The Virtual CPA Success Show: Episode 36
We are joined by Summit's CEO and Co-Founder Jody Grunden, and Tom Beck, Executive Director of SoDA to talk about the current state of the industry. Amidst these unprecedented times, businesses continue to thrive while some take it day by day to survive.
In this episode we take a deep dive into the industry insights from SoDa and take advantage of this knowledge to create strategies that will work for your business.
Jamie Nau: Hello everybody, and welcome to today's show. We are very excited about today's guest. One of the most common questions we get from our clients and one we've actually got a couple of emails in our inbox on it about what we are seeing within the industry? I think there's no one better to talk about this subject than Tom Beck from SoDA. SoDA does a lot of research in this area and they just actually did their 2020 research study. So we're going to dive into that. Then he's also done some pricing models as well and pricing studies. So there's going to be a lot of industry specific knowledge that I know all of our listeners are really excited for. So Tom, before we get down that path, introduce yourself a little bit and talk a little bit about SoDa.
Tom Beck: Yeah, sure thing. Thanks for having me. I appreciate it. I'm Tom Beck and I'm calling in here from Ann Arbor, Michigan. I'm executive director at SoDA. SoDA is a global member based organization for founders and owners primarily of digital centric agency, digital marketing agency, digital product design studios, content production companies. We've been around since 2007. Our primary mission is to help our members leadership teams become a little bit more connected, a little smarter about running their business. Our membership spans the globe. So we have around 100 member agencies, in 20 countries. So the community can really share knowledge from both a regional perspective, but also of agency focused perspective. So that's what we're up. As Jamie mentioned, one part of our programing over the course of the year is to do a number of benchmarking studies on various aspects of the agency business. I'm excited to be here with you guys today to talk about some of that stuff.
Jody Grunden: Hey Tom, real quick, what would you say the range is from your average client that you're dealing with? Would it be from zero dollars to one hundred thousand? What's the revenue range like?
Tom Beck: SoDA is primarily made up of, I would call, small and mid-sized agencies. So the bulk, like 80 percent of our members would be in the 5 to 10 to 15 million in US revenue, net revenue. Then we have a good handful of smaller than five million in revenue agencies. Then we've got sort of a long tail of agencies who are 20, 30, 50 million. We've even got a couple hundred million dollar agencies. But those are rare, and primarily those have been members for many years and they've grown their businesses through acquisition and in other ways. But the sweet spot for SoDA is around 10 million in U.S. revenue.
Jody Grunden: I will tell you, Tom, this is like the first time I've ever seen without a beanie on right now. You know, I'm so disappointed. Your hair is done, you look nice.
All: Laughing [in audible)
Tom Beck: Jody doesn’t understand how cold it is in Michigan. Plus you've got to maintain the street-cred so I needed to wear the beanie. But I told you I cleaned-up for today's session.
Jody Grunden: I do appreciate that, for sure.
All: Laughing [in audible)
Jamie Nau: So both Jody and I have been to SoDA events. I definitely want to plug them. They're amazing. I know it's been a little bit different with COVID. I know a lot of times this research that we're going to talk about today is reviewed at those events so I would definitely recommend to any of our listeners that once things get back up to normal, attend an event, because it really is helpful. There's a lot to get out of it.
Jody Grunden: I am curious Tom, I know it's an invitation only type of event, but do you have events that are available to the public?
Tom Beck: Most of them are closed. I mean, the purpose of the community is really internal facing. So most of the programing is in the work we do, specifically, within the membership. But we do a few public events, and we do one bigger one called the SoDA Academy, which is basically track based content across ten or so agency disciplines. So like technology, strategy operations, even agency leadership, sales and marketing, et cetera. We're hopeful that in 2022 we'll be able to bring that back. We're definitely not going to try it for 2021. It's a bigger undertaking for us and I think things will be uncertain for a long enough portion this year. But 2022 we should be back at the SoDA academy, and that could be a good opportunity for listeners here today who aren't SoDA members but might want to tap into some of this peer network for a great few days of knowledge experience.
Jamie Nau: Perfect. Great, so let's dive in. I don’t want you to read numbers to us, even as accountants, we don't want to listen to that. But let's go over some of the information from your reporting. What are some of the trends you're seeing? What are the most exciting things you're seeing or commonalities that you found?
Tom Beck: Yeah, for sure. So I'll talk a little bit about our tracking study that we did last year in 2020. We do an annual digital outlook study and we have actually wrapped that one up in around December of 2019 as an outlook for 2020, and then started to play it out. We thought look, this is going to be interesting just to do a tracking study this year at two or three points during the year to see how agency leaders are actually navigating within the year. What their performance is looking like. What are some of the things they're doing operationally to wrestle with the uncertainty or maybe other pressures they have on their business? So we ended up fielding three studies, one at the end of March, March in the first week in April. So kind of right at the beginning of Q1 we were rolling out. We did another one right at the end of Q2 so late June and the first week in July. And then we did the last tracking study in late Q4, wrapping up on December 15th or something. I think that what's interesting. A couple of takeaways.
Jody Grunden: Great timing by the way.
Tom Beck: Thanks. A lot of the credit goes to the community here, too, because we are always looking for ways that we can share some things that we're doing in our business that might be helpful. You know, what we provide essentially is in three areas, it would be kind of the general outlook and optimism for the year from a financial performance perspective. Piece two was around kind of operational changes, or operational decisions people were making to wrestle with. Then the third area was kind of an outlook coming into 2021. Just a couple top level things. I think in one hand, 2020 was not as bad of a year as many people imagined it was going to be in March, certainly. So we saw confidence in the outlook for the year, just absolutely crater. We came into the year that about 80 percent of people in our studies said they were optimistic about 2020, and in an optimistic that it would be better financial performance than in 2019. That number dropped to something like 30 percent by the end of March, you know, so people were very uncertain.
Jody Grunden: Surprised it was that high actually.
Tom Beck: I know, I know. Exactly. There's always in these studies, you know, on both sides of the equation, you're like, who is this 30 percent saying yeah, this is going to be a great year.
Jamie Nau: The health care industry, health care companies.
Tom Beck: Definitely in our community, we have a good chunk of them who do a lot of work in high tech, you know, so they work with Apple and they work with Facebook and they work with YouTube. I know that a lot of those businesses remained confident of. But what was interesting is I think as we went across the year, you saw that stabilize more, and certainly confidence never recovered to the levels that we would see. Even most of the members that I talked with who even ended up having a good year, expressed that it was volatile and uncertain throughout the year. So they ended up in a good place. But at each kind of checkpoint along the year, they were going, I just don't know, like I'm not certain, you know, we had a decent quarter, but I don't know if we'll have one next year. So that, you know, that changed a lot. I give agencies a lot of credit for navigating the year. I mean, we saw people make quick decisions. Some you know, they adjusted staff sizes very quickly, just even as a proactive measure, which is terrible for people who lose their job, you know, but for business owners who are tasked with keeping a viable entity, you know, and making sure that their business thrives these were smart decisions. People protected their cash positions. People aggressively went after PPP loans. I think in our studies, we had 80 plus percent of respondents had received some level of PPP funding. I think that was a big cushion. So a lot of credit goes to agencies I think for making quick moves to be nimble and take the situation seriously. You know, that decision making revealed a lot of areas where agencies were softer than they thought they were. So we asked a lot of questions around where they felt prepared to address a crisis like this and then where they ultimately thought they were weaker. You know, and there were some things like places like culture and/or your ability to work remotely, you know, that was all easy for agencies. You know, they move that. So they're really confident in that. Interestingly, you know, from a financial perspective, a lot of agencies were very worried about cash positions and they were very worried about financial visibility, just given their fundamental reporting metrics, like can we actually do what we need to do to project where we think we're going to be. While many people struggled with that, those numbers actually improved over the year and people said, you know, we actually were better than we thought we would be. But on the flip side, agencies were weaker than they thought they would be in, you know, in executive level decision making, long term. You know, they thought that they would knock out the decisions they needed to really quickly and that became more of a labor. Sales and marketing, proactive sales and marketing, business development continued to be a big issue that agency said, like, we just aren't prepared for a big contraction in revenue. Things like knowledge management internally as an agency, you know, we have people go or we get an aspect of how we work kind of cut off and they didn't feel as confident there.
Jamie Nau: I think all three of those sound like they tied pretty closely to what you mentioned about staffing. A lot of times when you cut staffing, some of those executive initiatives fall to the wayside because they're doing a work they're not used to doing. So that made sense to me because those are areas I could see and have seen. I have seen owners step in when they needed to and then seen things fall to the side where they say, that will happen in year when we are better off. Then it doesn’t
Tom Beck: Exactly. Well, and on the flip side, it's like those are areas that when things are going well, you don't tackle proactively, you know? And so things like getting your business development pipeline really cooking for a future that you don't know about yet, when people go, we're booked. We have projects, we're not constantly investing in the project that we need to win six months from now, or a year from now. But same thing with things like knowledge management or getting your financial operations in order. Those are things you continue to kick off and to put off into the future until you really start to feel pain there.
Jody Grunden: So do you think the silver lining there is people are able to do a deep dive into their own business, and really kind of figure out where the holes are at and how to how to fix them not only temporary but long term?
Tom Beck: Yeah, yeah. I think it's the silver lining of any kind of crisis like this. It forces you to look at aspects of your business that aren't performing, that are vulnerable to underperformance when crisis hits. I think the challenge for agency leaders is to continue to sustain that mentality even once times get good again. Especially in smaller businesses. We all run really lean staffs, you know, and we're certainly focused on the future as business leaders. But it's usually not the six month to a year future. It is a shorter term than that. So I think this is a good a good lesson. It was also good just market pressure testing for agencies in terms of their positioning, their value, the service offering, the strength of their client portfolio. Heck, even the diversity of their portfolio, as you guys know, you know, some of the agencies that were hit hardest were ones that were overexposed to a particular client sector or just to one individual client. Again, we all know intuitively that over-concentration and one client or over-concentration in one sector can be great when it's performing well. It can be very efficient, but can be an Achilles heel when the when the market turns. So again, it forced people to really evaluate that. And just speaking from personal experience, I used to run an agency for many years and we found ourselves in that position several times throughout my tenure and lost big clients. Each time you come out of it a little smarter and you work a little harder to go, we need to get this balance right.
Jody Grunden: We always say as leaders and owners, you have to eliminate risk. That's the owner's responsibility. Eliminate risk or hit risk head on and figure out how to how to solve it. One thing we talk about a lot is niching your business. It’s kind of a double edged sword because if you niche your business in the wrong area and something like COVID happens, then you're not in a good position. You've got to be able to pivot pretty quickly. Think about those that were in the leisure industry, the restaurant industry, they got hit hard. But those in health care, like we were saying, those in high tech in particular too did okay.
Tom Beck: It is the challenge because a niche strategy is a good one, typically. But you have to be aware of the risks that you're taking and devoted to. To your point it's when a problem hits, you need to be more prepared to pivot or have a plan. I was just really impressed across the agency community that I work in to see people address it. We had one agency member who is in the travel and hospitality industry lost 80 percent of their revenue over a 12 week period. Over the next six to eight months, they found ways to pivot the business and close the year out pretty strong. The other thing I wanted to mention just quickly is the interesting takeaway I guess from the year is, and we were talking about this a little bit earlier. But from a financial performance perspective for 2020, I think we saw a broader spectrum of financial performance across the agency community than we would see in a typical year. And that's not surprising. There's the adage that all boats rise in the tide. So when the economy is strong, most agencies, unless they have a fundamental problem in their business, they're performing okay. This year we saw the weak separated from the chaff, so to speak. And what we ended up with in this scenario is about 30 percent of agencies in our study had a really pretty strong financial year. So they had revenue growth, they had profit, they were profitable and they saw improved margins. For some of them, it was their best year on record. For others, maybe not their best year, but a strong year. But on the other end of the spectrum, we saw about 30 percent of agencies come in and break even, or a net loss for the year. And that's a significant number. We typically would not see that many in this kind of pool of studies. I think that goes to what we were just talking about. Some of it is just wrong place wrong time in terms of your client concentration, or your client max or whatever the case is. But in other cases, I think that the heightened pressure from 2020 is it exacerbates the many other trends and challenges that exist in the agency market right now. So we've got pressure. It's gets more competitive every year. Our costs continue to go up because great talent is hard to find and costly. So those problems all existed in 2019, but because the economy was strong a lot more agencies were able to skate by. You know, you hit a tough year like we did in 2020, I think it really reveals the agencies that are really well-run, that have a really strong value proposition and really have a strong place in the market.
Jody Grunden: I would also add to that a strong cash position, too.
Tom Beck: Exactly. Yeah, totally agree because there is short term volatility. You may come out of that great three, four or five months down the road. If you're not in a position to weather that storm, it doesn't matter what your value proposition looks like in six months.
Jamie Nau: I know we've had some companies that have really good cash position and they were looking for ways to take advantage of it. Like okay, what are some actions I can take to make my business stronger when other businesses aren't doing so well? Is there some people I can hire that I wouldn't normally hire because another company let them go. So I think that's another thing about having good cash position. It gives you the advantage to be able to make those decisions,.
Tom Beck: Yeah, I totally agree. I think we saw, we isolated some of those and we call them high performers for 2020. They were definitely more focused on things like talent and talent acquisition and business development then the rest of the general community. I think that's part their mentality of talent and great work is part of producing a really defensible niche in the agency world. That's not all of it, right? You can produce great work and run a terrible financial operation and you're not going to be there. But I think if you have been focused on that differentiation and the caliber of your work and you've been smart enough from a financial perspective, these agencies’ outlook improved much more quickly over the course of the year. We're getting into stuff coming into 2021, something like 85 percent of the top performers from 2020 we're planning to hire in the early part of this year, whereas only maybe 50 percent or a little bit less of the general pool where we're planning to hire. So even if they had a slightly down year by their standards, they're bouncing back more quickly.
Jody Grunden: Kind of pivoting a little bit. I mean, we talked about pricing a little bit. You mentioned you just finished a price study. Can you give us a little information from that? What's in there without ruining it for those that are in the SoDA community?
Tom Beck: For sure. So for the audience, we've done a pricing and rates card study for probably eight years or something like that. The typical rates card study just goes roll by roll on the rate card. We get across the community anywhere from 70 to 80 agencies to participate in this. When we wrapped it up this year, a couple of things that bubbled to the surface that I think are interesting one is that, this rate card study really shows, even from our community perspective, I think that the stagnation in rates in general across the agency landscape. So, you know, we saw something like from 2016 to we'll say the end of 2020, which is when this really ramped up. So over the course of four years, across the board rates only grown by about 7 percent. So 7 percent in 4 years, not significant growth. We also look at, you know, even things like over the last 18 months, have you been able to raise your rates even across the board or for, say isolated roles or projects? Again we're only in a scenario where maybe 30 percent are saying yeah, we were able to raise our rates. You know, it's not that agencies continue to find ways to be profitable with how they run their projects, how to price projects in smarter ways, all of that. But it just shows that any of the any of the wiggle room, I guess, that we would have from a rate perspective gives us a little more ability to be sloppy in our operations. It's like we're losing a little more of that every single year. Once you start looking at it from a business perspective and going, I don't have any fluff or slop in my cost mark, you know in the way that I priced these things. So we need to run projects profitably. We need to estimate them in a smart way. We need to really control our cost structure relative to our revenue to do a great job about forecasting where our business is going to be. Because all of that is your margins are getting compressed every year. I know that probably a lot of listeners on this call feel that way and they see that. But we definitely see that in the in the data.
Jody Grunden: And we always tell people that it's not what you charge. You know, you're talking about being sloppy. That's where 90 percent of all of our losses come from, really being sloppy from your price to what you actually realize from the job. Like you're saying, prices are going to stay flat. It’s not like a roller coaster ride. It's not like a hockey stick curve. You know, you've got to make sure that you're tightening everything up and really watching the difference there.
Tom Beck: Yeah, I totally agree. I think it's just it applies more pressure to aspects of the business. I mean, there's a lot of people who founded agencies that got into it because they love the creative work, they love the strategy work. And for many years they're able to create really successful businesses because they can sell enough work at their prices and do good work. And that's great. That's not really enough anymore. You have to have a smart enough production, finance and sales capability to be consistently profitable in this in this environment. You know, and again, the great news is many agencies are finding ways to do that, and the markets growing. I mean, there's lots of great opportunity out there, you know, and at these rates, as you said Jody, at these rates you can still make a really good margin if you're running your business well and running capacity well, if you're estimating and running projects effectively, if you're controlling the cost of your staff relative to billable staff and all of that. So there's still plenty of levers to do that. It's just that you really, really cannot ignore those, or perform poorly in those areas because you're just going to find a declining business every year. I think, unless you really are, you know, seeing really strong growth every year that can somehow mask that.
Jamie Nau: It's tough because you see if your rates aren't going up very much, then you're paying your people more each year. So you really have to be able to figure that out. That's where I think it's more about okay, what is our system for being efficient? What is our system for having us built to make quick decisions? Those are all of really important, because again if you're only able to increase your price 7 percent over 4 years, that's tied to paying your people more than 7 percent increase from inflation.
Tom Beck: One thing I will add, and Jamie we're probably getting close to time. But another facet of this, and it comes out in the study, but I think agencies are experimenting a lot with their pricing models. So we looked across the SoDA portfolio and we're seeing a big mix of project based pricing, increment based pricing, by that I mean just deliverable based pricing for agencies who work on kind of an agile model, sprint based pricing. We're seeing a lot more time in materials, day rate based pricing. How consultancies work, either more maintenance, recurring services, pricing. So I think there's most of our agencies would use their revenues as a mix of two to three to four different pricing models. Some of that is driven by the client, but some of that's also driven around ways to reduce risks. So certain kinds of clients and certain kinds of project types will have less risks with different kinds of pricing models. For instance, if it's a project that you've done a million times and you're stamping them out and you can put some project based pricing on that, that you're, you know you can deliver on. That’s great. Your margins can actually be higher for projects there. For projects that have greater uncertainty or more moving parts you get into a time and materials day rate or even some retainer. And, you know, and you can create just a little bit more safety or a little less risk in what you end up realizing on that project. So I guess that's just the last thing I'd leave you guys with on the pricing piece, is that we do see a lot more experimentation on pricing models and kind of project structures is one of the ways to manage risk and to try to be as profitable as they can in the current environment.
Jody Grunden: Yeah, I'd say that reoccurring revenue is huge and the higher you can make as a percentage of overall revenue, the less risk you have, right? Because if you miss that big project, it's easier to scale down to 60 percent of what you're doing versus 15 or 20 and be profitable in the end. I think the recurring revenue is the huge one out of all of that. For those companies that really focused on that prior to a pandemic, it really carried them through a lot. For those that didn't, maybe now is a great time to refocus and take a look at what they can do now to create a recurring revenue model.
Tom Beck: Yeah, I couldn't agree more on it in terms of, you know, just planning for, you know, capacity planning. Certainly that makes things like capacity planning more predictable. The more predictable and better you are at passing planning, typically the tighter your numbers are going to be from the project operations perspective. So this is something I would encourage the listeners to look at in their own businesses if they're not doing it, because I also think that the marketing buyers are getting more savvy in terms of understanding. There's lots of different ways now to engage with agencies and creative services, and structuring a financial model that can be more favorable for the client in certain scenario.
Jody Grunden: Well, they felt the same issues, right? If it's predictable that’s a lot easier to control on their end of the budget. So I think it's overall it's a win-win for both the client and the agency.
Jamie Nau: Predictability is huge. When we build forecasts, the more you can predict the easier it is knowing what those costs are. I really appreciate what you said there, Tom. I think pricing can be different for different companies. You really have to stand behind it. You really have to believe in it, and you really have to be able to sell it. I think of how many events we have been at and the question that’s comes up is, what pricing is best? I think the answer depends. It depends on who you are and what you stand for and what works best for you. So as you predicted, Tom, we are right up against time here. So I'm going to give you both a quick chance to give your final thoughts. A lot of good information here. I know I really enjoyed hearing it. I'm sure our listeners will well as well. So any final thoughts?
Jody Grunden: Tom, the biggest thing I've got for you is the beanie.
All: Laughing [in audible]
Tom Beck: It can be a tough business out there. But like I said, I've just been you know, I've been so excited to see how creative leaders have adapted in the last year. I think we need to look at it as a good wakeup call in our business that we're getting good signals from the market in our external environment, that we need to be serious about where we're taking our business. We are fortunate to get those signals and have a chance to move our business in the right direction. I'm seeing lots of agencies doing that I think will come out on the other end of this much, much stronger and in a better position to say the next 10 years of, you know, of their agency cycle.
Jody Grunden: You have hit on the nose. There’s a lot of opportunity. I think for those having their eyes open, you should definitely take advantage of it.
Jamie Nau: Great. I definitely appreciate having both of you guys on the show. A lot of great information. Thanks.
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