Too many unprofitable clients? Fix your Client Dilution problem!

Written by: Karl Sakas

During an agency consulting project several years ago, I discovered the agency had been working for $5 an hour.

How did that happen? One of their clients cut their monthly retainer. The agency’s accountant updated the invoices… but no one told the PM. For two months, the agency continued delivering at the old level.

In my calculations, the agency averaged $5 an hour—less than minimum wage, and much less than the agency’s $150/hour target rate.

What went wrong? The digital agency had nearly 100 active clients—the retainer’s scope-change slipped through the cracks.

Lots of clients can be great for revenue, but terrible for profits—and “too many clients” are just one symptom of a Client Dilution problem.

Definition of Client Dilution at agencies

Getting just $5/hour is an unusual situation, but it’s a symptom of a common issue at agencies—what I call the Client Dilution problem. It’s the flip side of the Client Concentration problem.

Client Dilution refers to a pattern of small-budget clients demanding big-budget service from your agency. It combines over-servicing and under-charging to a degree where you hurt your profit margins… and your team’s morale.

The following quiz will help you check if this might be affecting your agency.

[Quiz] Do you have a Client Dilution problem?

If you answer “often” or “all the time” to 2+ questions, your agency may have a Client Dilution problem.

1) We have more than 25 active clients, and net profit margins are below 20%.

2) Clients who pay less than 3% of our annual revenue want weekly calls.

3) Our smallest clients are the most-demanding.

4) I’m struggling to find a way to get small clients to contact us less often… or to “fire” us so we can replace them with bigger clients.

5) Past clients show up expecting instant turnaround on their new request.

6) We regularly over-deliver by 20% or more… or we don’t track time, so we’re not sure how much each client requires.

7) Non-retainer clients expect retainer-level help, but they keep refusing to sign a retainer contract.

Got a Client Dilution problem? Read on for how to fix it!

How to fix your Client Dilution problem

Want to prevent a painful Client Dilution problem in the future? Keep these points in mind:

  1. Think twice about raising (or keeping) your client count above 20 active accounts. You probably won’t accidentally charge $5/hour, but more than 25-30 clients typically means a higher risk of things slipping through the cracks. At a minimum, fire any small, low-margin clients.
  2. Set & enforce a minimum level of engagement (MLoE) for new clients. This concept from Blair Enns at Win Without Pitching helps you front-load the process of preventing Client Dilution. New clients should make things better… not worse.
  3. Monitor how much time you’re spending on each client. Even if you charge on a milestone or value-based pricing model, your team’s time is ultimately your “inventory.” Do a sample set of Work Breakouts to calculate the profit impact. Over-delivery costs you money, both directly and via Opportunity Cost.
  4. Transition existing clients to a higher spend… or fire them. It’s harder but not impossible—here’s how to rank your current clients, and how to raise prices for existing clients. This may include putting one-off clients on retainer… or pointing them elsewhere.
  5. Connect a client’s level of service to their price tier. That is, lower-budget clients can’t get the same level of service as your higher-budget clients. If that seems unfair, consider airlines—Economy passengers don’t get to sit in First Class, no matter how much they think it’s unfair. Here’s more on price tiers or bands.

Your situation may require additional solutions, but I’d start with a combination of the ones above.

Not only will fixing things help you increase net profits, you’ll likely be less stressed, and your team’s morale will improve because they’re not at each tiny client’s beck and call.

Don’t want to reduce your client count?

Disagree with my advice about having 10-20 clients? If you have more than 25 clients, a Client Dilution problem is practically guaranteed—and you need to fire clients to fix things.

How so? Imagine you have 40 active clients. Let’s say the top five are 50% of revenue, and the next 10 are an additional 30% of revenue. That means your smallest 25 clients produce only 20% of your revenue, averaging 0.8% apiece. Yet many of those individual clients surely demand more than 0.8% of your team’s time—which makes those clients part of your Client Dilution problem.

Those smallest clients are likely costing you money, and you need to fix that (see above)… unless you like subsidizing your clients out of your own pocket.

Worried about losing revenue?

In my experience, many agency owners are reluctant to fire clients because they’re concerned it’ll hurt revenues. If your annoying clients are big, you’ll need to tread carefully. When it’s Client Dilution, though, those annoying clients are inherently small.

That is—firing your worst small clients will have a small negative impact on your revenue. And since you’ve been over-delivering, firing them can actually boost your profits.

Several years ago, I advised an agency in Virginia that struggled with Client Dilution. I asked the CEO to rank her clients by revenue… and then to identify her most-annoying clients. Interestingly, they skewed toward the lowest-revenue end. Combined, the three worst clients totaled only 9% of revenue—and the worst was less than 2%.

With my recommendation, the CEO fired the worst client without hurting revenues—and she simultaneously increased agency profits and team morale.

What Client Dilution is not

Client Dilution is different from my “strategically free” concept, where you choose to over-deliver (and intentionally call it out to clients). It’s also different from a single client or two being overly-demanding. And it’s not Client Dilution if your smallest clients aren’t demanding more than they’re paying to receive.

The key is that it’s a pattern of relationships skewed unfairly toward your clients—frequently where your over-delivery regularly exceeds 50% of their paid budget, and where you feel like you have no choice but to comply.

Question: What’s the next step to fix your agency’s Client Dilution problem?

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