Measuring Agency Profitability – the 80/20 Rule
The Pareto Principle states that most of the effects (80%) of many events come from 20% of causes. Thus, the 80/20 rule.
According to this rule, 80% of your agency’s revenue and profits should come from 20% of your clients. However, there are cases where companies have one or two huge clients responsible for a large percentage of their profit. While this is pretty normal, it also increases the overall risks.
Measuring Agency Profitability
One of the mistakes that agency owners make is failing to recognize profitability correctly.
Many agencies recognize their profits at the company level and not at the individual project level. This means that the returns from the 20% high-value projects are reinvested back to the agency as a whole, and are then used to fund the 80% non-profitable projects. This is ineffective and may lead to loss of critical business.
Admittedly, calculating project expenses for an agency can be difficult.
In other businesses, profitability is calculated based on the cost of materials allocated to the projects. Such a method cannot be applied to agencies, as pricing and costs are dependent on people’s talent, productivity, and skills.
To bridge this gap, agencies can measure project cost (and calculate project profit) by time tracking, allowing them to allocate the real value of people’s time to the projects.
How can the 80/20 rule make your project efficient? Here are four ways you can use it:
1. Risk Management
Project managers tend to allocate equal time and resources for each potential problem, which is a bad idea! Project risks are subject to the 80/20 rule since most of a project’s problems often stem from a few key issues.
Always look at the effects of the different risks when allocating resources. Otherwise, your agency will focus on the low-value risks that have a 20% effect and put little time on the small risk that will have an 80% effect on the company.
2. Resource Management
Assigning tasks among team members can be a headache. Team members are different, and some will attend all meetings, have great ideas, and work tirelessly to produce results. The best solution is to allocate your high-value tasks to the best members of your team. This ensures that your key clients are well taken care of, and your team’s talent is well utilized.
3. Stakeholder Management
A project’s success is dependent on different stakeholders, including partners and sponsors. Their buy-in and support could cause the success or failure of a project, which is why project managers have to channel time and resources towards getting them on board.
Focusing your efforts on stakeholders that have little effect on the project’s success can jeopardize your efforts. Project managers should keep their eyes steady on the goal and work with these stakeholders that have the most pull.
The 80/20 rule highly influences the productive hours of your day. If you look at your daily schedule, you will notice that there are certain hours when you are most productive and others where your productivity drops.
Allocate your high-value portfolio to your high productivity time for maximum efficiency.
Use the 80/20 Rule and Efficiently Run Your Agency Portfolio
Effectively managing the portfolio means allocating the agency’s resources relative to the value the portfolio brings. This means that if a project is more profitable, you should allocate more time and talent towards it. Learned something from this article? Find out more about assessing digital marketing agencies.