Why 98% Of Small Creative Agencies Are Unprofitable: Part 1

At the risk of pissing some people off... I'm just gonna say it: the way ALL small creative agencies operate is unprofitable. 

And I know why!

It's because you're making two major mistakes that you actually think are HELPING your business succeed.

You see, most people who start their own little design agency, branding agency, web design, or development agency usually learn their craft on the job at a larger agency. After a few years of working there, the allure of working from home in you PJs gets the better of you, and you realize you could be working for yourself, and you take the plunge and go out on your own.

But as soon as you get that first client, you’ve got to make a bunch of decisions about how you’re going to work with them. Not the actual creative work, but everything around the creative work: how you’re going to charge them, present work, get feedback, manage each step, and how you will or won’t interact with them throughout the project (Over email? Phone calls? Text? Voxer?).

Since the only other time you ever did this was at the big, fancy agency job, you naturally default to what you learned when you were a small fish in a big pond.

You try to do it how they do it, and that’s your first mistake.

Here’s why:

Mistake #1: Putting Yourself at a Disadvantage From the Start

In the agency world, when they land a potential client, they start by writing a proposal. You've watched them spend countless hours wining, dining and pitching potential clients (at no charge) for the chance at a huge project and payday. 

And because that's what they did at your company, that's what you do, too. In your proposal, you write out the scope of work. You calculate a bunch of estimated hours. You put some hourly rate on it based on what you think you can get. 

But what you don’t know is that this whole system of proposals is setting your small agency to be unprofitable before the project is even closed!

Part of this is because you’re starting the relationship off giving the client all the power: They have the project. They have the decision-making power. If the project goes forward, it's on their timeline, they don't owe you anything, and you haven't gotten paid for any of it.

You are hustling for this person before you've gotten paid, and you have absolutely no control over whether you ever will get paid by being chosen for the project.

And even if you are ultimately “the chosen one” it’s likely only after another time-consuming back and forth over the price.

Bottom line: pitching for free is what every small agency owner does, because that’s how big agencies do it, but it is a big reason why your small agency struggles to be profitable. (Luckily there is another way that eliminates the need for proposals altogether, but we’ll get there in a minute!)

And another big-agency strategy that leaves small agencies pinched for time and money is what happens right after you get hired. 

Mistake #2: Leaving Too Much Room for Error

Once you’ve closed the project, now the actual paid work begins.

If you’re like most small agencies, you operate on a process of sending deliverables at each stage, waiting for feedback, making revisions, and then repeating that process dozens of times until it’s over. If you’re like I was you are probably pretty diligent about putting all the stages carefully on a timeline in order to figure out how long this project is going to take, and therefore how much you need to charge.

But you also have to account for client opinions, so in addition to the week or so put aside for each step you factor in a few extra weeks just in case you need to make some extra revisions.

The problem with this is that that whole process is, even if you do account for unexpected detours, it still leaves all kinds of holes along the way and opportunities for the project to go awry.

Why? Because this project now relies on a client to show up and participate on your timeline. And we all know that clients are not great at doing that.

Plus, the way the timeline is laid out creates all kinds of opportunities for the client to add requests, ask for additional changes (big and small) or even change their mind about decisions they made earlier. Any one of these wrenches can throw the entire project and timeline off, making the project much bigger. 

And that's when the small agency gets into a sticky situation where they are spending extra hours that they weren't planning to spend managing all of these changes, and then spending even MORE time trying to figure out how they're going to charge extra for it. This can become an awkward battle with the client when you send them the invoice. The client doesn’t always agree that an extra fee is warranted. But you’re in so deep at this point you just want to get SOMETHING out of it, so you compromise and end up—once again—underpaid.

This is a big reason why small agencies are perpetually stuck in an unprofitable cycle of working overtime for never enough money. If you actually calculated the hourly rate that you're getting paid, you might very well find out you’d do better working minimum wage at the local gas station. It’s why one client of mine recently shared that they once closed a $40,000 project— the largest price they had ever charged by far— but why the time it was over calculated they were paid about $5/hour for their work.

This default agency model is a slow, painful death for creative entrepreneurs because it is guaranteed to leave you constantly overworked and underpaid until you fix it.

How to Fix the Broken Agency Model

Most agency owners focus on trying to fix the problems instead of the source of the problems. They focus on tighter contracts, more detailed SOWs, more specific timelines. They try to incentivize clients to deliver materials and feedback on time. They try to make stricter contracts to limit the endless revisions or leverage payment with legal threats... which all only produce more of the same problems they were intended to solve.

The only way to really solve this is to fix the source of the problem. 

In Part 2 of this mini-series, I dive deeper into how you can fix the broken agency model. But before you go, check out my 3-part blueprint to help you eliminate the wasteful proposal phase, get rid of the never-ending projects, and go from broken and bloated, to lean and profitable.

(originally published on Forbes)