by Tim Williams, Ignition Consulting Group
Would you like to earn money while you sleep? Most of your clients do.
While most product and service companies have diverse ways of generating revenues, agencies and other professional firms generally don’t make money unless they’re recording hours on a timesheet.
“Work a million hours, make a million dollars,” as the saying goes.
This is why the agency business is not really scalable. As long as your product line consists of “billable hours,” the only way you can scale your business is to add more people. And with the current pricing pressures on the time-based compensation system, this makes agencies perpetually high-volume, low-margin businesses.
But it doesn’t have to be this way. An emerging crop of innovative firms across the globe are successfully cultivating new revenue streams, diversifying their sources of income, and yes, even making money while they sleep.
How do they do it? Here are seven ways you can accomplish this in your own business.
Purposefully diversify your compensation approaches with clients
Your personal investment portfolio (the money you’re saving for retirement) is diversified for a very good reason: you’ll get a much better rate of return. The same logic holds for your firm’s compensation portfolio. If your revenue streams are generated in a variety of different ways, you can dramatically improve the chances of earning an above-average year-end profit.
Replace a standard rate card with an array of revenue options (a “pricing stack”)
Besides being remarkably uncreative, a standard list of hourly rates is a wildly suboptimal way to capture the value you create for your clients. When asked by a prospective client to supply your “rate card,” respond instead with your version of a “pricing stack” — an assortment of different ways your firm pricing its services. These can include such approaches as:
3. Risk Management
Bet on your own success by injecting elements of risk in selected opportunities
Not every prospective client is a candidate for an outcome-based compensation agreement, but some are. When you sense an opportunity to get paid for marketplace outcomes instead of agency inputs, seize it. You’ll learn from it and get better as you go.
Turn selected solutions into programs and products
As stated earlier, labor-based services on their own are not very scalable. But programs and products are. By packaging up selected services into programs and products, you enhance the perceived value of your offerings and create the potential for new ways to charge for what you do.
5. IP Ownership
Package your intellectual property in ways that can generate recurring revenues
Most firms have a wealth of valuable intellectual property scattered across their file servers. This can be “productized” and licensed to clients. Look for opportunities to license existing IP (software code, analytics dashboards) instead of approaching every assignment as “work for hire” in which the client automatically owns the IP. Why should your clients buy everything you do for them when they can rent some of it for much less?
6. Unmet Needs
Move beyond widely available services to develop solutions for the unmet needs of clients
The profit problems at most firms can be correlated directly with a service offering that the business strategist Clayton Christensen calls “overdeveloped services.” Good luck charging a premium price for something clients perceive they can get down the street at half the price. Instead, turn your energies to the “underdeveloped services” designed to meet the unmet needs of the marketers you serve.
Adopt a “test and learn” approach to generating revenue streams
The most profitable agencies we have ever worked with have the attitude that every new assignment is an opportunity to craft a new compensation approach they’ve never used before — the equivalent of a pricing “test kitchen.” They expect varying levels of success, but that’s the point. They learn from their experiences and get better and better at developing more creative, more effective ways of capturing the value they create for their clients.
Pricing professional Hermann Simon, co-founder of the global pricing consultancy Simon-Kutcher & Partners, offers an effective summation of the argument for diversifying and differentiating your pricing: “The profit increase we can realize from differentiated prices is always greater than when we try to fine-tune our way to an optimal price.”