work for at a discount. We can make decisions about, you know, doing a sponsorship for our kids baseball league or those kinds of things. Those are all the freedoms and flexibilities that we have as a business owner, and we should take advantage of that.
But again, to my earlier point, it should be intentional. It shouldn’t be just sure we’ve got a standard non-profit, 10% discount. We give it to everybody under the sun. It should be a conscious decision that you want to help that specific organization. And so that’s why you’re willing to take a haircut on your profitability. If you’re doing it for any other reason, if you do it just because you think, well, this is what’s expected, then you put yourself in a difficult position because now you’re effectively forcing all of your other client work to subsidize those non-profit discounts. And if, if you’re not happy with the fact that you are explicitly doing that, then you need to be rethinking that decision to have across the board non-profit discounts.
So, but I talk more about this in that, that article. So go ahead and use the search engine or send me an email and I’ll find it for you. Chip@smallagencygrowth.com. Right on the screen there still. All right, so with that, that will draw to an end today’s webinar about raising prices for your existing clients.
I appreciate everybody who has spent the time with me today. If you have one of the questions that I was not able to get to, cause I can still see that there are a few here in the queue that I didn’t get to, just drop me a note email@example.com and I would be happy to try to answer your specific question.
Of course feel free to visit smallagencygrowth.com for lots of additional resources on pricing and other things. The search engine been really working on that lately, so it’s, it’s a lot more useful and, and hopefully can help you identify some good resources right away. But as always, feel free to email me if you can’t find something and I will try to point you in the right direction, either on the SAGA website or somewhere else in the agency community because there are lots of other smart folks out there sharing lots of other great content.
So with that, thank you all. I appreciate your joining me and I look forward to seeing you back with me for a future webinar.