Consulting or running an agency is an interesting business. On the one hand, an agency can be a cash cow because your margins can be really high if you keep headcount low. On the other hand, many consultants and agencies struggle to make ends meet and do great work for their clients.
From my years in marketing and consulting, and now running my own business in the space as well as doing some consulting myself, I’ve realized that many consulting problems can be solved by one of two things (and usually both at the same time to make the magic happen):
- Charge more per hour or per month to increase your margins.
- Create better processes to save time and increase your margins.
Consulting is no different from other businesses in that when you increase your margins, many of your business stresses go away. Let’s talk about the two of these.
Raise Your Prices
Most agencies and consultants charge too little. While I believe that this is part of the reason why our industry is look at as a commodity instead of as partners in business, it is also not a problem that cannot be fixed.
In a consulting business, cash flow and margins = headspace. If you are a solo consultant and set a goal of $10k per month as a revenue goal, check out how different rates break down the number of hours you must consult each month to reach your goal:
- $50 per hour – 200 hours per month consulting. That’s four 50 hour weeks, and that’s before any marketing of yourself and your business or doing the necessary things to run your business (bookkeeping, accounting, research, etc)
- $100 per hour – 100 hours per month consulting. This is four 25 hour weeks (wow what a difference) which allows you 15 hours per week for work that you estimated badly (it happens to all of us), maybe doing some marketing of yourself (blogging etc), research, and the business things mentioned above. Or, you could exceed your revenue and take on another small client to fill 40 hours per week and you’d make another $6k per month (15x$100×4).
- $200 per hour – 50 hours per month consulting. Now you’re only consulting 12.5 hours per month to reach your goal. Now you really have options with what to do with those other 27.5 hours per month assuming a 40 hour work week. Use your imagination and expand on the things mentioned in the $100/hr section.
- >$200 per hour – increase revenue targets, enjoy better clients, launch a product, whatever you want. This is where the magic really happens.
Here is a strategy you can use to gradually increase your prices in a smart way. Every time you are pitching a new client, increase your prices a bit. You know what your current clients are paying, your potential client does not. For every potential client you pitch, increase your prices until you start losing clients specifically because of price. Then back off with the next one (never negotiate on prices if you’ve already given one. Only negotiate on scope of work) and see if it closes. If you’re still not to the level of hourly that you desire, put together some hypotheses why not. Test these with the next leads. Rinse and repeat.
Overall, here is my best strategy for increasing your margins – don’t charge hourly. Do project minimums and then set expectations for approximately how many hours this will be (with your hourly rate in mind). This way you eliminate the nickel-and-dimer clients that take all your headspace unnecessarily (and they are often your lowest paying clients too!)
The best post I’ve ever read about increasing prices: http://www.kalzumeus.com/2012/09/21/ramit-sethi-and-patrick-mckenzie-on-why-your-customers-would-be-happier-if-you-charged-more/
Optimize Your Processes
I recognize that not everyone can increase their prices to the level I talk about above simply because they have chosen to serve a group of businesses that cannot afford high budgets because they have razor thin margins as is.
If you’re in this camp and have to figure out how to increase your own margins to increase your business’s headspace (that’s the goal), it’s time to start thinking of the ways that you can reduce the busy work that takes up valuable time so that you can bring on more clients or work fewer hours.
Start by making a list of the things that either:
- Take up time that you could otherwise spend doing billable work
- Are menial tasks not worth your client’s precious tight budget
A few I can think of offhand are:
- Pulling data for reporting
- Creating your weekly/monthly/quarterly reports
- Business development
The way a lot of agencies and consultants manage a lot of these is:
- Hire someone lower paid or with less experience to do them
- Simply don’t do it
I get a bit crazy when I then see agencies take this a step further and not pay their employees enough because they cannot afford it and this leads to high client churn and even more overhead within the agency because of an increased need for business development. So how do we get around this and increase margins to relieve stress on the company and pay employees a fair wage while they take care of clients?
The answers are going to vary based on the business’s needs, but some thoughts that I’ve come up with to reduce overhead with reporting or business development include:
- Use a tool like DoorDash or Klipfolio to automate your reporting, and give access to your clients. You can bake this price into your monthly retainers too. Then you’re getting paid to increase your margins
- Automate followups to business development emails with a CRM like Salesforce for Startups, or cobble together a system with Boomerang on Google Apps for Business. You can also use Followup.cc for a lightweight Boomerang-like system on email programs like Outlook. PROTIP – Inbox by Google will automatically snooze emails for you until a set time.
- Send leads from your lead capture form to your task manager automatically with Zapier. I use Zapier to send leads via GravityForms to a Trello board with the needed information, then I take it through my usual workflow.
The best way to increase your margins in a consulting business is to do both of the above concurrently – raise your prices with each new client until you reach a point where you start not closing projects because of price (then back off a bit with the next as discussed above), while at the same time automating as many of your rote processes as possible.
Remember, your ultimate goal is to increase your margins and headspace by lowering the overhead in your business by automating processes and slowly raising prices over time until you find your market’s ceiling. Then you can decide whether you are happy with that, or if you need to go upmarket or downmarket with your business.
Good luck, and I’d love to hear how your experiments go!