Economic Uncertainty is Making More Clients Less Willing to Commit to Annual Budgets. Here’s What You Can Do About It.

Agencies need to be paid more while clients are now only committing to less.

 Many marketing communications agencies are facing a paradox. They are becoming more expensive for clients at the same time the economic outlook appears to be increasingly uncertain. Once again, many experts are predicting that a deep recession is coming.

 This threat has made some clients and prospects skittish about committing to the normal annual programs which agencies have expected historically. While many agencies are asking for and typically getting increases in their billing rates, they’re often no longer getting annual or even six-month client commitments. Clients are saying "We'll commit to working with you during Q1 as planned but, after that, we’ll need to regroup based on where the economy is at that time.”

 Every year, Prosper Group works with the owners of many different agencies throughout the United States. The purpose of this piece is to share what they’re thinking and doing about this situation.

(As a side note, not all agencies are facing this dilemma. For many, especially those in high tech, the recent layoffs in that category have been a windfall. Even with budgets being approved by project or quarter-by-quarter, now that big tech companies have laid off a lot of communications and marketing people, they’re looking to their agencies to take on more work. This has resulted in some robust revenue growth.)

 Why is this happening?

In 2022, most agencies were able to grow. However, due to overall industry demand for talent and the general U.S. inflation rate, owners had to fight to keep their talent in place. As an example, many of Prosper Group’s clients experienced average salary increases of 8.5%.

The 8.5% salary increase doesn’t even include the added costs of group insurance premiums rising 10% every year, the relatively recent need to offer more PTO and mental health days plus contributing to employee benefits related to physical, mental and emotional well-being.

With such highly inflated “people costs”, it was inevitable that agencies had to raise their billing rates.

Fast forwarding to 2023, the economy is experiencing a slowing inflation rate but there are increasing layoffs at many Fortune 500 companies, especially in high tech as noted above. These ripples of uncertainty are spreading rapidly among clients in general.

The result? Many renewing and newly won clients are now only committing to quarterly budgets (not annual) until the economic picture in the U.S. is clearer and more stable.

Here’s what you can do about it.

First, get into the right frame of mind. 

The annual program that was your agency’s security blanket is not so secure in a time of economic uncertainty. Annual programs are only as good as the termination provisions in your client engagement letter which give clients the right to end your annual engagement with appropriate notice. 

The fact that clients are willing to take a quarter-by-quarter approach may in reality be more appealing than their phone call saying “We can’t commit to anything right now. Let’s talk in a few months.” With a quarterly budget approach, at least you’re in the game and understand the situation you face (which should, among other things, lead to more prudent agency hiring and operating budget decisions).

The quarterly renewal process should also be viewed as an added incentive to better understand whatever it may be that’s keeping your clients up at night so that you can identify new opportunities for serving each of them. Simply said, view the quarterly budget as an opportunity instead of a challenge.

Build risk into the agency’s pricing.

One strategy for dealing with the uncertainty caused by non-committal clients is to build a premium price into shorter budgets. Isn’t this what other industries do? More risk equals higher price.

Given the increased uncertainty, it seems reasonable to build at least a 10% premium into the agency pricing model to help offset the added risk the agency has with full-time staff who are paid every two weeks even if a client decides to end the relationship.

How to turn quarter-by-quarter commitments into opportunities for your firm.

While there are no doubt challenges with shorter budget periods (not the least of which is managing staffing levels), the quarter-by-quarter approach actually provides at least three opportunities for organic growth.

First, the agency is far less likely to fall into the lull of a “good enough” mindset for client service and will now have an even greater sense of urgency for delivering exceptional performance. Every quarter is a renewal period when the agency is accountable for results… and represents an opportunity to demonstrate the agency’s value, highlight areas with strong results and make the case for a larger budget for the upcoming quarter. Each quarter can then build on the momentum created during the preceding one.  

In a very real sense, the agency’s heightened urgency for results can be a driver of not only higher agency performance but also an even stronger focus on providing overall value to clients. With an urgency mindset, there’s more attention to detail and a greater drive for excellence. It’s the difference between being just one of 162 regular season baseball games versus the World Series.

Second, with a super-focus on providing value to the client, the total of four quarterly budgets can often exceed the annual budget you would have normally proposed. For example, a client in a down economy may be unwilling to commit to $1,000,000 for the year but might approve $300,000 for the next quarter. This is far better than clients putting spending decisions on hold until an unknown future date.

Further, the quarter-after-quarter budgets can add up in the course of a year. At agencies serving big clients, we’re seeing overall budget growth even with quarterly renewals.

Third, if they’re not already doing so, clients’ quarterly approach to budget approvals will force agencies to quickly adopt a methodical process for generating organic growth from existing clients. Too many firms with annual client programs either don’t do this at all or don’t do it well. A disciplined agency-wide approach with client leader accountability to the owner will yield the most consistent results for organic growth.

Competing in a quarter-by-quarter environment will keep your agency sharp.

Clients will be looking for even more value from their agencies in the quarterly model. In particular, as more sophisticated measurement metrics are used, clients are demanding more proof of performance.

The agencies’ senior team should therefore be even more motivated to ensure that their account teams are performing well and you have the tools to prove it. With the comfort of an annual budget gone, the management of client work should become sharper via higher expectations for the work itself and the people who deliver it.

Consider moving to a more flexible staff structure.

Agencies that are facing the dilemma of shorter client budget periods should become more nimble in their approach to staffing. Owners should at least consider the implications of moving to fewer full-time staffers by not replacing staff attrition until future revenues are better known. This may require shifting to more part-time or freelance staff as part of the mix.

This could be a tough pill to swallow for owners given how hard you’ve fought in 2021 and 2022 to keep your talent. However, while you successfully navigated 2021-2022, we’re now in 2023. Agency leaders need to manage for today while continuing to prepare for future challenges and opportunities.

While it’s still very important to retain and motivate your key talent, the definition of “key” should be carefully reviewed during tougher economic times.

Last, protect your agency as well as you can.

Push as hard as you reasonably can to have an evergreen engagement letter (an agreement with no end date) that requires a lengthy termination notice even if the client wishes to approach budgeting on a quarterly basis. It’s important to maintain at least a 90-day termination period.

The fact that a client wants to budget quarterly doesn’t mean that a material termination provision isn’t warranted. The agency has still hired and allocated staff to the client’s account so sufficient notice is both fair and necessary to end the relationship. It will usually take at least 90 days (and often considerably more) to replace the lost revenue and the payroll for the account team assigned to the departing client. Your agency deserves the softer landing that a 90-day (or more) notice provision will provide.

The termination clause must also specify how much money will be due to the firm during the termination period and when it will be paid. Generally, this is the amount of the retainer or the average monthly fees billed during the 90 days prior to notice being given. A notice provision without the money due doesn’t provide much protection to your agency.

Eight additional steps you should be taking now in case a recession is in fact approaching.

If a recession is indeed on the way, here are eight things agency owners should be doing:

1.     Preparation should start with your client relationships. Stay close to the decision-makers. Keep abreast of their concerns and opportunities.

2.     Sharpen your brand proposition so that it’s ultra-competitive. Make it crystal clear. Give prospects a compelling reason to specifically choose YOU instead of the many other readily available alternatives.

3.     Ramp up your marketing to generate more leads and increase market share. Actively use today’s technology in your marketing efforts.

4.     Ensure the agency brings its “A-game” to every new business opportunity because winning now will matter later if a recession does arrive.

5.     A recession can be the best time to upgrade talent. Even highly talented people will be let go and searching for new jobs.

6.     Protect your profit, people and future with a strong Client Engagement Letter, clearly defined Scopes of Work and a “Best practices” billing process.

7.     Manage your agency for maximum profitability. Driving higher profits now will put you into a better position for paying the bills later. Tighten every area of your financial management. Cut general overhead wherever possible (e.g. – subscriptions, producing reports that are no longer really needed, unnecessary travel, etc.).

8.     Make sure you have a strong relationship with your banker (and an adequate line of credit just in case).

For the specific details of how to achieve each of these, you can review our in-depth piece on how to be prepared for the next recession by here.

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