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Agency Client Concentration
Had a great day at David Baker’s Financial Seminar in San Francisco today. He talked heavily about the dangers of having a client concentration of over 25%, ie: one client representing more than 25% of your agency’s sales. The inherent danger being that it only takes one turnover in procurement or at the VP level to make a decision to consolidate or change vendors that could cost you your company.
Many smaller to mid-size agencies have gorilla clients which are often the client’s that helped found or create substantial growth, making their agencies what they are today. According to David Baker, an agency’s valuation can decrease anywhere from 10-70% based on their level of client concentration. What does this mean for principals who hope to sell their agency someday? Continue to grow your client base and lower your client concentration below 25%. This will significantly lower the risk of an outsider or even a large agency purchasing your firm.
Those with the Workamajig platform can easily manage the issue of client concentration from two places:
- The Metrics Monitor under Financial Reports
- The Vulnerability to Loss widget on the Dashboard
You will need to be granted access to this financial reporting from the securities settings under admin in order to view these reports.
The Client concentration in the metrics monitor will calculate your client concentration by month, dividing out your largest client billing by your total billings for the month. With this report you can view this monthly, however I believe the trending over the year is significantly more important. For this I would use the Vulnerability to Loss widget, which will calculate your percentage of revenue by client for the previous year.
If you don’t have a technology with a dashboard, you can simply run a report of agency sales by client for the last year, find the largest client contributor to your revenue and divide it out by your total revenue for the last year. According to David Baker, as long as this percentage is below 25% you are in the safe zone.
About: CPI
Creative Performance Inc. (CPI) is a marketing operations consultancy for the marketing services industry (both Agency + In-House). We specialize in improving our client’s Organizational Agility and Operational Resilience, through a seamless integration of industry best practices, mar-tech and business intelligence. CPI is an AgencyStory®, Deltek®, Oracle Agile and Workamajig® partner.
About: Vanessa Vollum Edwards
Hailing from Portland, OR, Vanessa graduated from university with a degree in Philosophy. An amateur helicopter and fixed wing pilot since age sixteen, she began her first career as a pilot for LifeFlight. Upon completing her MBA, Vanessa was recruited by a fellow classmate into becoming the CFO/COO for a digital agency experiencing rapid growth. The agency was acquired in 2010. Over the last decade, Vanessa has built a strategic consultancy focused on empowering agency principals, accelerating growth, increasing profitability and deploying agency management software.