Originally found on Hubspot.

AU Contributor Jenn Scilabro from HarvestROI

How to Do an Annual Check-Up

1. Why You Need a Relationship Check-Up

The agency-client relationship is a symbiotic organism. Like every living organism, it needs regular check-ups to assess and maintain the health of the relationship. If the basic needs of either side aren’t being met, or if there’s an imbalance between the two, the organism can’t sustain itself.

So ... are your clients happy? Yes? No? How do you know?

Unfortunately, it’s rare that clients feel able to quantify the value an agency provides. Yet they can always quantify the invoices they receive. Any sense of disconnect between the two creates an unhappy client.

Bain & Company calls this the “delivery gap.” In their research, they found that 80% of companies felt they delivered a “superior experience” to their customers, yet only 8% of their customers agreed.

Happy and loyal clients provide stability and referrals. Unhappy and indifferent clients — or worse, angry or disappointed clients — result in a high rate of client churn and a bad reputation for your brand. For an agency, one unhealthy relationship can poison its overall well-being.

We’re all about preventative care. This ebook will help you be pro-active about taking the temperature of your client relationships. And it’s not just about a client’s happiness.

Symbiosis requires the relationship to work for both sides. That’s why we’ve made agency happiness an integral part of the relationship check-up.

2. Agency Happiness

Does it make sense for your agency to work with this client? That’s the fundamental question. In this chapter, we’ll break this question into three parts:

  • Does this client meet our agency’s long-term needs?
  • Does this client meet our agency’s financial goals?
  • Do we provide good value to our client?

We’ll also explore warning signs you’ll want to look for, which might indicate the relationship is entering a danger zone. As we go through the questions to ask and metrics to look at, you may find you’re not in a position to provide an answer. That’s not unusual — you’re not alone. To help you gather the right information, we suggest tools and processes along the way. Does this client meet our agency’s needs?

Your agency has its own interests and priorities, and it’s critical to know if a specific client meets them.

  • How well does the client match your ideal client profile? Depending on how you’ve defined your ideal client, this may include the client’s:
    • Industry or vertical
    • Annual revenue
    • Relationship growth potential
    • Need for services that are within your agency’s core competencies or in areas you want to develop
    • Corporate culture

The key is to respect your agency’s own values and strategy for sustainability and growth. If you’re really serious about your business, you’ve already mapped out where you want your agency to go at least two years in the future. Investing energy and resources in clients that don’t match your plan or can’t help you get there means fewer resources for the clients that can actually help you achieve your vision and goals.

If you don’t have an ideal client profile, get on it — now.

  • How much does your team enjoy working with this client?

For instance, does the client:

    • Provide clear creative briefs and direction
    • Offer opportunities to work on interesting projects
    • Constantly exceed project scope
    • Request too many revisions
    • Treat your employees well

Agencies aren’t typical vendors. You and your creative staff already know that. Working with creatives in creative endeavors is, by default, a more intimate and sensitive relationship than the average vendor-client business relationship.

Understanding the impact (team satisfaction, engagement, turnover) of clients who are unpleasant or disrespectful is crucial to any agency’s long-term goals — not to mention the financial costs involved. The truth is, a spirit of collaboration and mutual respect brings out the best qualities from team members on both sides of the agency-client relationship. Anything less is dangerous.

Does this client meet our agency’s financial goals?

Sometimes our teams are so focused on delivering services, we can forget to calculate whether an account is actually making our agency any money. At a minimum, you should be able to answer the following questions to conduct a financial check-up of a client:

  • Is the account profitable each month?
  • What percentage of total agency revenue does this client represent?
  • What is your agency’s CAC (customer acquisition cost) versus the cost of acquiring this
  • Is the client profitable over the course of the client’s lifecycle?

Let’s take a closer look at each of these, what they mean, and how to make sure you have the information needed to answer them.

Monthly Profit Margin

Is the agency making a profit every month? That is, does what you collect cover expenses, plus an operating profit? How much does this account contribute to the agency’s overall target profit margin?

The Tobin Group reports that the average profit range in the advertising and public relations industry is 12% to 15%. However, your agency may have set a higher target profit margin.

Whatever the target profit margin – does the client’s monthly billing meet that metric?

To calculate your profit margin on a specific account, you need to know the actual effort hours and costs associated with that account, in addition to its portion of your overhead. Calculate your profit margin based on what the client is actually paying, not what you’re billing. Consider as well whether they pay on time. If not, you’re basically floating them an interest-free loan.

Percentage of Total Agency Revenue

The risk is clear. A client notifies you they’re putting the account up for review, and you realize that this client represents nearly half your monthly revenue.

Not good.

As a general rule of thumb, no one client should represent more than 10% of your total monthly revenue. Anymore than that and the potential damage of losing the client to the agency as a whole is too great.

CAC – Customer Acquisition Cost

Your CAC represents the total average cost your agency spends to acquire a new client.

To determine your CAC, look at the total your agency spends on sales and marketing over a period of time, and then divide the number of new clients brought in over that same period.

Knowing your CAC is critical to assessing the overall value of a client. If your CAC is $20,000 and you are signing on clients for fixed-term $10,000 projects, that doesn’t make much sense.

To know whether your CAC exceeds a client’s value, you need to know the customer’s
lifetime value to your agency.

LTV – Customer Lifetime Value

Where your profit margin is focused on the monthly financials, the LTV assesses the big picture of the client value to your agency.

To calculate the LTV for a client, you need to know:

  • The average annual revenue you expect to earn (or have earned) from that client
  • The number of years, on average, a client stays with your agency

As part of your agency’s internal planning, you should have an expectation of what an acceptable LTV is for your clients. This should keep you from signing on accounts that are too small and don’t provide a foundation for growth.

For example, your agency may decide not to sign clients that can’t achieve a $400,000 LTV. Once you know your agency’s CAC and the LTV for a client, you can determine if you’re spending more on bringing in the client than the revenue the client realizes for your agency.

This is the LTV:CAC. This ratio represents the total value of a client compared to what you spent to acquire it. The higher the ratio, the greater ROI that client represents. So an LTV:CAC of 4:1 is better than an LTV:CAC of 3:1.

Are we providing good value to our client?

As professionals, can we really be happy if we’re not delivering genuine value to our clients?

We don’t think so either.

We’ll address results metrics in the next section, but the how we operate is as important as the results themselves in creating a strong, mutually beneficial relationship with our clients. Clients expect a level of professionalism and credibility that agencies must meet to hold their confidence.

To this end, does your agency:

  • Set challenging and reasonable goals with the client at the outset of a campaign?
  • Have clearly defined, repeatable processes for working with clients and implementing different types of campaigns? Does your client find the processes valuable and easy to follow? Do you know how your client feels about them?
  • Respond to client inquiries in a timely manner?
  • Keep up with your clients’ industry trends?
  • Have processes for identifying ...
  • Where there may be inefficiencies in workflows and how to fix them
  • Root causes when campaigns aren’t going well and what to do about it
  • Opportunities to improve the value the agency provides

Warning Signs

In addition to these metrics, there are common warning signs that may indicate a client isn’t a great fit for your agency’s needs.

As you prioritize your clients to take through a check-up, consider which may be showing any of these warning signs:

Warning Sign #1: Are you close to your average turnover point in that client’s lifecycle?

Meaning, if your average client relationship lasts two years, clients that have hit the 18-month mark should definitely get a check-up — especially if they haven’t had one in six months or longer.

Warning Sign #2: How does this client’s monthly revenue rank compare to other clients?

Are they at the very top (8% or more of monthly revenue)? Definitely assess and ensure their happiness monthly. At the very bottom? A check-up can help you decide to grow or let go of this client.

Warning Sign #3: Is the client constantly redefining expectations from discussed goals?

If so, this can be an indicator both of excessive effort hours needed to meet expectations and your team’s unhappiness.

Warning Sign #4: Is the client regularly challenging items on the invoice or paying your invoice late?

If so, your agency may be assuming a lot of financial risk. Constant challenges like this could indicate the client has financial problems, unrealistic expectations, or doesn’t see your value (this may be a matter of perception). Conversely, your billing could be inaccurate, but your team hasn’t been getting financial approvals in a timely fashion.

Bottom line: having monthly discussions about billing doesn’t make for congenial personal relations. You want to get to the bottom of this behavior, and fix it — fast.