What The Cost of a Flat White Tells Me About Pricing

I was queuing to get my morning coffee the other day. In front of me a woman was doing the same – she ordered a small cappuccino. With chocolate on top (don’t get me started on that). Her cappuccino was £2.45 whilst my skinny flat white came to £2.90. 45 pence more expensive. A price difference of 18.4%.

They were both the same size. Small.  As far as I could tell they had the same amount of coffee and the same amount of milk. They took pretty much the same amount of time to make. 

This got me thinking about why I was prepared to spend 20% more for the same ingredients but prepared in a slightly different way. Maybe I preferred the taste (I do), maybe I’d fallen for the hipster barista hype and thought the flat white better represented my lifestyle (I don’t think it does, but who knows?)

But the cold, hard fact was I was paying more money for the same ingredients because my perceived value of my flat white, which had slightly smaller bubbles, meant I was prepared to pay a premium.

So I did what most people do when their curiosity is piqued. I googled “why does my flat white cost more than a cappuccino”. And back came the responses. There was some slightly spurious justification that making a flat white required a higher level of skill from the barista.

The cold, hard truth is that my coffee shop charged me 20% for my hot milky coffee because I was prepared to pay the premium. The flat white premium tax.

This led me on to one of my favourite topics; can agencies use different pricing techniques to increase their prices? Imagine the effect on your Agency if you could raise your prices by 18.4%. 

Nice daydream or achievable goal? To be effective I think the following conditions need to apply;  

  • Use the same people, doing pretty much the same things
    • There is no point being able to charge 20% more but we have to employ people costing 30% more.
  • Package the service and/or the output  
    • There has to be a point of difference between your previous approach. If we can combine a mixture of technology, process and output under a product/programme title that answers a particular client need then we are far more likely to be able to charge a round sum fee that is not directly related to a fee estimate.

  • There needs to be a market and a market perception that the new product/service is valuable
    • Does it answer a question; solve a problem; reduce costs; generate more revenue? Does it, simply, have a better report? Combining our core skills, knowledge and expertise in conjunction with technology to answer a client problem is a great place to be. 

I’m not saying it’s easy but Agency margins are always going to be under pressure. We work in an oversupplied market so we need to be imaginative in how we sell our services. 

Developing a price stack that has a variety of pricing techniques of which the above is one will be vital if we are to remain profitable. Be more flat white and less cappuccino.

“My formula for success is rise early, work late, and strike oil” J.P Getty

2 out of 3 isn’t too bad is it? Striking oil, though,  is a little unlikely in my patch of suburbia. Geology (and most likely local planning) isn’t in my favour.

This applies both to me, as a freelancer, and all agencies in that hard work is necessary but not sufficient for success.  What you are doing, how you position yourself and package your services, your knowledge and your expertise is the equivalent of striking oil. It is the thing that will put you ahead of the competition. It is the thing that will make you more profitable.

Every Agency I’ve worked for works hard and none of them get paid for all of the hours they work. Whilst they may not get in too early they all stay to get the job done. 

The need  to work efficiently is obvious. Being efficient will never strike oil for you though.

We have to keep drilling though. Keep looking for opportunities to turn our knowledge into products. Keep looking at our pricing stack to make sure we are sharing in the value we create. Keep asking ourselves if we are still relevant; still answering (and asking) the right questions; still responding to what our clients really need and want.

Take a step back every now and again, get out of the office or talk to different people to check you’re still as relevant, needed and important to your clients (and future clients). If you do a budget make sure it’s not just a numbers exercise. Make it a proper strategic exercise.  

For myself, I know debits and credits. I’ve picked up some knowledge of what makes creative agencies tick. My focus, for the moment, is packaging that experience up in a range of products and services that answers what I think every Agency needs. 

This includes a revenue forecast that helps you look into the future and plan your business more effectively.  There is a CFO report that gives you CFO level insight into your business at a fraction of the cost.

These products will save you time. They will point the way towards success. The oil strike I can’t promise – check out the details  https://bit.ly/2Rl98l2

Top 10 Cashflow Errors Agencies Make

Turnover is vanity, profit is sanity. We’ve all heard this haven’t we? It’s only partly true as you can be profitable and still have negative cashflow. Try keeping sane without any money to pay next month’s salary bill.

How does this happen? Many Agencies make the following common mistakes. Here they are and how to avoid them.

  1. Make sure you have got a purchase order.

If your client has a purchase order system you won’t get paid without one. Make sure you get one as close to the start of the project as possible. Preferably before but that’s not always possible. Bear in mind the track record of this client in judging how far/hard to push on this.

  1. Terms and conditions – ask to invoice % up front

Good cashflow begins before you start working. Ask for 50% invoice up front; they can only say no. If they say they might be more inclined to say yes to 20%.

  1. Don’t wait until the end of the month to invoice.

Batching your monthly invoices until the end of the month will slow down your cashflow by up to 2 or maybe 3 weeks. Catch up with invoicing on a weekly basis or when projects or campaigns pass a milestone.

  1. Make sure they are received

A quick phone call to make sure your invoices have been received, logged and input will mean no excuses if payment is late.

  1. Understand who has to authorise them.

Someone, somewhere will have to agree your invoice. Maybe it’s more than one person. Find out who they are, understand how your invoice gets in front of them and onto a payment list. For smaller clients this might be just one person; for larger clients there will be system. Learn the system and use it.

  1. Weekly cashflow

Knowing what you’ve got to pay next week (Suppliers, tax, salaries) balanced by what you know is coming in from clients is a really useful tool to focus the mind. Who do you need to call to get the cash in?

  1. Factoring

If cashflow is tight and your cash is tied up in debtors, then there are ways to access the cash. Factoring has moved on and there are several new, more flexible cloud solutions that allow you to sell individual invoices such as marketinvoice.com. There is a cost involved but it can help to get over a temporary cash squeeze.

  1. Escalating

Always monitor your debtors. Most systems will have an aged debtor report which will take the hard work out of this. If they slip past their due date, make your normal phone calls to chase. If there is no success do you know who to call to chase? Top tip here – Finance Directors hate to be chased for invoice payments. Be polite but clear and it’s likely you’ll be added to the next payment run.

  1. Getting Carried Away

Just because you have cash in the bank don’t get carried away and spend it. Seems obvious but Companies house is littered with failed agencies who paid out too much in dividends, kitted out expensive property and didn’t keep enough cash in the business. Aim to keep at least 2 months’ worth of running costs as a cash buffer.

  1. Forecast

Cashflow is a lagging indicator. It shows what you have done in the past. To get a rounded view on your cashflow and what you can afford to do or not do, you need to look at a leading indicator – a forecast of your future revenue. If your forecast is down be more conservative with your spending. I have such strong views on what makes a good forecast I’m building my own – check out agencymap.io to find out more.

 

Why Your Agency Will Fail. Updated.

Why do so many dreams turn into disappointment? Why do so many Agencies fail?

Maybe some agency founders aren’t good enough designers/marketers/consultants or coders.

I have a feeling, completely lacking in evidence and entirely anecdotal, that most failures will be caused, not by a lack of core talent, but by a lack of wider business or commercial knowledge.

What are the things that new Agency founders need to know to get through the early years? Here are my favourites;

New Business

At some point when you start hiring people it will become crystal clear why new business is so vital. You have to cover your costs and then some. And you have to do it every month. You have to balance doing the work right now with investing some time with making sure there is enough to next month too.

It’s easier when there are just one or two of you but as your team grows that fixed cost becomes more and more pressing. The work from your initial clients or contacts won’t be enough and you will need to widen the net for new clients. Whether it is outbound, inbound, networking, alumni, events or clients who have moved on making sure there is a pipeline is vital.

Financial Insight

You don’t need to be a qualified accountant to be a success running an Agency. But you do need some insight into what your numbers mean and what they suggest you need to do and how quickly you need to do it.

If you do only one thing over and above looking at your Xero, FreeAgent or QuickBooks P&L then please, please do some reading about these metrics. How they are (simply) calculated and what they mean;

  • Revenue per head
  • Client Utilisation and Recovery
  • Cash cover

Luckily I have written a helpful book “Where Is The Money?” to help explain these basics. And more. Available free at AgencyMAP.io.

And one more thing; don’t over-complicate your spreadsheets.

Managing Growth

This is where people can relax and get hit by a sucker punch. You’ve won some clients, employed some people and have plans for more of the same. A small word of warning here; this is where cash flow is absolutely vital. Paradoxical as it might sound it is possible to be profitable but be hit but poor cash flow. Kit has to be bought up front and salaries paid monthly but it might be several months before the cash from that healthy growth comes through. Just be (even more) aware of your cash flow and don’t get carried away with your early success. Delayed gratification and a healthy caution will, literally, pay dividends later.

If needed there are some good invoice finance services around such as marketinvoice.com who can unlock cash earlier.

Reaction Time

The best thing to do with a problem is to react quickly. Too often I see Agencies where a potentially fatal crisis has developed where earlier action could have avoided potential disaster.

Part of this is human nature; most founders are optimists who believe things will get better next month. But to make sure this doesn’t happen to your Agency you need to do a couple of things.

First is to make sure you have a robust forecast. Let me repeat this; if you read this and take only one thing away from it is this; make sure you have a robust forecast. By robust I mean only include revenue you know is going to happen. Not what might happen. Not what you think might happen. What you absolutely, 100% for sure, know is happening. The other possible stuff goes into the pipeline. This will make it far, far easier to know when to react.

Secondly make sure you get good, clear and understandable figures from whoever does your numbers. And make sure you get them promptly. Good and early numbers beats perfect and late every single time. Whoever does your figures needs to get them to you promptly – ideally within 5 working days but certainly by 10.

If, for whatever reason, this isn’t possible then it should always be possible to estimate the P&L based on forecast revenue, known salary costs and a pretty good estimate for overheads. It’ll be a little rough, but it’ll help you react.

Client concentration

Having any one client who makes up too high a % of your business is a risk. It’s attractive because, well, of the money but it is a risk. Any one client who can wipe out your profit with one phone call can sink your agency. The only way to mitigate this (apart from making sure they are happy with your work) is having a notice period and providing a service they need during that notice period. That and a decent pipeline.

Most businesses that fail will fail not because of lack of talent. They will probably fail due to one of the above reasons. The good news is that they are avoidable. A lot of the above risks can be measured and controlled using a decent forecast/pipeline/cost tool. Luckily, I am developing one – find out more at Agencymap.io.

Life is uncertain. Here’s a spreadsheet for that.

Uncertainty is everywhere in life. You can view it as an exciting challenge or a scary threat but it won’t go away. As I’m typing this on the runway at Heathrow it’s not a comforting of thoughts.

The same is especially true of Agency’s finances. Clients can change their mind, pitches can be won or lost. Projects can be delayed until they are needed yesterday.

Trying to get a handle of what net effect of these movements will have on your Agency is a daunting challenge. Added to the uncertainty there is the practical problem of having different bits of information in different places.

Hopefully you’ll have a forecast. Probably you’ll have some form of CRM system to track new business and each account manager will be aware of what their clients might do next month/quarter.

If you want to have any sense of control this is an impossible situation. For many, many years I struggled with this. Wrestling data out of various sources to forecast what will probably happen can be a thankless task. Especially when it turns out to be wrong.

Occasionally, and I do mean occasionally, I get a moment of clarity. A coming together of ideas, a conversation which clears some previously obscured problem up.

I’m both happy to have had such a moment and a little embarrassed that it’s taken me over, ahem, 20 years to have such a moment about the best way to manage the uncertainty about Agency revenue forecasts.

I’ve written before about revenue forecasts. My advice was to take uncertainty out of the equation by only forecasting what was definitely going to happen.

That idea still has some merit but it’s not the full answer. It avoids the issue by shutting it’s eyes and covering it’s ears and hoping the nasty uncertainty will go away and leave you alone.

We all know this is not going to happen. To forecast accurately we have to embrace uncertainty but we have to do it systematically and we have to do it in a well constructed spreadsheet with each uncertainty broken down and a judged.

Now I’m aware that writing about spreadsheets has a limited appeal. But to make the point I will have to explain how this new, and to me vastly improved, forecast tool works.

I start by breaking by separating confirmed projects from potential activity with current clients with a further analysis for new business into 3 different worksheets. Never cross the streams.

The confirmed activity should represent the worst case scenario. Only projects which have signed off authorisation go into this list. Anything from your clients which hasn’t been signed off goes behind door number 2.

By adding some clever formula to the client development and new business sections we can decide whether each potential opportunity is probable/possible or hot/warm/cold (take your pick about how you classify them – the only rule is to be consistent). Only the probable or hot prospects will add through to the forecast.

The summarised forecast has a column for definite projects and one for projects you think will most likely happen even if you don’t have full sign off. This moves the forecast from being a pessimistic view of the minimum that will happen to a dynamic view of what will probably happen.

I call this view the Most Likely Outcome (“MLO”). It gives you the ability to breakdown uncertainty line by line. It moves our focus from what is happening to what should happen.

More importantly it gives us the ability to think what could happen if the possibles/warms were signed off. This means the forecast can move in from the wings as a necessary but rather dull spreadsheet to centre stage where it can become a planning tool, a “what if?” Dashboard. Exciting isn’t it?

Whether there is a gap to fill to hit your target or whether there is a resource shortage if a project is signed off it is vital to know the effect of the revenue increase and (any) costs you need to service the extra work.

This is a recent step forward. I’ve shared it with my clients who have, to a person, reacted positively. “Thanks for the new spreadsheets – I love them!” was the unprompted reaction.

So positive has the reaction been I’m going to spend some time and money to move it from a spreadsheet to a simple web based solution. Watch this space as I report back from time to time about the trials and successes of turning a simple forecast spreadsheet into a sophisticated planning tool for any size of agency.

Wish me luck.

List of Blog Titles; An easy return to writing

It’s been a while since I’ve written anything – blame it on work commitments. Blame it on Brexit. I’ve continued jotting down a blog title as it occurs. Some make sense to me, some I’m genuinely confused by. I’m sure the meanings will come back to me.

So, in a first step back on the blogging treadmill, here are my favourite titles. I’ll get round to fleshing them out very, very soon.

5 Reasons Not to Start An Agency

Things I have learnt this week

A banquet of consequences

Do Bigger Clients Mean Bigger Profits?

Common Mistakes By Agency Founders

The Cashflow blog

Learning To Love Your Numbers

Small Agency Financial Model

Perfect Board Meeting Agenda

Pipeline; People; Profits; Plans

Low overheads and underpaid owners – the curse of a growing start up.

Always believe good stuff

Are time sheets a good thing?

Information is a measure of how difficult a thing is to describe

Selling, Doing and Counting

What is your cognitive bias of choice?

The 3 minute P&L

A 3 month rescue plan

Winter is Coming

1 hour a week finance

And my personal favourite;

Dance Monkey, Dance

 

Clarity of Purpose. Flexibility of Process

Or beware consultants with a fixed view. 

There is a world of difference between the purpose of your Agency and how you go about it. The purpose should be to solve business problems for your clients. Whether it’s to help them sell more, influence more or promote their brand more effectively that should be your purpose. 

How you do that will vary. Anyone with a fixed process will find themselves going backwards quickly; overtaken by nimbler competitors. 

What is true of how you work is also true of how you charge for your services. This is not about value pricing versus timesheets; plenty of that another time. No, this is about the need to remain flexible when it comes to pricing. 

I came across just such a case recently. A small agency, recently set up and initially profitable had hit a major problem with one client that nearly broke them. They were in recovery but they were living hand to mouth from project to project with a constant cash flow struggle. 

I wasn’t charging them for my time; I was doing it as a favour. Occasionally I feel generous. I’d looked at their numbers and was explaining what they meant and how they could use them. I was on my hobby horse about the need for an accurate forecast and a new business pipeline. About how the hot prospects on the pipeline could change the next few months if the deals were closed. 

I asked if any of the pipeline deals were price sensitive. The answer was, yes, this one definitely was and this one probably is. Do you have any capacity in the month after next when your forecast dips rather alarmingly? Again the answer was positive. 

“Could you close the jobs if you did a deal on the price?” In the current situation with debts to pay and payroll to meet it seemed to be obvious plan. 

The reply prompted this blog. They had spoken to a consultant who advised them never to discount their rate; it sent out the wrong message and undervalued their worth. A fixed approach to pricing. 

Probably sound advice if you were successful, had money in the bank and had more opportunities than you could handle. To a start-up who had little or no money though it was potentially disastrous. 

Some things are absolute; advice about how to price Agency services are absolutely not. 

In the early years you have to be flexible. In terms of tasks you take on; in terms of work that you do and certainly in terms of how you price your services. 

Be prepared to negotiate. Always think in terms of the extra revenue a job will bring in and what extra costs you will incur. Using up the available capacity you have already paid for is a far more successful tactic to survive and prosper than a refusal to negotiate on price which leaves your team twiddling their thumbs. 

One of the (many) challenges of starting and running your agency is sifting through well-meaning advice of consultants. What could be wrong with seeking help from experts in their field? Nothing really just beware if you get a fixed, absolute point of view about something as subjective as what you should charge. Context counts.