Stalling agency growth is an issue many of us encounter and can, if you are scaling for sale, become a very real concern and cause of much hand wringing. “Why is it …” we were asked the other day by a new client “that so many agencies of our type grow quite spectacularly until they hit fee income of £2m and then can never get past that barrier?”
In our experience it is because of client churn rate and a lack of sufficient investment in new business to counteract it.
The way to assess your client churn rate is to divide the number of clients lost (or value thereof) by the average number of clients you have (or value thereof) over a year and multiply by 100. Ergo, if you lost 4 clients during a year and had an average of twenty, then your client churn rate is 20%.
A salesperson should generate three times their cost in sales (GP).
So if you want £250k GP of new business, expect it to cost you £75k in salary and contributions, or one new business person.
Starting from a base of £250k in Y1 sales, Figure 1 shows what happens over time in this scenario.
To counteract this and deliver sustained growth, you should increase your new business target by the previous year’s churn rate each year. This, of course, is all well and good and many agencies do, naturally adopt this rationale. However, where many fall down is in how they implement the strategy. Many simply increase their existing new business team’s target from, say £250k to £500k and say “go for bigger clients!” or worse still, sack their existing team and fall for the promises of a fresh new business director with a ‘little black book’ of contacts they take from agency to agency every two years.
Figure 2 shows what can happen if you take the approach of increasing your new business budget by the churn rate rather than just the target.
In this scenario the new business budget is increased from £75k to £315k over a twenty year period to deliver sustainable agency growth.