News outlets have been warning of a potential recession for a while now—citing everything from declining consumer confidence to trade wars.
And it’s no secret that marketing services are often among the first items to go in the event of a recession.
Case in point: in 2009, the last year of the Great Recession, United States advertising spend fell by 12%, while it plummeted 9% globally.
Although some agencies are fighting for top talent and working hard to maintain the growth they experienced in 2018, we’re already seeing signs of a slowing labor market.
For in-house marketing departments, that means lower-than-predicted hiring growth rates.
Hiring at agencies reached record highs last year, but many agencies are now trimming their staff.
What’s more, a February 2019 survey of CMOs revealed that most CMOs are “on the fence” about the U.S. economy.
Respondents ranked their optimism at around 57 (on a scale of one to 100), a 21% drop from the previous year’s score.
And according to Forrester’s global CMO practice leader, Keith Johnston, agencies could lose between 3% and 30% of their revenue during an economic downturn.
So what can agency leaders do to prepare for a recession properly?
We must look at trends for the right answers.
At Agency Management Institute, we work with more than 250 agencies every year, and we interact with tens of thousands of them through our podcast, workshops, and more.
Based on those interactions, here are the top four trends that may affect how your agency prepares for the future.
Over the past few years, fewer companies have hired agencies to act as the “agency of record” or to take on longer engagements.
Instead, companies are increasingly hiring agencies for project-based work.
Thus, agencies have to multiply their business development efforts because winning one project isn’t as valuable anymore.
You need your biz dev people (or yourself) at-bat more than ever.
You might be winning more clients right now—and that’s great—but the dollar amounts for each are smaller.
Therefore, it’s more necessary than ever to have multiple wins for the same dollar amount.
Taking on more project-based work is not necessarily a bad thing.
But to ensure your business stays afloat when it’s time to tighten the belt, you should start looking for the right balance between long-term clients and short-term projects.
Despite the trend toward project-based work, many agencies still have “gorilla clients”—those that make up 20% or more of their adjusted gross income.
That kind of dependence on one client comes with a certain amount of risk.
How will your agency’s financial health suffer should that client decide to take its business elsewhere?
Beyond the money aspect, I’ve also seen gorilla clients exhibit “bad breakup manners”.
They’ll pick up the phone on a Tuesday, demanding the completion of all projects and that everything is closed out by that Friday.
Or they’ll require you to transfer all your files to a new agency they’ve already hired before you have a chance to learn what went wrong or how to save the relationship.
I’ve spoken with many agency owners who have experienced the consequences of an out-of-the-blue breakup from an important client.
If you currently have a gorilla-sized client in your roster, consider turning that client into a monkey-sized client—especially in light of an impending recession.
Lack of Transparency
I’ve seen many clients leave agencies due to a lack of transparency, mainly where commissions and agency fees are concerned.
Clients become rightfully frustrated when they can’t understand how agencies are billing them.
One common sticking point between clients and agencies is markups with third-party vendors.
Unfortunately, when you are working with a third-party vendor, you might not even know what the vendor’s markup is.
As a result, there’s a severe disconnect between what the client thought it would be paying and what it actually owes.
This would frustrate just about anyone.
The issue isn’t the commission or markup itself.
In fact, most clients I’ve spoken to absolutely want all parties to be fairly compensated for their work. The issue is the lack of transparency.
Eliminate this frustration by outlining in your master services agreement exactly how you bill clients as well as how you handle markups and commissions.
Don’t just include the language; make sure you explain the terms clearly, so there’s no room for interpretation.
Go out of your way to demonstrate your transparency, and clients may see you as an indispensable partner during an economic downturn.
Working Harder for the Money
With an impending recession on the horizon, agencies will need to work harder for every penny.
The stakes are high, and CMOs’ jobs are at risk if they make the wrong partnership decisions.
Don’t expect your sales process to go smoothly all the time. In fact, don’t be surprised if it is stretched out over several months.
Once your agency lands an assignment, the client may do its best to squeeze as much as it can out of you.
Regularly check your numbers to make sure you aren’t paying for the privilege of working for some clients.
There are a few exceptions to the rule.
Pay-per-click advertising and “21st-century PR” (i.e., PR that includes influencer marketing, content creation, and building channels) seem to be services that clients will pay for with little to no haggling.
In fact, agencies that perform PPC and 21st-century PR find that clients want spend more money.
I am not necessarily suggesting that every agency launch a PPC or PR division. It’s always a good idea to regularly evaluate your current offerings and explore ways to diversify or add more value.
Heed the Recession Warnings and Keep Evolving
This isn’t the media’s first recession warning, nor will it be the last.
Regardless of whether we experience an economic downturn, it is vital for agency leaders to pay attention to industry trends.
Our industry is simply moving too quickly for us to think we shouldn’t be continually evolving.