Most companies’ margins grow as they become bigger. This is especially true of the Web’s leading media businesses: Twitter, Facebook, or Google. For web design agencies, however, the opposite is true. Their margins will shrink as they grow.
Why is this the case? Let’s first consider Google; whether they serve one search or a billion, they still need to develop a search algorithm and crawl the Web. This is a significant initial investment, but the cost of serving each additional search is next to nothing. So as they scale, their revenues increase while their costs remain relatively static. This makes Google ideally suited to grow and operate at a large scale.
For web design agencies, on the other hand, the most significant cost is paying the wages of their staff. So if an agency receives ten times as much work, they’ll have to pay at least ten times the wages. While margins may have looked attractive when the business was being run out of a bedroom, it soon becomes clear that costs are too high to maintain strong margins as the business sets up an office and takes on administrative staff.
Hence, web design agencies generally scale poorly, as their costs grow with their business and their margins tend to diminish as they increase in size.
So what’s a growing agency to do? Here are a few key pointers to keep your costs low and your margins high when you move from the bedroom to the boardroom.
Because smaller web design shops enjoy better margins and so resist becoming too big, the market is always begging more and more agencies to join the race to service the growing demand. This is one reason why the web design industry is bursting at the seams with competition.
In such a crowded marketplace, clients come in all shapes and sizes. While high-end clients may be perfectly comfortable paying high-end rates, those with budgetary concerns resist paying even $10-$20 an hour, effectively alienating any businesses with serious aspirations. As a result, competing on price is rarely an effective strategy for a web design agency.
Your mantra has to be: you can’t win them all. You should, however, always try to bring reluctant clients around to your way of thinking.
The ideal client for a web design shop is one that understands the market sufficiently to appreciate that agencies of quality need to charge robust prices. The best agencies make money from smart execution, flair, and creativity, rather than by saving pennies on strategic activities. Clients that have yet to test the market might be tempted to stray when they catch wind of cheap prices elsewhere, so make sure your clients have a solid understanding of why you charge the prices you do.
When you establish your prices, try to take account of your costs both in the present and in the future: when your company grows larger, you might need to keep a law firm on retainer, hire a full-time receptionist, or take on various other costs hard to anticipate right now. You need to consider whether your current rates will allow for expanding costs and still deliver profit as you grow.
The larger your agency becomes, the harder it is to be the cheapest in the market. Therefore, your value proposition needs to be either that you’re the best, or that you provide the best value. You might be tempted to charm your clients with low “teaser” prices, but make sure they know your prices will rise in the future. Otherwise, you risk watching your margins shrink as your business scales up.
When suppliers smaller than you have the price advantage, you only have one option to compete in the long term: promote your agency’s competence, based on having superior staff, knowledge, and service quality. Businesses that opt for mediocre or sub-par staff hires in the interest of temporary margin gains will, as well as failing to wow clients, miss out on winning their long-term loyalty and respect.
Hiring the best staff available allows you to compete for higher quality contracts, even if it means that your margins will suffer a little in the interim. There’s no better feeling than speaking with a client and knowing—with unadulterated certainty—that you’re the best shop for their project.
Another way to compete is to specialize in a particular sector—such as real estate or insurance—giving potential clients confidence that your agency is the best-suited for projects in their industry. Or you might decide to focus on building WordPress sites only, or solely ecommerce sites, for example. Both of these forms of specialization can be great ways of differentiating your services and standing out from the crowd.
Hiring mediocre design and development staff will prevent you from winning good clients, because you’ll fail to differentiate yourself from your competition. It can also impact negatively on management. Instead of focusing on mid- to long-term strategy, your managers will be bogged down in the minutiae of everyday operations; they’ll lack confidence in their staff’s ability to handle even low-level tactical decisions, which prevents them from being as effective as they can be. Training, developing, and hiring a great team takes time, but it’s a must if you want to scale your business.
The more time you invest in workflow, software, and systems to automate your business processes, the more money you save as your business progresses. For example, having your CRM software automatically send reminders when payments are 3 days late, or developing an email template for communicating standard messages to clients. Each time you invest in efficient work practices, you reduce your marginal costs. That provides a real advantage over your competitors.
Your small web design agency can continue to flourish by being innovative, both in the services you sell, and in the way you develop web sites for your clients. For example, you can:
create a custom CMS so that you avoid having to design web sites from scratch each time
charge a licensing fee for your custom CMS, allowing you to create revenue with virtually no marginal cost
offer hosting and maintenance contracts to your clients
sell templates, domains, and DIY web site software and hosting packages solely targeted at small businesses lacking the capital to hire your professional services
use your web design expertise to build the next hot startup, using the cash flow from your design business to fund your idea
Innovation and a robust strategy will allow you to stand out from the crowd in this web design market. When other agencies start to choke because they fail to scale adequately, your agency will be positioned to forge a path and keep on growing.