If you’re like me, you may not have excelled at math in high school. Hell, I got into graphic/web design precisely so I wouldn’t have to do math in my career (short-sighted, I know).
Being data driven in your business doesn’t mean you have to be a super-brain analyst in a white lab coat poring over lines in a graph as they spew from a bubble jet printer. All it means is that you approach business decisions with a pseudo-scientific mindset.
What is “lean analytics”?
One of the best business books I ever read was Lean Analytics by Alistair Croll and Ben Yoskovitz which I still refer to regularly to help me with Proposify. It focuses on business models most commonly associated with technology startups, like SaaS, eCommerce, and mobile apps.
The book helps you understand what stage your business is at and which metric you should be focusing all your efforts on improving until it’s time to move on to the next stage. They call it the “one metric that matters”, and it’s a very simple but methodical way to quickly grow your business.
It got me thinking about how there needs to be a book like this for service agencies. I certainly could have used it when I was running my agency. Of course, agencies aren’t typically built to scale the way startups are, so fast growth isn’t usually as important to founders as other more long term goals.
However, I think there are a lot of small agency owners that aren’t quite sure what their business should be attaining to or realistically where it should be in five years. While I’m no expert, I can use some research and my own personal experience to at least help you start thinking about taking a more data driven approach to building your agency.
Knowing your stage determines which metrics you focus on
What makes it difficult for agencies to be data driven is that everything takes longer in a service business. It takes longer to generate leads, longer to close them, and longer to get paid. They are like product startups in slow motion.
Agencies do have one thing going for them - unlike a product startup there is a low barrier to entry and you can generate revenue your first month. There’s no months-long hustle to get a minimum viable product into early adopters’ hands. It’s you closing a deal on day one and getting a cheque in your hands. This is a huge leg up when you’re a fresh-faced agency starting out.
But by taking a more data driven approach you’ll understand which stage your agency is at and which metrics you should be tracking and improving to get you to the next level.
Stage one: Discover
The discovery stage is similar to the empathy stage described in Lean Analytics, but what makes it more complex is the fact that you’re servicing clients and generating revenue while at the same time trying to find your market. So of course you have to keep an eye on a lot of things, like cash-flow and profitability, while also figuring out what kind of agency you want to be.
The goal in this stage is to uncover which types of clients you’re most passionate about, and how you can serve them better than any other generalist agency. In other words, find your market niche.
Be warned that if you decide to make a certain type of technology your niche, like a CMS platform, you are putting an expiration date on your unique value proposition. Technology changes with the wind, and eventually it will either be outdated or all your competitors will learn it. Instead find something more stable and long-term, like an industry (food & beverage) or topic (Italy) or niche within a niche (Italian food & beverage products).
Generally speaking, follow your passion but make sure there’s money to be made in it. The market needs to be be big enough to sustain your company for years.
When you’re starting out, and sometimes even when you’ve been running for years, you work with anyone and everyone who will hire you. You might as well start collecting data from all these clients. To take a data driven approach at this stage, after each project you need to find out:
a) how happy you made your client, and
b) how happy the client made you.
Why is this important? Because your agency will likely be what you do for the next 5-10 years or more, and life is short. There’s no sense doing work that doesn’t make you happy.
Here’s how you go about gathering data:
Force yourself after each project to call your client up and ask for 15 minutes of their time. Tell them you just want to learn what you did well and how you can improve. If the project didn’t go well, expect to hear some negative feedback; it’s ok — that’s what you want at this stage. If the project did go well then your client will be happy to pat you on the back, and you’ll get to ask for referrals and a testimonial. You should do this for the lifetime of your agency, but early on it’s absolutely critical.
Here’s a sample checklist of questions to ask your client:
- What kind of results were you expecting when you hired my agency?
- How well did we deliver on those expectations?
- Was the experience of working with us enjoyable or could we improve it?
- Will you refer us to other colleagues who need similar work?
Then later ask yourself the following questions:
- Was I excited and passionate about the subject matter on this project?
- Was I proud of the work?
- Was the project profitable?
- Did the client pay me on time?
- Was I able to bring tangible business results to the client?
- Was my contact person throughout the project the same person I originally pitched for the work? (this is important for later)
Put this all into a spreadsheet and score each answer with either a yes or no and then for each yes give the client a point. 8 out of 8 would be the perfect client, whereas 0 out of 8 being a terrible client. This will help you treat this qualitative research more objectively.
If you find the happiness level is high for both sides then you need to find a correlation - which client factors are relatively consistent? What you’re looking for is a market. Overall, if clients who come from industry X make great clients (determined by the factors above), do some research on that market to determine the market size.
Remember, the more specialized you are, the more you can charge clients, the fewer competitors you’ll have, and the wider your geographic reach. No one wants their business to have to rely on local RFPs for work.
Stage two: Define
When you have your market niche defined, the next step is to position your agency appropriately to attract that market. You’ll want to do more research to determine some things about your target client:
- Who makes the purchasing decisions at these organizations when they need design/marketing? Are you going after founder/CEO types or lower level marketing managers?
- What is the biggest challenge your target client faces that they can’t solve internally?
Only when you know the answers to these questions can you start creating your marketing materials to attract the right types of clients. You want to make it clear what problem you solve and for whom. In other words, your value proposition.
Your website, blog, podcast, e-books, elevator pitch, case studies, pitch deck, and emails should all be based around this value prop. The more targeted you are, the less time you’ll have to spend weeding out leads you don’t want. They’ll weed themselves out.
Eventually you’ll start noticing that targeted sales leads come in the door regularly without you needing to cold call prospects. When this happens, the two key metrics you’ll want to focus on are:
The size of your sales pipeline
Your pipeline is the sum value of all your proposals that have either been sent out to clients and are awaiting approval, or that you are currently working on. Track the size of your pipeline each month to see if it’s predictable — the more predictable the better for your business. If your market is seasonal, you need to know that and account for it.
A good metric to track is the average deal size so you can work to increase it. Finding the average is pretty easy, just add up all the proposal values and divide them by the number of proposals. If your average deal size is $25,000 then work to increase that each month.
Proposal conversion rate
In accord with your pipeline, you need to know your close rate using money as the data point, not just the number of proposals. That’s because you could have drastically different sized deals, so winning 10 clients each worth $10,000 isn’t as good as winning one client worth $500,000.
The formula for your conversion rate is: amount / total X 100
So, if in January your sales pipeline is worth $500,000 and you close $57,000 worth of work: $57,000 / $500,000 x 100 = 11.4% conversion rate
If your conversion rate is stable from month to month, then you know that filling the pipeline with more deals will generate more revenue for your agency. Once you get to that point, hiring a sales team could actually help you, but don’t do it prematurely.
[ I’d be remiss to not point out that we make proposal software that automatically generates your sales pipeline and conversion rate :) ]
The whole point is that you want your business to be predictable. If you just take the work that comes in and don’t know whether your KPIs are increasing or decreasing, you can’t make pertinent decisions like knowing when to hire or lay off staff.
Stage three: Distill and Dominate
OK, so you know what you’re selling, who you’re selling to, and you’ve got a solid system in place for turning qualified leads into clients. This translates into predictable revenue.
But revenue alone won’t mean anything if it’s not profitable. Before you can really grow you need to make sure that the projects coming in are as profitable as possible.
Not every job you do will be profitable. You’re going to lose money sometimes and, hopefully, learn from your mistakes — that’s just part of the game. However, if your profit margins are razor thin on the average job, you’re in trouble and you need to make a change.
Even if you don’t directly sell hours to clients and charge by the project, you still need to keep track of your employees’ hours so you can tell whether or not that $100,000 project actually made you any money.
One thing to point out here is that I haven’t included the typical “accounting stuff” in this post on lean analytics because monthly revenue, EBITDA and profit/loss are things you and your bookkeeper are probably, or should be, tracking anyway. Of course you need to keep an up-to-date balance sheet, know how much your monthly expenses are, how much is in receivables, and collect payments faster. But that is just the end result of how you run your business.
To really grow you need to know why your revenue and expenses are what they are, which is what key performance metrics are for. The key metrics to focus on here are:
Client Acquisition Cost
Try to calculate the cost of each sale — how much time/money/resources does it cost you on average to win a proposal? Every sale costs money, so total up all your sales and marketing expenses (value of hours spent, client dinners, events, travel to meetings, etc.) in a month and divide it by the number of new clients you won.
For example: $10,000 in monthly sales costs divided by 4 new clients during that time means your CAC is $2,500, so you’d better make sure they are bringing in at least 5-10x that in their lifetime. If not, then find a way to increase your close rate, lower your sales costs, or increase the lifetime value of your clients by selling retainers or regularly up selling existing clients.
Think of your employees’ hours, which translate to results for your clients, as if they are a product you’re selling. How much does that product cost you to buy wholesale? How much is that product worth to your clients? How much of the product do you have in stock each month?
- Total up the monthly hours of all of your billable resources (designers, developers, content creators, project managers).
- Then figure out how many total hours your team bills out on average.
The formula for your utilization rate is the same as your conversion rate: amount / total X 100
Example: 15 billable employees each work 40 hours per week. That’s 600 possible hours you could bill per month. If you’re billing 400 hours per month on average: 400 / 600 x 100 = 66.6% utilization rate.
If you have a high utilization rate and your profit margins are too narrow then you’re not charging clients enough so you can increase your rate or simply bid higher on new projects. If your utilization rate is low and the sales are there but your team just isn’t pushing through it fast enough then you need to find a way to inspire your staff to get their billable hours up or fire the low performers.
There are probably more metrics I haven’t thought of but the point of all of this is to not leave your business to chance. To truly work on your business you need to keep a close eye on your KPIs so you can tweak and refine what’s working. A data-driven approach to business takes getting used to, but once you do you’ll realize it’s the key to long-term growth, profitability, and peace of mind.