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It's no secret that the larger Canberra agencies, graphic design studios and printers with mainly government clients have all felt the pinch this year.
The theories around this downturn range from a reduction in spending by federal government program areas to an increase in the number of smaller operators entering the market.
Whatever the reason, the lull we are experiencing now has gone well beyond that of ten years ago.
To be successful and achieve sustainable profitability during quiet times like these it's critical agencies don't lose control of their pricing as well as the quality of their work and service. Becoming panic-stricken and heavily discounting to win work is not the answer.
Going in cheap just to get some more work through the door is detrimental in many ways.
First, it devalues what we do - the service and products we provide.
Second, unless you greatly reduce your overheads by downsizing or paying yourself less, discounting will have a negative impact on your business' profitability as you are doing more work, for less money. As a result of the drop in profitability you may have to rely on cash reserves or borrow money to pay bills. This in turn increases or introduces new costs such as interest and bank fees.
Third, there's the risk that the quality of the work produced will suffer and further devalue our services and products.
In essence, heavy discounting can suck you into a nasty downward spiral that is hard to get out of.
Murdoch University's Centre for Enterprise Development & Entrepreneurship in Perth has undertaken studies that demonstrate the positive impact raising prices has on a business' gross profit margin, as opposed to cutting them and increasing turnover.
A simple example illustrates the case. Assume an agency generates $100,000 in revenue with direct costs of $50,000. In this model the agency's gross profit margin is $50,000 or 50%. If the agency reduces its rates by 10% its revenues will fall to $90,000. Since the rates are the only variable to change the direct costs remain the same. That is, it will still take the same direct inputs to produce the output. At the end of the day, the agency's gross profit falls to $40,000 or 44.44%.
On the other hand, if the agency increases its rates by 10%, revenues will increase to $110,000. Again the only variable to change is the rate. On this basis the gross profit increases to $60,000 or 54.54%.
This example clearly illustrates that unless you downsize when you reduce your rates, you will also unwittingly reduce your profits. Of course you could always use your cash reserves to absorb the immediate losses, but either way you will lose money and potentially put your agency at risk.
Financial wiz Eddie Senatore from Senatore Brennan Rashid agrees.
"The moral of the story is if you opt to increase your rates and keep your loyal staff on board, the phone is probably not going to ring quite as often as it did.
"But at the end of the day the work you do will be at a higher gross profit margin. You'll also have more time to service clients properly and deliver a superior result."
Frederica Heacock
Joint Managing Partner
MA@D Communication Canberra
http://www.maadcom.com.au
June 2006
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