Do Retainer or Project Clients Build an Agency’s New Business Pipeline?
What's the right mix?
Ad agency clients regularly ask us this question, "What's the best mix of retainer vs. project work?" I think the answer can determine how successful you are at creating a sustainable new business culture and a healthy revenue pipeline.
Most agencies strive to land retainer clients for many good reasons, not the least of which is that they represent a predictable revenue stream. A sufficient retainer helps to cover overhead, allows you to hire good people, plan for the future, and hopefully do good work. Having a handful of retainer clients normally equals profitability. However, it may help you be lazy about new business, and it can be risky.
Case study: a family friend was, until recently, the chief creative officer at a 40-person, well-regarded regional agency. They'd had one big retainer client for 10+ years and felt very confident about keeping them. This client represented 70% of their agency's revenue. About 18 months ago I started pushing him to get his team to start prospecting for new business, but they never did. Of course, we can all guess what happened next: CMO turnover, new agency hired. His former agency is now a small fraction of its former size, my friend is out of a job, his family had to move in with his in-laws, and they and their many former coworkers are struggling.
The sad part is, while the client loss may have been unpreventable, an active new business program could have kept the team intact and avoided the massive upheaval that impacted dozens of lives.
Most agency principals I know who run project-driven shops are always trying to land retainer-based clients. They dislike not being able to predict revenue more than a few months out. They also dislike the constant hunt for new clients, and the never-ending need for talented account managers to grow existing clients. That said, they're often very good at new business. They're good networkers, aren't afraid to pick up the phone, and understand that there aren't any "silver bullets" or quick fixes. As one such principal said the day before yesterday,
New business is a numbers game, and it takes time.
The ideal mix
From a strictly new business perspective, I think the ideal client mix is something like this:
- 50% retainer-based clients, with no more than 20% of your revenue from any one client.
- 50% project-based clients, representing as many clients as you can handle above your minimum project size.
My rationale is this: having 50% of your revenue coming from project work requires that you're constantly prospecting for new business. If you are, some percentage of your projects clients are likely turn into retainer clients, which will allow your agency to grow. When this happens, however, resist the urge to alter the 50/50 balance, as that will reduce your "hunter mentality", which is the lifeblood of your agency.
I'd love to hear if this balance makes sense to you.