The Financial Cost of Agency Mistakes
I am a fan of people making mistakes. Let me qualify that statement by saying this: there are good and bad mistakes. Good mistakes are a signal that people are pushing the envelope and trying something new. Bad mistakes are repetitive—i.e., it's a mistake that you or someone else in your organization has made in the past. For marketing agencies, our world is defined by creative solutions; mistakes are the price we pay to be innovative. You do not have the luxury of trying the same old marketing ideas and expecting different results.
Regardless of the situation, your clients want new ideas. They trust you to bring innovative ideas to the table to help them better connect with their audience. The path to innovation is riddled with one mistake after another. But when you are innovating, you don't see it as a mistake; instead, you view it as a lesson learned. Here's the thing: it's only a lesson learned the first time you make a mistake (i.e., a good mistake). When the same mistake happens a second or third time, it officially becomes a bad mistake. It’s frustrating, not to mention costly. That got me thinking—just how costly is it when you or someone on your team makes a bad mistake?
"It's good to learn from your mistakes. It's better to learn from other people's mistakes." - Warren Buffett
Calculating the Cost of Agency Mistakes
The agency that I typically work with has less than 50 employees and makes about 15-20% profit before taxes. That profit number is important, yet often misunderstood. Your true profit is calculated after you've paid overhead expenses like salary (including your own) and rent; it is not just revenue minus cost of goods sold.
Imagine this scenario: you have an important event coming up for a client. As part of the event, your agency prints material to support messaging on-site. When you receive the materials from the print shop, you realize that someone on your team made a bad mistake. You can't go back to the client, because this was your team's error. The mistake will cost your agency $5,000. This is the moment in movies when the record scratches, and you see yourself saying, "Hi! You're probably wondering how I got here." You really are wondering how you got to this point; after all, your process was supposed to eliminate this type of mistake. Realistically, your only option is to eat the cost and reprint the material (that is, if you want to stay in the good graces of your clients).
Here's the right way to think about that $5,000. This is not simply $5,000 less that you'll be making on this project. In reality, the payment for that $5,000 mistake is coming directly from your profit. I used to think that recouping this money simply meant finding a way to charge the client $5,000 more somewhere down the road. But I now realize that's not the right way to think about the loss. You would need to sell $25,000 more in new business to recover the $5,000 as profit (as an agency with a 20% profit margin).
If you are inclined to use pencil and paper, your formula would look something like this: (5000×100) / 20 = $25,000.
The scenario above is a heart-stopping example of how mistakes can be crushing. At a 20% profit margin, you need to bring in $25,000 in new business to recover the cost of a $5,000 mistake.
Moving on From Mistakes
In the agency world, the price of a good mistake should be seen as the price of innovation. To minimize the chance of encountering bad mistakes, you must have systems and processes in place as safeguards. Your goal shouldn't be an error-free environment, because the downside is that your team won't try anything new or innovative. They'll be too worried about making mistakes. Instead, you want to embrace good mistakes and minimize the chances of bad mistakes. If you are interested in leveling up your systems and processes to get work done efficiently and avoid those bad blunders, check out our Agency Ops Advisory Service.