The retainer is growing. So why is the agency margin shrinking?

Professional Services

An agency retainer becomes less profitable when the work, senior attention or external costs increase faster than the fee. Recurring revenue is useful, but it needs to be reviewed against the resources each account actually uses.

For an established agency, the awkward accounts are often the longstanding ones. The relationship is good. The monthly fee arrives. Nobody wants to reopen a conversation about scope.

Meanwhile, the team is doing a little more every month.

Start with the account, not the agency average

An overall profit and loss report can conceal a profitable project team subsidising several demanding retainers. Look at a representative period for each material account.

Capture the agreed fee, the work delivered, employee time and direct external costs. Include account management, revisions, reporting, briefing and senior review. Those hours count even when they never appear on a client invoice.

Cost the work using a consistent basis. Salary alone does not represent the full cost of employing someone. Your accountant can help you allow for employment costs and productive capacity without confusing direct delivery costs with overheads.

The first report does not need to be elaborate. It needs to be credible enough for the account director and finance team to discuss the same job.

Make the difference visible

Consider a hypothetical monthly retainer of A$15,000, excluding GST. Delivery labour costs A$8,500 and external production costs A$2,000. That leaves A$4,500 towards overheads and profit.

Now add A$2,500 of unplanned delivery time. The contribution falls to A$2,000 even though revenue is unchanged. Neither amount is net profit: rent, administration and other overheads still need to be covered.

This is why a busy team can feel less profitable while sales remain healthy. Small, repeated additions to the work can matter more than a visible discount.

Review the largest changes with the people doing the work. Is the original scope too broad? Are approvals slow? Are senior staff solving issues that should be addressed earlier? Is the team redoing work because the brief keeps changing?

Each cause calls for a different response.

Reset the agreement with evidence

The Australian Government's pricing guidance encourages businesses to consider their costs and the value delivered, rather than copying competitors' prices. For an agency, a renewal is a useful moment to connect the fee to the actual service.

You might clarify the number of deliverables, the approval process, included revisions or how additional work is authorised. You might change the delivery approach or propose a different fee. The right answer will depend on the client relationship and the commercial facts.

Have the discussion before resentment builds inside the team. A precise explanation of what has changed is easier for a client to assess than a general statement that everything costs more.

Any revised terms should be agreed and documented, with legal input where appropriate.

Watch the money that passes through

Media, production and other third-party expenditure can make turnover look larger without providing equivalent agency income. Ask your accountant how those amounts should be presented under the actual contractual arrangements.

For management purposes, keep a clear view of the fee the agency earns and the costs it takes responsibility for. Also examine who is funding those costs while payment is outstanding.

A client paying the agency after a supplier must be paid creates a cash requirement. Clear payment terms help establish expectations, but the forecast should use realistic collection dates rather than assuming every payment arrives on time.

Make senior time a conscious investment

Sometimes an account deserves more senior attention: it may open a valuable market or offer strong future work. That can be a reasonable decision.

Record the reason, the expected benefit and a date for review. Otherwise, an intentional investment can quietly become a permanent subsidy.

Apply the same discipline to the owner's time. If you are repeatedly rescuing projects in the evening, the agency may be relying on capacity that will disappear as you step back. That matters to future hiring, succession and the income your family expects from the business.

What to review this month

Choose three accounts: one you believe is highly profitable, one that repeatedly overruns and one that has not been repriced for some time. Compare the fee, delivery effort, payment timing and senior involvement.

The contrast will usually produce more useful questions than a long list of agency-wide ratios.

Should every retainer have the same margin? No. Delivery models, risks and strategic purposes vary. The important point is to understand the differences and decide whether they are justified.

Is time tracking necessary for fixed-fee work? A consistent view of effort is valuable even when clients are not billed by the hour. The purpose is to understand delivery cost and capacity, rather than make every task a separate charge.

If recurring revenue is rising but the benefit is not reaching you, talk with EFS. Our Professional Services advice and outsourced finance support can help connect account performance, cash flow and the owner's financial plans.

General information only. Seek advice on your business circumstances before changing pricing, contractual or financial arrangements.

Speak with our team

For advice on your circumstances, speak with Theunis Holl or Adrian Dorca.

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