How Your Agency Can Survive & Even Thrive in a Recession

Hannah Cohen
March 19, 2020
Creative Agency Management
10 minute read

How can your agency survive - and even grow - in a time of economic gloom? What can you do to retain clients and cut costs? Find clear answers in this guide.

The stock market is tanking, demand is crashing, and your clients are starting to tighten their belts.

All signs say the same thing: there is an economic downturn on the horizon.

If you’ve been running your agency for a while, you know that ups and downs are a part and parcel of business. Market conditions can change, outside events can affect demand, and sometimes, growth stalls simply due to cyclical reasons.

As a serious business owner, you should perennially be preparing for such inevitable downturns. Even as you marshall resources toward growth, it’s also important to create a contingency plan when things go south.

At the same time, you must structure your agency to be more resilient (or what Nicholas Nassim Taleb calls “antifragile”). A few changes in how you operate can make you more recession-proof.

How?

I’ll share some answers below.

 

AGENCIES, ADVERTISING, AND ECONOMIC DOWNTURNS

Agencies don’t do particularly well when economies tank. Marketing is the first casualty when clients see their margins shrink and demand crater. After the 2008 crash, ad spending in the US dropped by 12%.

However, there is substantial research to prove that companies should maintain (or even grow) marketing spend during a recession. Amazon, for instance, grew its sales by 28% during the 2009 Great Recession.

One study of the 1981-82 recession found that companies that advertised aggressively during the period saw their sales grow by 256% by 1985.

 

Recession Graph

 

This sounds contradictory to conventional wisdom, but downturns are the perfect time to advertise for three reasons:

  1. Advertising rates drop due to lower demand
  2. Higher customer mindshare as competitors cut back on spending
  3. Better brand image since customers see active ads as a sign of corporate stability

If you see an economic downturn approaching, don’t panic - it’s not all doom and gloom. If you can convince your clients to continue marketing, both you and your clients will be better off in the long run.

Having said that, you need a short-term plan to deal with the immediate aftermath of a recession. You also need a long-term strategy to decouple your business from market conditions and become truly “recession-proof”.

 

 

HOW TO SURVIVE A DOWNTURN

In an ideal world, your clients will keep spending money judiciously during downturns to win market share from their competitors.

But in the real world, businesses panic and pull funding when they see demand crashing. When that happens, you need a plan in place, as I’ll share below.

1. Evaluate your risk

At the start of every economic downturn, there are three risks you need to evaluate:

A. Recession risk

How confident are you (and economic experts) about a crash? If there will be a downturn, how long and severe will it be?

While this can understandably be tough to predict, it’s important to have some idea of the reality of the crash. There is a world of difference between two-quarters of a demand crunch vs an epoch-shifting recession (like the 2009 crisis). The severity of your actions will change accordingly.

 

B. Risk to your business

How well-placed are you to survive an economic downturn? How many months of cash do you have in the bank? What are your payment terms? How much do you owe to lenders? How much do clients/partners owe you?

These are critical questions to answer. Some agencies are recession-proof simply because they have ample cash to survive a crash. I’ll share how to build such agencies later.

Also, evaluate your client roster. Does a single client make up a disproportionately large part of your revenue? In such a case, you need an all-out effort to save this client.

 

C. Risk to clients

What are the chances that your clients will be affected by the recession? Are your clients localized in a single industry? Or are they spread across multiple sectors? How recession-proof is each sector?

While demand usually falls across the board in an economic downturn, some businesses survive better than others. If you work primarily with doctors, for instance, you might find that demand remains stable (or even goes up) during a recession.

 

2. Segregate your clients

Some of your clients will pack their bags and leave at the first sign of economic trouble. Some others might stick it out for years.

Step two, thus, is to dig deep through your client roster. You need to consider:

  • The client’s risk exposure to the economic downturn
  • The client’s importance to your operations and your ability to serve them during the downturn

The latter is particularly important. Sometimes, it’s worth fighting to keep a cornerstone client even at a loss. The bad times don’t last, but losing a critical client can be tough to overcome.

Also consider your ability to serve each client. Clients that can be served completely with cheap resources (in-house or freelance) are easier to retain during a downturn. On the other hand, if a client has razor-thin margins and depends on expensive talent, it might be worth it to cut them off.

Based on these criteria, segregate your clients into the following three categories:

  • Immediately departing: These are clients who are most vulnerable to the downturn. They’re also not massively profitable for you. They’ll likely dump you as soon as things go south. In most cases, it’s not worth fighting to retain them.
  • Wait and watch: Clients who are going to hurt through the downturn, but are comfortably placed to survive it. They might tighten their belts but won’t dump you completely.
  • Comfortably placed: Clients who will take minimal damage from the downturn. Most likely these either have a ton of cash reserves or operate in an unaffected sector. Retaining these clients is crucial for surviving the downturn.
  • Value shoppers: These are clients who will use the downturn to renegotiate contracts and bargain for lower rates. Evaluate them on a case-by-case basis. Some of them you might want to dump if it’s too expensive to serve them. With others, it’s okay to renegotiate a lower rate if it means keeping them from going to competitors.

 

3. Evaluate your services

What kind of services do you offer? Is your work concentrated in “must-have” service areas - say, website maintenance and hosting? Or do you offer a lot of “nice-to-have” services such as branding or social media?

Remember that just as you’re evaluating clients, clients are evaluating their agency partners as well. They will cut anything that isn’t 100% necessary to their operations or doesn’t have a clear ROI.

For instance, AR/VR might be a great branding play when clients have surplus cash. But since these rarely have an immediate ROI, clients will likely cut them in a downturn. If AR/VR design forms a big part of your revenue base, now would be the time to diversify.

As part of your risk analysis, ask the following questions:

  • What percentage of your revenue comes from “must-have” services? What percentage comes from “nice-to-have” work?
  • Can you prove the ROI of your work beyond vanity metrics?
  • How close is your work to the bottom of the funnel? In a downturn, clients will often cut down on top of the funnel marketing. But they will still keep pumping money into bottom of the funnel, revenue-generating leads.

4. Create a plan of action for your top clients

So far, you’ve analyzed your clients, services, and overall risk.

The next step is to create a plan to retain your clients.

Assign top priority in this plan to clients who:

  • Form a large percentage of your revenue, and/or
  • Are comfortably placed and thus, unlikely to fire you, and/or
  • Use must-have, revenue-generating services, and/or
  • Are marquee brands that attract other, newer clients.

You’ll have to address each of these clients individually. Find out what their key pain points are and how you can resolve them.

Some steps you can take include:

  • Cutting low ROI and low-priority work to reduce their total billings
  • Going above and beyond to show better work and higher ROI
  • Offering discounts
  • Renegotiating contracts to earn work that’s closer to the bottom of the funnel (and hence, is harder to cut)

When it comes to your top clients, there are really no limits to what you can and should do to retain them. As we wrote earlier, it costs 5x more to win a new client than to retain existing ones. All your efforts should first be concentrated on making sure that your good clients don’t leave.

 

client chart

 

Of course, this doesn’t mean that you can ignore other clients. You should put in as much effort to retain them as well - just on a lower priority basis.

 

5. Rework your story and services

While economic downturns are mostly about money and margins, they’re also about narratives. “Growth”, “branding”, “prestige” - the words clients love in bull markets give way to words like “ROI” and “savings” in bear markets.

A little-followed tactic, thus, is to rework the narrative around your services. Don’t tell clients about growth and brand equity. Instead, tell them about savings, better ROI, and getting more from less effort.

For example, if you’re selling web design services, you might have two different narratives for different economic situations:

  • Growth narrative: Best-in-class, bespoke design services for clients who want nothing but the best
  • Savings narrative: Low-cost design services for clients who want more from less

Thus, instead of selling “handcrafted websites”, you might pitch clients “heavily customized WordPress websites”. Since your clients are looking to save, your pitch, too, should focus on keywords like ROI and affordability.

This applies to both new clients and existing ones. With existing clients, sit down with them and show them how you’re changing your service mix to save them money. Use off-the-shelf solutions, more affordable components, and cheaper labor. Your goal is to show these clients that you’re committed to helping them thrive in the downturn.

 

6. Clean up internally

Agencies can pack on a lot of fat during growth phases. You might hire personnel you don’t really need, buy software that remains underutilized, and adopt inefficient practices.

An economic downturn is the right time to clean up internally and cut down on the flab. This can be tough, especially if you have to let people go.

There are three key areas you need to clean up:

A. Software

Make an inventory of all the tools you currently use. Evaluate their current and average utilization over the last 6-12 months. You’ll often find that there are tools that are used just once or twice a month then sit unused.

Also consider:

  • Software contract period (monthly, semi-annually, annually)
  • Contract type (per seat basis, flat monthly, usage-based, etc.)
  • Penalties for early closure, if any

In an economic downturn, it can be smart to switch to multi-purpose software instead of single-use tools. Workamajig, for instance, can do the work of your accounting, sales CRM, task management, collaboration, and project management tools. This can result in substantial cost savings.

 

B. Personnel

Salaries are the biggest expense for every agency. Cutting down on this can be the easiest way to keep your business afloat.

The first thing you need to know is how well you’re currently using your resources. You need to track three metrics to understand it:

  • Utilization rate, i.e. the ratio of hours worked to total available hours for each resource
  • Realization rate, i.e. the ratio of total billed hours to total available hours for each resource
  • Agency utilization rate, i.e. the total utilization rate for all employees divided by the total number of employees

These three metrics tell you:

  • How well you’re currently using your resources (utilization rate)
  • What percentage of each resource’s time is spent on billable work (realization rate)

For example, if you have three employees with utilization rates of 66%, 86%, and 80% respectively, your agency utilization rate is 77.34%.

 

total agency utilization rate

 

In other words, roughly 1/4th of each resource’s time is wasted.

Evaluating your personnel can tell you where you need to cut the flab.

You can learn more about utilization rate and how it affects your profitability in this article.

 

C. Practices

What’s the biggest expense for agencies outside of salaries?

Office space.

For a modern agency, there is no real need to spend money on extravagant offices. A great deal of agency work can be done remotely. In fact, as we wrote recently, remote workers are happier than their in-house counterparts.

 

employee survey

 

Asking people to show up to the office when they can work just as well remotely is an example of inefficient practices common at agencies. As a downturn looms on the horizon, it’s time to take stock of such practices and find solutions to them.

Ask yourself:

  • Does my agency waste time and resources in finding information? Do we have a centralized knowledge base to keep track of everything?
  • Is collaboration a challenge for our employees? Does everyone have access to what they want in a streamlined manner?
  • Are we using cutting-edge communication tools? Is our software library up to date?
  • Is there something we can change about the way we work to save resources?

Something as small as going digital-only with your documents and using e-signatures can save you a great deal in paper and postal charges.

Consider discarding such practices in a downturn to save costs.

 

7. Furlough, don’t fire

Rehiring and retraining can easily end up being more costly than laying people off during a recession. If you have no choice but to let people go, try to put them on furlough rather than firing them. That way, you have experienced staff ready to return when you can take them back.

 

8. Centralize decision making

Studies have shown that companies that involve all employees in decision-making do better in a recession than companies that have all their decisions made at the top. Although one might think that it’s better for top executives to make the important decisions, the facts are that centralizing decision-making allows companies to gain insights from employees throughout the company, with each adding their own expertise so that well-rounded decisions can be made.

Additionally, centralizing decision-making gives employees a feeling of empowerment and the transparency of centralized decisions increases their confidence in the company. This makes employees more likely to give their work their all, which ultimately boosts the bottom line.

9. Focus on branding

People trust familiar brands. In fact, people are more likely to buy products from familiar brands even if the quality is not as great as the product of a different, less familiar brand. It’s therefore worthwhile focusing on bringing out your brand messaging during a recession. And even better if you can make that brand messaging ‘recession friendly’ by labeling your brand as affordable and emphasizing ROI.

10. Actively boost team morale

A recession is hard on everyone, not just business owners. Your employees will likely have personal worries such as how they are going to put food on the table and pay off the mortgage. This stress, coupled with the inevitable changes happening at work, requires you to step in and boost morale as much as possible.

Here are some ways you can significantly boost morale in your company:

  • Show empathy - Encourage your employees to discuss their worries with you, then validate their concerns, and brainstorm ways to solve any issues they may have.

  • Conduct a survey - Show your employees you care by sending them a survey containing questions pertaining to their well-being and how they feel at work. Then, actively pursue ways to solve any issues that come up.

  • Allow flexibility - A great way to increase happiness and feelings of well-being at work is by allowing employees to choose their hours and giving them the option of working remotely.

  • Be encouraging - There’s nothing like a good word from the boss to boost morale. People aren’t only there to make money, they want to feel that they’re doing well and making a positive difference, so be generous with your compliments.

  • Show interest in employee growth - It may not be possible to raise your employee's salaries during a recession but there are many other ways to help people feel that they are making strides rather than stagnating. For example, you can offer training so people can gain higher certifications, and you can discuss future plans with your employees so that they feel they’re working towards a goal.

  • Team-building activities - Create a feeling of camaraderie and team unity by planning fun team-building activities that put a positive spin on work and enhance relationships. 

  • Prioritize wellness - Although you’re likely to have more work per person during a recession since you’ll likely be hiring less, make sure to split work fairly so that no one gets overwhelmed. Also, take note of your employee's state of mental health and if you notice something, take the time to speak to them about it. 

Building a Recession-Proof Business

Surviving and even thriving in a recession is about making tough decisions and judicious cutbacks. You need to go all out to save your best clients. At the same time, you need to realign your practices and make better use of resources.

At the end of the day, building a recession-proof business comes down to building industry-beating expertise, attracting strong clients, and adopting better software and business practices. Tools that give you better visibility into your agency’s operations, such as Workamajig, can help you spot and fix inefficiencies early.

Take Workamajig for a test drive today to see how it can save you money:

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