Beefing Up Agency Margins Through Social Intelligence

Beefing Up Agency Margins Through Social IntelligenceAny one who has ever worked for a creative or communications firm – or even attempted to start their own – knows the financial side of the agency world can be a tricky beast. Agencies are mostly considered “services”, and the margins for companies in the services space are often razor thin.

Most agencies operate on a retainer-billing model where they charge clients either a recurring monthly fee (for example, $15K/month), or an agreed-upon amount based around a project or campaign (like, $25K for work around a product launch or trade show). The retainer amounts and length of engagements vary from firm to firm, but the point is, most agencies bill in terms of monthly retainers and project fees.

And within these monthly retainers, the agency often outlines, explicitly, what services the client will receive in exchange for their monthly fees, along with an estimate of how many hours the agency team members will spend servicing their account. For example:

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The Mitch Agency charges Company X $20,000/month for communications work. Scope of work includes:

-$6,000: [40 hours (@ $150/hour) for media pitching, placement and reporting]

-$3,000: [15 hours (@ $200/hour) for communications strategy]

-$3,000: [12 hours (@ $250/hour) for content creation for web site, news releases and blog]

-$1,500: [10 hours (@ $150/hour) for crisis communications, alerting, and awareness]

-$1,500: [5 hours (@ $300/hour) for media training of executives and public-facing staff]

-$5,000: for misc. costs, such as travel, subscriptions, tools, ad hoc requests, etc.

Total: $20,000/month (80-plus hours/month)

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Keep in mind, the above scope of work is very, very basic and non-descriptive. But this is typically how many firms determine client costs, and how they lay them out.

The tricky part to all of is the hours’ piece. While an agency may designate 40 hours/month on a retainer sheet for media pitching, placement and reporting, in actuality, that agency may spend 50 hours accomplishing this task. This overage could be for a number of reasons — it may have been a particularly busy month on the pitching front; there was an unexpected story that boosted visibility; or the firm just didn’t do a good job of tracking its hours.

Regardless of the reason, the agency is now in the unenviable position where they either have to charge the client an unexpected fee for the additional work, or, simply, the agency has to eat the cost (which they’ll often do to avoid aggravating the client). And rather than pocketing the $20,000 for the client work and netting $3,000 (after overhead costs), the agency now pockets the $20,000 but loses $1,000 because of the extra costs it incurred to keep the staff working and lights on during those extra ten hours.

Again, this is an overly simplified example. But the gist here is, agencies have very thin financial margins because they’re selling strategy and human-generated services, which are much more vulnerable to human error and loss of profitability then if the product sold was something tangible and transactional, like software, cars, real estate, etc.

Social intelligence reporting can greatly improve agency margins

So, how can an agency offset its thin margins, while at the same time stay current in its offerings and diversify its product set? Easy. That agency can begin selling and packaging social intelligence.

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From what I’ve seen in the market the past year, it’s safe to say most companies are doing very little in terms of collecting and analyzing social intelligence that directly impacts their business. Sure, that company may have a Twitter feed, Facebook Fan Page, and LinkedIn microsite. But when it comes to making light of the trillions of data points in the social sphere, those organizations are doing next to nothing.

Even more surprisingly, very few firms have the tools and the know-how in place today to help companies understand and take advantage of this expansive data set. This represents a GIGANTIC market opportunity for all kinds of agencies – communications, digital, marketing, advertising – to begin collecting social data on behalf of their clients, and then report back those findings to their clients on a weekly/monthly/quarterly or annually basis.

Using another basic example, let’s say a small agency works with a dozen clients who each pay, on average, $8K/month in retainers. This amounts to $96K/month in retainer fees for the agency, or just under $1.2M/year.

What if the agency introduced to all its clients a very simple set of monthly social intelligence reports, where the firm billed each client at the modest rate of $750 each?

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If we do the math – $750/report x 12 clients x 12 months – that agency just grossed an additional $108,000. This represent a 10% increase on top of what it was just earning on its old set of standard services.

Better yet, the margins in selling the social intelligence reports are, likely, far better than normal agency offerings, as the only incurred costs to the firm are (a) the data and platform fees (which are extremely reasonable in today’s market), as well as (b) the fast time it can take to extract social data and productize it by way of a report.

Bottom line

Most communications agencies operate in the services space, and as a result, they are subject to thin margins due to the fact that they’re selling strategy and counsel, which are not tangible things. Agencies can improve their bottom lines, not to mention, expand their suite of services, by investing in social intelligence software, and then re-selling this data back to their client base. Social intelligence reporting is a relatively untapped market, it’s easy to productize, and can be quite lucrative.

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