Great PR firms set themselves aside from mediocre ones through one key financial metric: profitability. High profitability means things are running well - clients are happy, employees are performing, retention is strong and the ratio of staff expenses to fee income is healthy.
PR firms with 10-15% profitability are doing okay. Those with 20% profitability are very healthy. And the fortunate few who make it to 25% or higher profitability are killing it. For such firms, each dollar the firm collects in fees can be broken down by 50 cents going towards labor, 25 cents going towards overhead, and the remaining 25 cents being profit.
Firms with this level of profitability do so well because they can invest significant money back in the business to grow, improve technology, roll out new services, expand geographies, and hire the best talent. This investment reinforces their advantage and the cycle continues, allowing the firm to further set itself apart from competition and strengthen its core.
I sold my firm, Cutler PR, one year ago and so I am quite familiar with the immense importance of profitability in PR agency M&A discussions.
Firms with 25% or higher profitability are much more likely to get acquired for healthy sums of money. For example, if an agency has 25% profit margin, their value to acquirers will likely be 1.25X annual revenue or 5X EBITDA.
So, for all of these reasons, and more, increasing profitability of your PR agency is probably the most important thing you can do as a senior executive or owner of the firm. There are few things, though, that agencies can actually do to increase their profitability. One important measure that can be taken is investing in tools and technology that improve productivity.
Earned Media Productivity Tools Are a New Must-Have
A majority of PR firms find that the most unpredictable and challenging service they offer is media relations. It is therefore particularly in this area - earned media - that new and innovative technologies can help firms make a significant difference in their profitability.
Earned media productivity technologies allow firms to increase their client load by 10-15% without hiring additional resources. And that doesn’t mean burning out your existing team members! Because we all know that is not worth it. Rather, the increase in client load without hiring more people is possible due to the automation, workflow management and efficiency that these technologies bring to teams and individuals. You can simply accomplish more in less time and with less hands on board.
Because 50 cents of every revenue dollar goes towards labor costs for most firms, being able to increase client load by 10-15% means increasing annual profit margin of your media relations revenue center by 5-7.5%. If your media relations revenue center is currently generating 10 cents per dollar, this means an earned media productivity platform can help you half again or nearly double your profit margin to 15-17.5 cents per dollar.
If your media relations revenue center is generating 20 cents profit per dollar, you can increase that by 5-7.5 cents per dollar, thereby reaching 25-27.5 cents per dollar. That means an increase of a quarter to over a third in your profit margin, simply by adopting earned media productivity technology.
This means that if your firm has a 20% profit margin and $5 million in annual fee income for media relations services, earned media productivity technology can help you generate anywhere from $250,000-375,000 in additional profit per year due to increasing account load by 10-15% without having to hire additional staff.
Earned media productivity tools additionally help firms increase client retention by 2-4% annually, which boosts profitability further. If your firm has 50 clients, a 2% increase in client retention means holding onto an additional client per year that would have otherwise been lost to attrition. Likewise, a 4% increase in client retention means holding onto an additional two clients per year. If your average monthly retainer is $15,000, this means $180,000-360,000 in additional revenue per year due to increased retention.
When combining impact from account load increase and client retention increase, a $5 million revenue firm can collectively generate an additional $430,000-735,000 in profit annually.
To sum up, adopting and earned media productivity tool can help your agency increase profitability by 25-75% per year. These increases in profit can be a total game changer and take a firm from mediocrity to excellence.
Investing in any technology has some upfront education and learning curve. The payoff, though is remarkable.