5 Things Needed for a Profitable & Healthy Design Agency

Over the Thanksgiving holiday of 2009, my first son was born and my largest client went bankrupt. Within six weeks, two additional clients informed me they wouldn’t be renewing retainers with my company for 2010. My quarterly revenue dropped from $120,000 to $16,000. I almost lost everything.

Yet, here we sit in 2016 and I, along with my business partner J Cornelius, have a healthy and cutting-edge design and user experience agency in Nine Labs. So, what happened in those 5 wilderness years? Well, I learned at the school of hard knocks how to take care of the right clients, the right way, and to do the same for my employees and contractors. More than anything, we all learned that the word “profit” isn’t owned by Wall Street crooks; it’s an honest way to stay in business and provide a valuable service to our clients. Our clients need us, and they want us around for as long as they need us, the only way that happens is when we’re actually making money.

Having an early, open, and honest conversation with our clients and customers about the pink elephant in the room–money–has been the best decision we could make. Not only are our clients and employees happier, we’re doing the right work for the right people. And when we can’t, we have a good idea of whom they should hire to get what they need for the right price. That’s a good thing for the entire Atlanta consulting and technology community. The worst thing that could happen is when someone’s business is put in the wrong hands with the wrong expectations.

Yet, the money conversation isn’t the only thing that seems to be missing from most consulting and agency playbooks. Across the board, I’ve found that there are countless things an agency can do to find stability and profitability, but these 5 have stood out time and again as the most crucial for long-term growth.

1. A unique selling proposition in a specialized vertical or horizontal market

It’s simply not enough to offer generalized design, websites, or development anymore. There are two directions any agency or freelancer can take now: highly specialized with whom they work or highly specialized in what they do. It’s even better if you can specialize in both areas, such as “secure API services for healthcare companies” or “infographic and visualization design for fin-tech companies.” The reason is that so many tools, builders, and off-shore services are coming after your client base with broad promises, cheaper prices, and “it’s as easy as 1,2,3” statements.

To get to the bottom of it, you’ve got to sort out not only what you’re good at (and capable of), but you also have to explore:

  • What you actually want to do
  • Whether you have access to the people who pay for it, and if you can effectively find them
  • Is there money in the short and long-term in that market?
  • Is this service easily replaced by cheaper alternatives?
  • Is my expertise something that audiences can clearly understand and believe in?

Simply saying “we build eCommerce websites” isn’t going to get you very far unless you’ve already established yourself quite well. And even if you have, well I hate to say it but Squarespace and Shopify are coming for you. And who knows what great product is being built right here in Atlanta as we speak that will usurp the next generalized creative or technology service? Being a mile wide and an inch deep used to be the best way to go for the general marketing agency, but today most companies need partners who can deliver on highly specialized and detailed assignments.

2. A team built on people first, skills second

It’s common for job postings in creative and technology to list a myriad of required software or technology proficiencies. Just because someone knows Angular or Java doesn’t mean they’re any good at solving actual problems. In the past, most companies were selling a solution: Microsoft, Oracle, IBM, etc. had their proprietary technology and server that they wanted you to buy. Now, companies need problems solved, not boxed solutions.

For an agency to thrive, you need people who can think, adapt, and solve any problem thrown at them. You need critical thinkers. These critical thinkers and problem solvers can then decide which technology or creative solution to use and whether it’s something you should do in-house or sub-contract. Remember, you’ve gotta specialize and say no to technology and services creep. If it’s outside of your focused horizontal market, you can partner with others. And yes, you can sub-contract it off-shore to those very same cheaper solutions if it’s manageable. It’s good business when it’s the right solution for the right problem, not the only solution you offer for any problem. ninelabs-team

3. A rate and billing practice that’s mathematical and transparent

There are hundreds of books, podcasts, and seminars on pricing your work. Some are good, some are misguided. But no matter what you learn about methods, models, and tactics, there’s one thing that most people aren’t telling you. It’s simple math to know exactly what to charge. There are three key things you need to know:

  1. How much you actually spend both monthly and annually to run your business. This means everything from office space to coffee to computers. Anything that’s monthly or recurring seems obvious, but what doesn’t seem obvious until it hits you are big purchases like computers, furniture, and annual premiums. Take those annual expenses and divide them by 12, then put that amount into your monthly budget. Give yourself a number that includes a healthy percentage for taxes, profit, incentives, and savings. Be real with yourself and find out what your core operating number really is. Oh, and don’t forget your salary along with any employees, you’ve gotta pay yourself, too.
  2. How much time you can actually sell. Even if you don’t offer hourly billing, you still only have so much time to sell in a given month. And for most of us, it’s not 40 hours. You can probably do about 25 or fewer hours of billable work most weeks. If it’s just you, simply add that number up and get an average of weeks. So if it’s 25 hours a week, and there’s usually 4 weeks in a month, you’ve got about 100 hours a month to sell. If you’ve got employees, everyone’s hours go into one bucket you can sell.
  3. A realistic operating rate. This is what I call a “shop rate” and it’s a hard number. You simply divide the first thing–your core operating number–by the second thing–your total hours you’ve got to sell–and you’ll get a fixed number that you know you can sell each hour for. Let’s say that core operating number is $10,000 and your inventory of hours is 100 hours, then (ta-da!) your shop rate is $100 per hour. Now you know how much to charge. How you sell those hours, however, is completely up to you. Whether that’s value-based pricing or incentive models, it doesn’t matter. The thing that does matter is now you know where the line in the sand lies.

The result is a number that takes out the emotion. One of my favorite sayings is “your gut is not a calculator”, and this makes the numbers the bad guy instead of you. If a project doesn’t make sense, then you’ve gotta walk away. Oh, and I should note that you can always charge more for each of those hours you sell. This just tells you the absolute least amount you can charge.

4. Constant and jargon-free communication with clients and customers

Clients can quickly lose confidence in your abilities if you appear naive or disorganized when it comes to operations. We know we need paperwork and invoices, but this isn’t exactly fun. What I’ve learned is that the more structured your operations, the greater freedom you’ll have with your work. The positive change is most visible when it comes to contracts and proposals. You may spend up to half of your time finding clients, but the process of getting started and working together can be made far less painful.

An ideal proposal is short, direct, and confident. You only need a summary of the project to outline the general scope, your proposed costs, the payment schedule, and your legal provisions. Cut the fluff and pomp and make it about the client. Rather than focusing on what tasks you’ll complete, focus on what the client will receive. The more jargon you use, the less your client fully understands what’s going to happen. This doesn’t foster trust. Instead, be clear and direct and make yourself available by phone or in-person to discuss work before it starts. Don’t blindly send over a technical manual on how things are going to go.

5. A crystal-clear engagement and discovery process

Set expectations up front with your clients on the ways that you can get started working together. It doesn’t always have to be massive annual engagements, nor does it have to be death by papercut via hourly billing. Instead, sit down with people interested in working with you and get a feel for their culture. Sometimes, the best way to get to the bottom of things is to simply get together in a room for a few days and build a plan of action. Other times, it’s to jump right in and start triage because they need help now. But not every method of engagement is right for every client. Find out what they feel comfortable with instead of imposing what’s most comfortable for you.

When possible, take the time to “date” your clients a little with a simple paid Discovery session. Discovery is essentially a paid workshop with the client to determine the right response to each of their needs or project requirements. Consider it a first date before getting married. The goal of Discovery is to go deeper and find out why the client needs the particular service they’re requesting. Clients tend to focus on the actual work—the widgets and features—rather than the business reasons for them. They’ve been trained to get a new logo or update their marketing campaign at set times or seasons. Discovery helps you find out what the client actually needs, which may be a new set of brand standards or updated copy rather than the requested deliverable. This makes you a partner instead of a service provider, and that’s what good clients need from good agencies. ninelabs87

What’s next?
I’ve translated the years of ups and downs into a full day workshop and book, where I offer clear answers and actions on how to strengthen your agency or freelance practice. (The next class is February 20 if you would like to sign-up). Some of the key learnings and takeaways include:

  • How to actually start a business including legal and operational steps
  • How to market and clarify a message so that you’re getting the right work from the right clients
  • Exactly what you should charge for your work and which pricing models will work for you
  • Best practices for communicating with your clients so that everyone’s happy and successful
  • How to grow your team, raise your rates, and build steadily

These 5 steps are a great start and I hope they’re a big help. Through my book, Creative Truth, I offer a playbook for starting, building, and enjoying a profitable design business. From learning how to price your work and manage your time, to setting up your business and defining your market, it covers everything designers need to know to run a freelance practice or agency without losing heart. Hint: the book is really, really funny and the workshop is the farthest thing from boring. There’s whiskey involved.

Brad Weaver is the Chief Experience Officer at Nine Labs, a comprehensive user experience agency that creates powerful app and web interfaces that people love. You can join Weaver at the launch party for his forthcoming book at Cover Books in West Midtown on Thursday, February 25, from 6pm-8pm, a kickoff event for the annual design conference, Web Afternoon.