There is an enormous, albeit unstable, market for project-based services. The success of solutions such as Logoworks, crowdSPRING, and the HubSpot Services Marketplace has demonstrated a rising wave of interest in affordable marketing support. As a result, agencies and professionals that out models to profitably meet the growing demand for project work stand to prosper.
However, project-based work is less predictable, making it incredibly difficult to forecast workflow, expenses, staffing, and income. In other words, if you are planning to stay a solo practitioner or if you are building a distributed network of contractors, project-based opportunities may be exactly what you need.
However, for those of you focused on building an agency, success depends on your ability to create recurring revenue from a diverse and stable client portfolio. The goal should be to sign up the majority of your client base to long-term contracts, preferably 12 months or more, and to have 80 percent or more of your annual revenue coming from those contracts. This ensures a predictable and steady cash flow, assuming clients pay their bills on time, and it gives you the confidence to invest in growth and take the calculated risks needed to innovate and excel.
While building your contract base, your largest client should not account for more than 20 percent of your annual revenue. This rule is flexible if it is a long-time loyal client that has grown organically over time, but never for newer, high-risk accounts. You take on too much exposure, to borrow an insurance industry term, when you rely so heavily on one account.
No matter how good you are, there are too many variables out of your control that can lead to an account loss. We have had solid contract accounts disappear overnight due to bankruptcy, mergers and acquisitions, internal shakeups, and poor management decisions. On the other hand, we have also had to drop clients for a variety of reasons. You have to protect yourself and your employees. When accounts leave, you are stuck with the overhead, and you either need to quickly replace the business or make difficult decisions to cut back expenses, which may include staff reductions. You can mitigate your risk and give yourself the freedom to walk away from deadbeat accounts by having a well-balanced portfolio.
The traditional billable-hour system is tied exclusively to outputs, not outcomes, and assumes that all agency activities—account management, client communications, writing, planning, consulting, creative—are of equal value. The amount professionals are paid does not have a direct correlation to the quality or value of the services they provide, especially when you consider the impact of change velocity, selective consumption, and success factors. Distractions lead to higher costs and lower quality.
Transparency in pricing builds trust, removes friction from the client-agency relationship, and makes it simpler to sell services to the mass market. If you can define the scope, you can standardize the service and assign a set price. The burden is on the agency to build systems and processes, and put the right talent in place, to profitably deliver services at set prices.
The value-based pricing model takes seven primary varied ambles into account: estimated hours, hourly revenue target (HRT), costs, perceived value, and builder vs. driver, loss leader, and service level.