$1.3M/yr Agency Tunaround

Here are my thoughts on what to do about an agency that's been stuck at $1.3M for the last 2 years.

As a reminder, here's what his business currently looks like:

• Annual Revenue: $1.3M
• Annual Profit: $240k
• Avg. Client MRR: $5,400/mo.
• Monthly Client Churn: 10%
• Monthly Prospect Calls: 14 per month (3 inbound / 11 outbound)
• Close Rate: 33% inbound / 9% outbound
• Monthly Sales: 1 inbound / 1 outbound

MY ANSWER: ?(Skip to end for TLDR)

?? First, a Problem-Solving Framework

Without getting too much into the weeds, my framework for problem-solving generally goes like this:

• Understand the Target State
• Understand the Current State
• Find the Root Causes
• Implement Solutions to Solve for Root Causes
• Monitor the Solutions
• Standardize the Solutions, or find better ones.

We will discuss the first 4 parts of this framework here in the rest of the article.

?? The Target State

This agency wants to grow to $2M/yr., and increase profitability to 25%.

This gives us a goal to shoot for, and we know they want to optimize both revenue and profit.

We know there is a gap between this and the current state, so that is what we need to solve for.

?? Understand the Current State

The numbers I listed at the beginning of the article are mostly symptoms of a problem, rather than the problem itself.

The problem is that this agency is stuck at 20 clients because churn is canceling out new sales revenue (they are losing 2 clients per month and only gaining 2 clients per month).

I call this “Churn Limbo”, and they won’t escape it until either sales volume increases or churn decreases.

We won’t know why until we find the root causes.

???Symptoms & Root Causes:

• Flat Revenue Growth: Stuck at $1.3M last 2 years. Root Cause: Low Sales & Lead Volume
• Low Profit Margin: It’s actually not 18.5%; both owners take home a reasonable salary (which Adam Knihtila caught), so it’s actually closer to 27%. I feel much better about this; but, there is room for improvement. Root Cause: Many
• Low Close Rates: The Founder tackling sales does not have a sales background, but found a sales script that “works for him.” Root Cause: Unfortunately, when he did hire a salesperson, he did not implement solid sales training or sales management processes, so closing rates have dropped.
• Limited Inbound & Outbound Leads: Most of their inbound is referral-based, and they have no regular process for requesting referrals. Most of their outbound is from an internal SDR cold calling. Root Cause: This person has limited training, resources, and process.
• Overstaffed: He has about 30% excess capacity for his team, meaning he can bring on an additional 6 clients and still be fine from a workload perspective (according to him). Root Cause: Overhired for future growth, and they also did not think to increase the capacity of the existing team before hiring.
• High Client Churn: This one worries me the most. We don’t know the root cause of this yet, but typically it will either be offer-related (overselling), client-related (bringing on the wrong kind), or delivery-related (can’t deliver on the promise).

Overall, we see a consistent theme of a lack of management and process. This is typical for agencies of this size.

?? Possible Solutions:

• Increase Lead Volume: Adding 8 additional outbound calls monthly should add 1 additional client per month and increase MRR by $5,400 and eventually scale to $1.94M/year. Additionally, A Full-Time sales rep should be talking to 10-15 qualified leads per week, assuming that it takes about 3 hours on average of process time to close a deal. They could triple lead volume to increase sales with the current setup.
• Increase Close Rate: The Founder can either take sales back to increase the close rate, or he could invest time in training and coaching. Most agency owners do not understand the time that training a salesperson takes. It requires managing and coaching every single day. It is not something you can have a 1 or 2-week training program for and expect someone to be world-class at.
• Decrease Churn: We don't know the root cause of this yet, so we need to find that out. However, if churn is 10% when they are overstaffed, it will be higher when they are at or near capacity, especially without systematized, repeatable processes that people actually follow. This is a huge risk to the agency, and could cancel any optimization in sales and lead volume.

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? Recommendation:

• We should fix churn first. I want to see churn at or approaching 5% before we invest.?If this business was on its last breath, I would say focus on lead gen to drive quick revenue and survive another day. But it’s not, and has plenty of runway. They need to solve the root causes of churn first, address them, and then they can scale to the moon.

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Things to consider:

• Overstaffing: While the business is overstaffed, I would not let people go unless necessary. It’s profitable, and you will need that excess capacity when you start scaling again. Use this time to train the team and implement better processes. Think long-term.
• Outsourcing: I believe outsourcing should be a last resort. We look at costs from a system perspective, not from a direct cost perspective. Meaning, while outsourced labor may be "cheaper" from an hourly perspective, outsourced labor makes it difficult to retain quality and knowledge. Agencies are knowledge businesses, so this usually translates into slower response times, slower lead times, more errors and revisions, and other client issues that will ultimately lose clients and cost more than their labor savings.
• Pricing / Offer: Pricing is our biggest lever for profitability, and we wouldn’t need a huge price increase to impact margins dramatically. If we raised MRR from $5,400 to $6,000 (10% increase), that would drive an extra $144k in profit (60% increase!)

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TLDR:

• They are stuck at 20 clients due to a 10% churn rate and low sales volume, because they are losing 2 clients per month and only gaining 2 clients per month.
• They can increase their sales closing rate, increase lead gen volume, or decrease churn.
• Churn will only get worse if they focus on driving revenue, so they should fix churn first.