The cost of winning new business has increased an average of 20 percent over the past two years, according to a survey of independent agency presidents by industry newsletter, Management Strategies.
The CEO of one large Midwest agency responding to the survey identified several causes for the cost increase, including: “More competition; need for a 110 percent effort on every pitch; longer selection process; more formal requests for proposals for smaller pieces of business; more stages in the process—a request for qualifications; initial meeting; proposal to narrow the field; budget clarification once the prospect realizes that the ‘undetermined budget’ left them comparing apples and oranges; and finally the presentation.”
To control new business costs, three quarters of the agencies responding to the survey said they now estimate the cost of winning a piece of business before pitching the prospect; estimate the expected profit to be generated from the prospect; and decide whether to go after a piece of business based on the estimated cost of the pitch.
“We plan to make at least 20 percent profit on net fee income for all our accounts. If it costs us more than 20 percent to pitch, we’re giving up our entire first year’s bottom line. That’s the threshold we evaluate carefully,” said the president of another Midwest agency.
“The majority of independent agencies appear to be going down the right track,” said Al Croft, Management Strategies editor, and a consultant to PR firms. “However, I’m concerned about the 25 percent of agencies who do not follow such cost control procedures. In today’s tight economy and tough competitive environment, such controls are almost as important to an agency’s financial health as positioning, creativity and client service.”
The majority (90 percent) of survey respondents said they track how much it actually costs to win a new client; 75 percent of these track costs by the hourly billing rate of the staff members involved. Said one agency president, “We track costs to the penny so that we can recover the investment over time with the growth of the client’s account.”
Three-quarters of the respondents also include a provision for new business development in their annual agency budget, averaging 5.5 percent of annual fee income. And two-thirds (65 percent) say they are able to recoup some or most of the cost of winning a piece of business in the first year of serving the client.