How to tell which clients are costing you money
Your biggest client may not be your most profitable one. A worked example from a Lagos agency, and a one-afternoon method to check your own clients.
Our connection: the Tallokin team builds ProfitMind, which is mentioned in this article.
Picture a creative agency in Lekki. Nine staff, four retainer clients, and a calendar without a free afternoon. Every month it invoices ₦11 million, and one client, a consumer brand, pays ₦4 million of that.
The owner is proud of that account, and fair enough. It is the first name he mentions when he pitches for new work, and it is the reason he has hired four more people since it came in. However, when you work out what that client actually costs to serve, the picture changes.
The agency and the figures in this article are an illustrative example, not a real business. The method is real.
Big revenue is not the same as big profit
Most owners can tell you, without looking, how much each client pays them. Very few can tell you how much each client costs them. That is not carelessness. The costs simply do not come labelled: salaries go out in one payment, the diesel bill is the diesel bill, and freelancers are paid from whichever account has money that week.
So the big invoice gets all the attention, and the cost of earning it hides inside the general running of the business.
What the big client really costs
Start with the cost of one hour of your team’s time. In our agency, salaries and staff costs come to ₦6.42 million a month, and the team spends about 1,200 hours a month on client work. That is ₦6.42 million divided by 1,200, or ₦5,350 an hour. This is what an hour costs the agency, not what it charges.
Now put the big client next to a much smaller one, a law firm paying ₦1.5 million a month.
| Per month | Big client (consumer brand) | Smaller client (law firm) |
|---|---|---|
| Retainer | ₦4,000,000 | ₦1,500,000 |
| Staff time | 520 hours = ₦2,782,000 | 130 hours = ₦695,500 |
| Freelancers for rush jobs | ₦450,000 | ₦0 |
| Shoots, travel and meetings | ₦300,000 | ₦50,000 |
| Tools and licences for their work | ₦150,000 | ₦40,000 |
| Cost to serve | ₦3,682,000 | ₦785,500 |
| Profit | ₦318,000 | ₦714,500 |
| Margin | 8.0% | 47.6% |
The smaller client makes the agency more than twice as much money.
It gets worse. Rent, power and internet still have to be paid, and in this agency they come to ₦1.76 million a month, 16% of revenue. The big client’s share of those bills is ₦640,000. Take that out of its ₦318,000 profit, and the agency is actually losing about ₦322,000 a month on its biggest client.
Where the money went
Nothing dramatic happened. The big client simply asked for more, a little at a time:
- A weekly status meeting with six people from the agency in the room.
- A third and fourth round of revisions on work the contract priced at two.
- Weekend turnarounds that the team could not cover, so freelancers were paid to do them.
- Shoots and meetings at the client’s office across town, with the transport and lost hours that come with them.
Each request was reasonable on its own. Together, they used up almost the whole retainer.
How to check your own clients in one afternoon
You do not need software for the first check. A sheet of paper or a spreadsheet will do.
- List each client and what they paid you. Use last month, or an average of the last three months if your work is lumpy.
- Work out what an hour costs you. Take your total monthly staff costs (salaries, pension, health cover) and divide by the hours your team spends on client work. If you have no timesheets, ask each person to estimate how they split the last two weeks. Rough is fine.
- Estimate the hours each client takes and multiply by your hourly cost.
- Add the costs that exist only because of that client: freelancers, travel, shoots, printing, tools bought for their account.
- Subtract from what they paid. That is the profit from each client. Divide by what they paid to get the margin.
- Compare each margin with your overhead share. Divide your rent, power and other fixed costs by your total revenue. Any client whose margin is below that figure is costing you money.
What to do with what you find
The answer is rarely to drop the client straight away. A client that size is hard to replace, so start with the changes that keep the relationship:
- Write the scope down. Number of revision rounds, number of meetings, response times.
- Charge for the extras. A rush fee for weekend work, and a set price for each round of revisions beyond the agreed number.
- Change how you serve them. Two people in the weekly call instead of six. Shoots grouped into one day.
- Reprice at renewal. Show them the hours. Good clients usually understand numbers.
- Only then, if nothing moves, plan a gradual exit, while you replace the revenue.
Check it every month, not once
If you ask me, the first check is the easy part. The hard part is keeping it up, because hours and costs drift a little every month, and the big client of today may not be the problem client of next year.
That monthly view is what we built ProfitMind for. It reads your bank statement and sorts your income and costs by client and service, so the margin on each client is in front of you every month without a weekend in a spreadsheet.
Your next step: this week, pick your biggest client and the one you enjoy working with most, and run the six steps for just those two. The comparison alone will tell you a lot.