Many digital agencies are small businesses, building upon intimate relationships with each of their clients. Others are in pursuit of growth, either to be the creatives for Fortune 500 companies or to scale with volume.
My company works with many different agencies as their development partner, and they all have in common the wish to be sustainable and profitable. It’s a tough market out there, and agencies face competition on many fronts. So how can a WordPress agency go from good to great? This article presents four strategies that can increase an agency’s profitability.
From break-even to profitable – four strategies
Assume that you have a small web agency with three people on the team and your own office. One designer, one developer, and one CEO/project manager/salesperson. Probably you’re all doing a bit of project management and sales.
Let’s run through some very rough estimations for the costs and revenue of your business. You can skip the number exercise and head straight to the strategies if the example doesn’t apply to your operation.
Depending on where you operate and how senior your staff is, the cost of salary will differ greatly. For this example, we assume an average annual salary of $55,000 per person. The costs of running the shop would then be around 3 x $55,000 (salary) + $35,000 (office and other costs) = $200,000 per year, or $17,000 per month.
You have 500h each month of capacity (3 x 168h), giving an average hourly cost of roughly $35. Let’s further assume that you spend 20 percent of your total time trying to close deals that never go through. That leaves 400h per month to spend on the sites that you build, and closer to $45 per billable hour. In this example from Hubspot, the effective cost was as high as $73/h due to counting on higher salaries and overhead, so make sure you run your own calculations too.
A typical WordPress site can cost anywhere between $2,000 and $20,000, but for this example let’s set the average price to $5,000. In order to break even with $5,000 website projects, you’d need to build four of them per month (in: $20,000, out: $17,000). I put a bit of margin in there – as a business owner, you know that’s needed.
The four strategies to increase profits
Now that’s a three-man-shop breaking even, and the Porsche of your dreams is still on a poster and not in your garage.
From a business development perspective, there are four different strategies for how you can start saving up to that sports car:
- Premium pricing
- Economy of scale
I’ve worked with agencies successfully integrating all combinations of one or more of these into their model. Let’s dig deeper into each and see how they can be realized.
There’s really no reason you shouldn’t work with retainers. For your clients, it’s extremely important that their site is running smoothly, and they don’t want to worry about what to do if something happens to it.
Further, there are all kinds of SEO and PPC services that go together with having a website to make sure someone sees it. In the analog world, you see stores opening up on the street outside the main street all the time, only to close down and be replaced by a new one shortly after since no one was walking by. You know that building a website is like opening a shop in the middle of nowhere. Making it visible is key to making it effective, and your client needs some help there.
A typical retainer can generate $100 – $300 per month, which means already at your baseline of 40 sites per year you’d be increasing your monthly revenue by $4,000 – $10,000 if you got them all on retainers. That’s up to 50% extra revenue per year – not bad.
However, you’d need to have the capacity to work on them, and maybe half a team member would be enough for supporting 40 sites comfortably, which is a yearly cost of $25,000 extra to make $50,000 – $100,000 more.
2. Premium pricing
I have a great example here. One of the partners we build websites for have quadrupled (4x) their prices during the last 5 years. And they claim that the sites are basically the same. So what’s the difference?
Two things. First, they hired a sales consultant to learn how to sell the value of a website to their customers instead of just the product to get online. Second, they established a reputation for building great websites and made sure their own site was representable of the work they do.
If you’re not a salesperson yourself, find one who is or get a consultant if you’re up for learning the tricks of the trait. And, make sure you know what value your services have to your clients. Mike Ramsey has written an excellent post about it as part of his lessons learned from building a successful internet marketing agency. It will pay back greatly to sell a site for $10,000 instead of $5,000.
Cost-cutting goes hand-in-hand with efficiency improvements. The cost for you to build a website for your client is 99 percent made up of manpower. You need to spend less time with your client and on his website if you want to save money on the project.
If you’re currently spending 100h on each client, it might look something like this (cost at $35/h):
- Closing the deal: 10h ($350)
- Collecting client specifications: 15h ($525)
- Design: 30h ($1050)
- Development: 30h ($1050)
- Tweaks and fixes: 15h ($525)
You can surely save a little time here and there, but the effects will only make a difference if you combine it with the fourth strategy – scaling. Think this way: if you save 10h on each project, you can use those 10h to close the next deal. And so on.
4. Economy of scale
If you sell more, you make more money. The general rules of how to sell more are beyond the scope of this article, but instead, I’ll dig into how you can make sure your costs don’t double when your revenue does.
For most agencies, the idea of scaling is just as enticing as it is frightening. Creative entrepreneurs who are the founders to most agencies sometimes hesitate to build a website factory, over the fear of losing touch with the craftsmanship that got them there in the first place. But that also means an opportunity for those who have an operations mindset.
I find this strategy to be the most challenging idea to the agencies I talk to, so I’ll be a bit more detailed in this section.
Can websites really be mass-produced?
Website clients see their businesses as unique and want websites that speak to their visitors with a good balance of being trendy without looking like every other website online. This is where the craftsmanship of the agency comes in – how to match the needs of your client to a custom designed website that converts. To find a solution, we need to glance at other industries that lead the way in economies of scale.
In the manufacturing industry, this has been a key challenge for a long time. How do you provide a wide range of products to match a diverse customer group, while keeping the operations simple and standardized to get a streamlined process and low cost per unit. The answer there is mass-customization. That is, mass-production combined with customization.
In the automotive industry, different brands have cars that look very different, feel different, and sound different. But underneath the hood, 75% of the parts are identical across brands that are owned by the same group, or who collaborate across corporations.
For web agencies, the first step in this direction was already taken about 5-10 years ago. With WordPress as the CMS, 28 percent of the world’s websites already use the concept of mass-customization. The majority of the code is the same on all of them, but the front-end is uniquely tailored to each website owner.
However, there’s no need to make websites more unique than necessary. For this reason, we sometimes help growth-minded web agencies to create a set of page templates that allow enough variety to create results that look unique to the clients, but that simplify the work for both designers and developers a lot. You might say it’s the lean and flexible alternative to using premium themes, keeping you in full control of the sites you hopefully manage on retainer plans.
Specialization of roles
The other side of scaling is a specialization of roles. When we helped a web agency grow from selling four to forty WordPress sites per month, the roles became very specific. They had their sales team and designers in-house, working closely with the clients.
Then the agency collected all necessary information on a standardized format for their seven developers that were rented from us, and we had a dedicated quality assurance engineer and a team leader to manage the development team for them.
Cost structure with economy of scale
A typical website project now took 50h instead of 100h, with the approximate breakdown:
- Closing the deal: 5h ($175)
- Collecting client specifications: 10h ($350)
- Design: 10h ($350)
- Development: 15h ($525)
- Tweaks and fixes: 10h ($350)
Note that this is the cost breakdown of a simple WordPress site, and the development time for more complex WordPress sites can be much higher.
There’s no reason to stick to just one of the strategies, but I would recommend one of the following combined approaches:
A. The premium web agency (1. Retainers + 2. Premium pricing)
Get some sales training and dig into the needs of your clients and how you can provide supreme value for them. Spend the extra time on each project to get quality right, and to make sure they are satisfied enough to tell their friends about your agency for free advertising.
This approach targets more premium clients, who can expect a return on investment and have the funds to invest. But don’t be fooled, most small businesses can get ROI from a $10,000 investment.
B. The large-scale operations agency (1. Retainers + 3. Cost-cutting + 4. Economies of scale)
Set up your agency to deliver quality websites at reasonable prices. To help to scale, you need to also appeal to clients who don’t take the bait if you charge $10,000 upfront for a website. But they can afford something like $5,000 for it, and will happily spend $200 per month to make sure it stays up and active with some support for smaller fixes.
With this approach, your team is centered around sales and operations. You have designers and an operations manager who coordinates the PSDs to WordPress process, which might be sourced to a white label development agency. With the large scale of your operations, you’ll soon have more revenue coming from retainers than from new website development.
Having a small agency is comfortable and joyful, and maybe stressful at times when sales is weak. But if you have your eyes on a Porsche, or want to put your name on a bigger building, you need to think large.
Which one of these two approaches suits you and your skills? Or do you have another ace up your sleeve? Please share your thoughts in the comments.