“What kind of agency are you trying to build?”
This is the question that I’ve asked a couple of my agency clients over the last two years when the topic of deliberating churning clients has come up.
Most agencies (including my own) go on a similar journey. They start relatively small and take on projects at pretty much every level of revenue – perhaps with a very low minimum. Then as they grow and take on more clients, this minimum naturally increases.
As time goes on and they take on bigger and bigger budgets, they start to increase that minimum budget and naturally, this means that a bunch of older clients (we tend to call them legacy clients actually) fall below this level.
This is when agency owners and senior teams start talking about whether to churn those clients and if so, how do they do it? I mean, it can be a bit of an awkward conversation to basically say that you’ve outgrown them and perhaps they can’t afford you anymore!
It’s a bit mean given that some of them were probably amongst your earliest clients, right?!
But it may be necessary to do so in order to continue your growth.
As you’ll see though, this isn’t always the case.
The revenue growth problem that most agencies hit
Most agencies follow the journey I described above and naturally increase their retainer size over time. I get it – they want more revenue and believe that the path towards this is bigger retainers.
But it’s not necessarily the most profitable path.
As retainer sizes grow, you usually need more people to service them, sometimes with different skillsets and across different teams.
Then as the agency grows, you need more non-billable staff to keep things moving such as HR, people operations, finance and marketing folks.
These hit your margins.
This is exactly why many agencies will grow revenue at a rapid pace in their first few years, but then see their margin start to shrink and plateau.
They’re making a lot more revenue but actually making less profit.
It’s normal to be honest and hard to escape unless you’re able to consistently charge more for the same work.
The reason this is important in the context of churning clients is because bigger budgets doesn’t necessarily mean bigger profits. Yet bigger budgets are a key reason why we decide to churn clients.
There is nothing wrong with staying small
I don’t mean small as in the overall size of your agency. I mean small in terms of the clients who you serve and the budgets that you work with.
One of my clients followed the journey above and started to look at increasing their minimum retainer size. In the midst of figuring out if this was the right move, they received an RFP from a very large organisation who were asking for the exact services that they provided – just with much bigger budgets (about 3x) their current biggest client.
It looked like a challenging project, but not impossible to service. So they went for it.
They didn’t win but when they were told, the founder was actually relieved. The process of pitching and putting together a proposal for a much bigger budget made them realise that it wasn’t right for them.
With bigger organisations and bigger budgets come different expectations. The agency simply wasn’t set up to meet those expectations. They’d built systems, processes and a team who are excellent at serving small businesses who have a modest budget.
Working with much bigger budgets would break everything.
So, losing that RFP made them realise that they wanted to continue working with “small” budgets because they knew how to deliver value at that level.
I’ll be honest – many agencies would turn their nose up at these budgets. But they’ve made it work and rank amongst the top performing clients who I work with right now.
The kind of agency they want to be is one who specialises in one particular industry, across a small number of services and who can work with small businesses.
This means that proactively churning clients will rarely be a problem for them for revenue reasons – they can deliver great work at a profit and keep margins at a good level without having to increase their minimum retainer levels.
When to churn a client who is below your ideal budget
Okay, with all of that said, most agencies are going to have to churn clients at some point who no longer meet minimum revenue numbers. So let’s talk about timing this correctly for you and for the client.
Here are some questions that you need to ask when working this out.
Is the client unprofitable?
You’re measuring individual client profitability, right?
If you’re not, step one is to start!
If you have a client with a small budget, but they don’t actually require lots of time in order to service them well, then there is an argument to keep them, even though they are technically below your minimum budget requirement.
If you’re actually delivering a volume of time and services that would usually be appropriate for a much bigger budget, then they’re likely to be unprofitable or at best, barely profitable. So they’re a good candidate for churning because you’re losing money on them.
Is the client easy to work with?
A client may not be very profitable, but they’re easy going and easy to work with. This may mean that they’re a good one to keep because they are a good one for new members of the team to work on.
I know some agencies who keep smaller, less profitable (but not unprofitable) clients because new team members can learn with them and practice their client communication skills too.
If they’re profitable but difficult to work with, then they are a good candidate for churning. The headspace that a difficult client takes up from your team can have a negative impact on their other, less difficult clients.
Is the work interesting, challenging or innovative?
Smaller budgets doesn’t necessarily mean that the work has to be boring. If the project lends itself to testing new platforms, ways of working or innovating, then it can be worth keeping even if it’s not very profitable.
This ties back to the point above about being a good one for new team members to work on. But it goes beyond this because not every client is interesting to work on or allows you to test new ideas. The ones that do can hold a lot of value for you as an agency.
How is your overall retention looking?
If a legacy client is profitable and generally easy to work with, then you are under no financial pressure to churn them. Because of this, you should only churn them if your overall retention rate is high i.e. you’re not losing lots of other clients at the same time.
Fix overall retention problems before churning small, but profitable clients.
The last thing you want is to deliberately churn some small clients and then have your bigger clients hand in their notice.
How is your pipeline looking?
Again, you shouldn’t be churning small but profitable clients if your pipeline isn’t strong. Ideally, you churn a small client and are confident in replacing them with a bigger one that drives more revenue and profit.
The best time to churn any clients is when your pipeline is strong and you have a high likelihood of replacing them quickly.
Unless you have a capacity issue…
How is team capacity looking?
The final question to consider is whether the team is under, at, or over capacity right now.
If your team is over capacity and struggling to deliver work, then churning smaller clients (even profitable, easy going ones) can help ensure that you don’t put other clients at risk.
If your team actually has “spare” capacity right now, then you need to ask what they’ll do with the time that is freed up by churning a client. Will you over deliver on another client who may need some extra love? Or will they use it for training and development?
Either way, this is a question that you need to consider.
Most agencies don’t have a structured way to figure out whether to churn clients or not. But the questions above give you a solid starting point and remember, there is nothing wrong with staying small and resisting the temptation to always increase your retainer size.
It comes back to the type of agency that you want to build and ultimately, enabling your team to deliver great results for clients – whether that’s with £1,000 per month or £100,000 per month.