I recently wrote about differentiating your agency over on Spin Sucks.
It prompted the following question from a reader:
What if your business has two different revenue models? Say for example, retainer crisis communications and strategy and project-by-project basis for referral work. Would this cause value proposition confusion for prospects?
This is a great question because as important as it is to find a focus for your agency, you can end up narrowing it too much.
Multiple revenue streams can actually be advantageous, and it is common for agencies to mix retainer and project work.
But you want to think through clearly the revenue models and ensure that they are strategically determined and that you can describe the options to prospects in a coherent way.
You don’t want to just throw a whole bunch of different revenue streams at the wall if you can’t explain why you have them and understand how they all fit together.
It starts with being able to describe the value proposition and menu options to prospects, but it also requires that you understand the relative profitability of each.
Many agencies have an ideal revenue stream that achieves high profitability but may be harder-to-sell and then couple it with easier-to-sell and less profitable (but still profitable) supplemental options.
Find synergy in your revenue strategy
This can be a smart strategy, especially if you can move clients between revenue streams or get them to combine them for a complete solution.
For example, you can find ways to add project work to retainers and/or convert project work to retainers.
If your revenue streams are mutually exclusive or appeal to entirely different clients, it may not be the right model for you.
Complementary revenue streams, on the other hand, not only provide you with a powerful selling tool, but they can also help smooth out cash flow.
Let’s say that you primarily provide project-related services so your per-client revenue fluctuates from month-to-month. Adding in a retainer-based service offering can help ensure a steady baseline income between larger projects.
Alternatively, adding project revenue to a retainer-oriented agency can provide beneficial bursts of cash that can help fuel more aggressive growth, leverage underutilized staff, and reduce gaps in retainer income.
One important thing to be wary of is introducing a new revenue stream that eats into existing client fees.
Introducing project-based options can potentially discourage clients from signing retainer agreements. This can be remedied by making the retainer option more economical, but you need to be cautious not to negotiate against yourself and needlessly erode your profit margins.
Questions to ask about potential new revenue streams
As you consider diversifying your own agency’s revenue paths, consider the following:
- Can one client take advantage of multiple revenue streams?
- Are all of the revenue streams capable of meeting your minimum profitability requirements?
- Can you concisely explain the service options to a prospect in such a way that they understand their choices?
- Can your existing team effectively service the work tied to the different revenue streams or do you need to hire fresh?
- Is your agency set up to effectively manage the new type of revenue stream? Are your processes for time tracking, invoicing, and project management prepared for it?
- Does the new revenue stream mitigate overall business risk?
- Will the new revenue stream cannibalize revenue from existing sources of income or is it purely additive?
The key takeaway is to do careful analysis of all of your revenue streams. You want to have a conscious income model, not a hodgepodge of options designed to scrape up whatever pennies and dimes you can find from potential clients.
A well-designed multiple revenue stream model can mitigate risk, improve cash flow, and generate greater profits for your agency.