Client turnover creates profitability problems at agencies

Is your client turnover above or average? It depends on whether your agency focuses on retainers or projects.

Knowing I’ve worked with agencies worldwide, the COO at a 25-person agency asked for my perspective on client turnover:

“What do you think a typical digital agency should expect for annual churn rate? We measure [client] churn based on revenue, and have always budgeted using a somewhat arbitrary benchmark. I was wondering what you’ve seen out there and what you recommend people budget for this. My research is showing anything from 25% to 50%—but this seems very high.”

The answer varies but a key driver is whether your agency focuses on retainer or project-based work. Let’s take a closer look to see how your agency compares—since client retention impacts your profitability.

Client Turnover: Retainer vs. Project-Based

If you’re at a retainer-oriented agency, I’d be concerned if client turnover was higher than 20%—because that implies that another 20-30% is currently at-risk. For example, seeing 50% client turnover at a retainer-based agency implies that only ~25% of its clients truly like the agency. That means you’re unlikely to get strong referrals ’til you fix what you’re doing wrong.

If you’re at a project-based agency, client turnover could reasonably be closer to 30-50% annually, assuming you have a strong sales pipeline to replace the revenue and you tend to get repeat business from past project clients. But you probably want to grow your retainer business, so you aren’t spending so much time selling to new clients.

Client Concentration Can Skew Turnover

Those percentages are skewed if you have a Client Concentration problem (that is, any one client is more than 20% of your business).

For instance, if you lose a single good client that produced 40% of your revenues, that’s bad—it’s a huge hit to revenues. But a losing a single client is not necessarily a sign that you’re bad at client retention.

On the other hand, losing 10 good clients totaling 40% means you’re probably making a lot of clients unhappy. That’s a bigger sign that you have a client retention problem.

But losing 10 clients totaling 40% is worse, in the sense that you consistently made a lot of people unhappy for that to happen. And since you didn’t lose that 40% simultaneously, you may get complacent.

You can track the percentage by dollars, number of accounts, or both. (This helps you avoid over-reacting if you lose several tiny clients, or under-reacting if you lose a single enormous client.)

Don’t Get Complacent about Client Turnover

If you’ve ever lost a big client, you know how it feels—a mix of panic and confusion. If they were a client you didn’t like, you’re relieved they’re gone—but worried about how you’ll replace the revenue.

When you lose several clients at once, it feels bad—but it often feels less acute. A few thousand here and there doesn’t hurt as much as losing that single big client. Yet it can add up to the same impact on your agency.

If you’re not strategically focused on client retention, you’re going to have an avoidable client turnover problem. Remember, the choices you make today impact what happens a month and a year and five years from now.

Question: What are you doing today to maximize client retention tomorrow?

Image credit: Washing machine photo by Sunny Ripert, via Creative Commons

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