Tracking Job/Customer Profitability

Many agencies want to track profitability at a granular level. They choose to track profitability at either the customer or job level, or both. This method of tracking seems to be readily accepted by the agency profession, but I'm not so sure the benefits outweigh the costs or input.

Why do we track?

We track things to know new things, which then hopefully changes our behavior. Agency professionals often tell me that they want to know what their jobs 'cost' them so that they can price their services better in the future. But I rarely see this behavior play out in practice. Simply tracking customer or job profitability doesn't ensure that the agency pricing professional will price higher next time. Pricing is more a component of selling, education, and value recognition by the client. Because of this, new information rarely makes us better able to price our services.

What would happen if we didn't track?

I think it's helpful to question our current practices by asking, 'what is the worst that could happen if we didn't continue this behavior anymore?' Would we become bad at pricing if we didn't track job or customer profitability? I don't think so. It would be almost certain that you would have less information if you did not track granular profitability, but I don't think it would really hurt the creation of your prices. Many agency owners create a budget of hours to create their prices anyway, often ignoring any prior information they've gained from granular profitability tracking. I believe one main struggle agency owners would have is the fear they feel from the lack of information that granular tracking brings them. There is truly comfort in this information.

Can you really know your costs per customer?

I'm not sure agencies can truly know their cost per customer. Maybe you can get close, but can you truly know the cost you put into serving a customer? To know this, many things would have to be true:

- every time sheet for work done for every client would have to be completely accurate,

- all costs (large or small) associated with serving the client would have to be perfectly allocated to the client in the accounting system,

- the agency would have to perfectly apply overhead incurred by the whole agency to all clients.

Not only is knowing the true cost per client hard to do, it also takes a huge amount of administrative time to accomplish it. It becomes a huge distraction for the agency to track, with the high risk of not even having the right information when the tracking is complete.

Where does profit come from?

This is a tricky question, but 'risk' is the answer. Taking risks is what ultimately produces profit in a company. Job and customer profitability tracking is an internal commitment to a huge amount of detail, with no promise of profit when it's all done. However, looking outside your company, and taking risks to develop value in the face of the customer is what produces ultimate profit. When agencies are perceived as experts with high value, they can often demand double the price that general agencies request. This ability for high value firms to command high prices far outweighs the imperfect cost tracking that most firms seek to accomplish.

Building an Agency with No Granular Profitability Tracking

Maybe it's time to consider converting your agency from a cost tracking agency to a value based agency. It can be a disruption to your business model, but the results could be huge. When agency owners take their eyes off of the details, then they can begin to focus on creating new innovative services and selling value instead of tracking expenses.

As Peter Thiel, author of Zero to One, says, "today's best practices lead to dead ends; the best paths are new and untried."