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What connects the Sistine Chapel, Dinosaur Feathers and Revenue Maximisation?

Occasionally my interest in etymology, history, science and finance align to illustrate a principle that applies as much today in marketing services finances as it did to the great Renaissance artists.

OK, that’s a huge, huge lie. Occasionally I shoehorn them together to make a point that might seem mundane without a different angle.

These interests, with a little imagination and goodwill on your part, come together when the concept of a spandrel is expanded from its original architectural meaning to be used in evolutionary biology. First, some definitions.

In architecture a spandrel is the roughly triangular space between an arch and a wall. The arches used to support great domes gave rise to these spaces and many artists used these spandrels as a canvas. Michelangelo’s Sistine chapel springs to mind. Full of spandrels in fact.

In evolutionary biology a spandrel is the adaption of one characteristic for another purpose – the best example of which is the use of feathers by dinosaurs to fly rather than their original thermoregulation use (kept them warm to you and me).

As an aside there is a fascinating argument about whether music is a spandrel of speech in human development or vice versa.

Whether it is the by-product space of architecture or dinosaurs finding that feathers also enable them to glide from tree to tree the common factor is that the process has thrown up an unplanned opportunity.  The original feature can be developed into something unexpectedly valuable. By now, you might have a clue where I’m going.

The finance part of this thought came to me when I was sitting in on a meeting about a social media strategy which was made up of many different and interlinked elements. One project amongst many was about blogger engagement which caused some faces to light up as this was exactly what would excite the client far more than a complex social strategy. Put front and centre it was sold in. The other social stuff won’t be far behind.

This illustrated nicely to me the point that somewhere tucked away in every agency process there is a spandrel or two waiting to be discovered. It could be something you do but haven’t considered charging for like post launch support or a little gem tucked away in a larger process that clients would willingly pay for if only they knew about it. It could be the data collected along the way or, the holy grail of spandrels; it could be a technical development which can be resold. If you look hard enough there will be a spandrel in your agency. Find it, package it and sell it and you’ll have linked dinosaur’s feathers, Michelangelo to your agency process and maximised your revenue along the way.

If you need a hand to find your missing spandrel the author has spent the last 18 years unknowingly looking for them. Email him on simon@novemberfriday.wpengine.com if you’d like him to help maximise your agency’s revenues.

Not all revenue is equal – how marginal revenue can improve your profitability.

It hardly needs saying that revenue drives an Agency. Everything from resource levels, pay rises, premises and, of course, profitability are ultimately determined by your income.

When a new opportunity comes up should you treat all revenue as the same? Should every project to every client be priced using the same ratecard? Does the type of project, the nature of the relationship affect how you price the opportunity?

Obviously this would be a short article if I thought the answer to these two questions was yes. In my opinion pricing of projects is as subjective as it is mathematical and needs to factor in the concepts of risk, reward and the vital importance of marginal revenue and costs.

It’s stating the obvious again but project income is generally riskier than a fixed monthly resource based fee. The income stream is more volatile and can be switched off completely at short notice. It can put a strain on resources and it is more difficult to plan around. This is why it’s perfectly reasonable to ask for a project rate card higher than your fee rate card. You may not get it but it is reasonable to ask.

Resource based fees (RBFs) should guarantee a level of work but this guarantee comes with the expectation of a lower price tag. Lower risk, lower reward. The danger with RBFs comes in managing the scope of work. There is always the danger of being asked to squeeze in another piece of work into a fixed fee. You will need to measure the potential income against being too inflexible and damaging the client relationship. Always tricky, you need your Client lead to be sensitive to rumblings of unhappiness.

Another choice comes when pricing up a project for an existing client. It may be in a slightly different area, another brand but it does come from a new budget area. It’s not handed to you on plate so it is a competitive situation. Should you stick with the existing rate card or should you discount?

There are two schools of thought here. Pricing at the existing rate card preserves the integrity of the current commercial agreement. It also maximises the margin. The other perspective is that, if you have the capacity, this is marginal revenue which has no added cost and should drop straight through to the bottom line – 100% margin in reality whatever it might say on the WIP report.

There is no right or wrong answer here. My preference is always to do the deal, to get more revenue through the door. If we can do this without bringing in additional headcount then the argument is that much stronger. If it gets you into another budget area then I’ll need a lot of convincing not to use our current team and billing to make us very competitive.

I always strip back proposals to understand what this means to marginal revenues and marginal costs to deliver the project. Rather than the profitability of the job I think about the effect on the bottom line overall. You can have an unprofitable job but a more profitable agency – this is the importance of marginal revenue.

Looking at projects in this way is a powerful way of linking the opportunity to agency profitability. It may be that you want to preserve the integrity of the existing arrangements but, now more than ever, it’s worth considering if there is a deal to be done. I may try to keep the rate card the same but discount the overall project – that way you can still go back to the higher rate for future work.

The author, Simon Collard, is an experienced, commercial Finance director with 18 years experience of worrying about proposals and costings. If you would like to have a chat about how using his experience could improve your profitability you can contact him on simon@novemberfriday.wpengine.com.