When you hear the word “diversification,” you may have flashbacks to the last conversation you had with a financial advisor. But I’m not talking about stocks and bonds here.
Instead, I’m asking you to focus on the client list at your agency. It’s just as important to have diversification of your client base as it is to have a good mix of investment types in your retirement portfolio.
Unfortunately, there are no index funds or target date funds for you to use to diversify your agency’s clients without having to worry about the details.
You don’t want all your eggs in one basket. You do need to worry about the details.
Avoid the One Big Client Trap
First, you want to make sure that you aren’t too heavily dependent on any single client. The reality is that most small PR agencies have one really big fish — often the one that helped launch the agency.
How big is too big? Well, I hate rules of thumb. Certainly you don’t want any client to be over 50 percent of your revenue, but what about 40 or 30 or 20?
The reality is that it very much depends on the size of the agency and how it is structured. Details matter here. For example, if you are staffed mostly by freelancers, a client loss is usually a smaller blow to withstand than one with fixed payroll costs.
Similarly, if you have a high profit margin, you can absorb more losses in most cases than an agency that is just skimming by.
What Happens if a Client Leaves?
What you really want to do is look at your clients and evaluate what would happen if each of them left. For some, this will be a quick exercise. If it’s a very small client, you probably just bang your desk once and move on.
When a large client leaves, you often have tough decisions. Think about what you would be required to do if that client leaves. If that list of changes is big enough that it really scares you and makes you wonder if your agency could survive the loss, then that client represents too large a percentage of your annual revenue.
Of course, diversification isn’t just about not having one or two really big clients.
Smaller Clients Provide Staff Development Opportunity
You also want to have a good mix of client projects because it creates greater opportunities for learning and growth. Smaller clients are great chances to provide project management experience for your rising stars. The lower revenue equates to lower risk (in most cases) and that means you’ll be more likely to give a less seasoned staffer a chance to run it — and they will be more comfortable at the helm.
I know you don’t want me to tell you not to go after the big fish. When you see zeroes, you want to chase them. And there’s nothing wrong with big clients. But don’t ignore the opportunity to bring in smaller guys, too.
The Risks of Industry Specialization
Industry diversification matters, too.
I once talked to an agency owner who was talking about all of the great clients he had. It quickly became clear that they were all in the same industry. Not only that, but it turned out that they all shared a common corporate parent holding company.
So on paper, it appeared that they were well diversified. But if anything happened to that holding company, they could find themselves in a sea of deep trouble.
That’s a pretty extreme example. More common is an agency that specializes in a particular industry or market segment. This may be strategic – building a boutique practice with a special focus – or it may be coincidence as a result of the agency founder’s connections.
While this sort of specialization has clear benefits in pitching services to potential new clients, it carries downside risk, too. Think about the agencies that specialized in Internet startups and what happened to them after the bubble burst in the early 2000’s. (Especially since many PR firms of that vintage agreed to take equity instead of cash – but that’s a discussion for another day.)
In some cases, you may be able to diversify to mitigate the risks of industry downturns, while in others you simply must have contingency plans to deal with it. I have spent a lot of time in the public affairs space over the past couple of decades and there is a certain weird seasonality to that business in Washington, DC – tied to election calendars not the weather.
Variety in Types of Client Projects Helps
Now that we have talked about client size and industry diversification, let’s look at one last area where you can diversify your client list.
You want to diversify your clients, to the extent possible, based on the kinds of services that they need. By having a good mix of types of client projects, you will be able to more effectively (and efficiently) grow your team.
For example, if you have just one or two clients who need digital work, you won’t be able to build much of a team – and they won’t be able to learn from other project challenges to improve.
Think of it like a workout program. If all you do is grab dumbbells every day and do bicep curls, you’ll probably have some pretty big arms. But the rest of your muscles will slowly atrophy.
Diversification Takes Hard Work
Diversification isn’t easy. It isn’t something you can achieve overnight. And since you can’t force specific prospective clients to sign, it often remains elusive – even for the best agencies.
But if you want a healthy, sustainable, profitable agency, you need to think about diversification and have a plan of action.
If you diversify your client list based on client size, industry relationships, and project types, you will be well-positioned for the long term.