The PR Trifecta: Growth, Profitability and Billing Rates Stalling
By Matthew Schwartz
In light of this solar eclipse this week, the constellations have started to align for the PR industry.
But it’s not a pretty picture, with all the major financial indices down and little sign that the industry has started to make headways in order to reverse the declines.
Just check out the tale of the tape for the PR field: Industry growth down for three consecutive years. Billing rates stuck in neutral. And, the coup de grâce, agency profitability essentially flat for three years running, hovering in the 15% range.
Taken together, there’s a growing onus on PR firm owners and C-level executives to change the way they manage their financials or risk further declines in their top and bottom lines, says Rick Gould, CPA, J.D., managing partner of Gould+Partners, who has been tracking PR industry benchmarks for 30 years.
“The numbers will continue to head south unless PR firm owners start to make some tough decisions,” Gould says. “They have to proactively start to raise their billing rates, so the firm is adequately compensated by their clients. They also have to raise their retainers to inoculate the firm from when it hands out raises and/or promotions.”
Industry growth has been falling for the past three years, an ominous sign for owners already contending with fierce competition. The U.S. PR industry grew by just 4.8%, according to a recent survey released by Gould+Partners.
The results of this survey were consistent with the results of the annual Best Practices Benchmarking report released in June, showing that Operating Profit decreased from 15.3% to 15.2% and the Billing/Utilization report issued in July showing that billing rates did not increase during 2016 at the same pace as salaries and costs.
Based on stats from 226 North American PR agencies, most categories of firms had less growth than the prior year. The $3 Mill to $10 Mill group had a negative growth rate of (1.4%).
Meantime, the average annual net revenues for each net revenue class. Firms under $3 Mill averaged $1.51 Mill in Net Revenues. Firms from $3 Mill – $10 Mill averaged $6.02 Mill. Firms with more than $10 Mill- $25 Mill averaged just under $14.97 Mill and firms in excess of $25 Mill averaged just over $162.07 Mill. This includes Edelman and the holding company firms, Gould says.
The second part of the study focused on industry growth in the 10 regions of our focus and average net revenues for each of the regions (see chart below).
The survey is the fifth annual poll focused on Net Revenue Growth by Gould+Partners, which has been conducting other industry wide surveys for 20+ years, including the recently released Best Practices Benchmarking Report and the Billing/Utilization Report.
The decline in PR industry growth comes amid foreboding signs concerning billing rates and agency profitability, as well.
Call it the PR trifecta.
Indeed, we frequently ask PR firm owners how their agencies are performing financially. Invariably, the response is a variation of “awesome,” or “great,” regardless of how the general economy is doing. We appreciate the mindset and we’re not opposed to positive thinking. However, at the same time, it would be refreshing if there were more daylight between the rhetoric and the reality of PR financial data.
Billing rates were stuck in 2016, as well. Based on responses from 101 PR agencies based in the U.S. and Canada, billing rates are now averaging $486 per hour for CEOs of agencies with $25 million or more in revenues and $272 per hour among agencies with under $3 million in net revenues, Gould says.
Productivity—measured by billable time utilization—has been far below optimal levels, Gould adds. “Account Executives” are billing out only 84.1 percent of their (theoretical) yearly capacity of 1700 hours, according to Gould+Partners.
For PR firms dealing with fierce competition from myriad creative services agencies, settling for the status quo may be downright counterproductive.
The other ominous signpost is agency profitability, which for the past three years has been as flat as the Midwestern plains.
One of the most significant findings of the profitability survey is that, among G+P ‘Model Firms,’ the dozen agencies consistently meeting or exceeding the G+P model performance target criteria continue to remain profitable during slow or recessionary periods.
In 2016, as in previous years, these firms averaged an operating profit margin well in excess of 20 percent, partly due to their ability to hold professional staff salaries to around 40 percent of net revenues, total labor cost at 50-55 percent and operating expenses at around 25 percent.
This should be the goal for all PR firms. Any decrease in operating profit was totally attributable to an increase in labor cost without a corresponding increase in fees.
Click on the link to view the full Industry Growth report: Gould+Partners 2017 Net Revenue Growth Report.
Register here for our free Webinar: How Millennial Creative Service Firm Owners Boost Profitability, Spike Valuation and Position Themselves as Thought Leaders. The webinar will take place Tuesday, September 19, from 1:30-2:30 ET.
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Gould+Partners provides consulting services for Public Relations Firms and Creative Services Agencies for increased profitability and is the PR industry source for key profitability benchmarking statistics/insights and successful mergers & acquisitions (M&A) transactions. From our experience gathering and evaluating relevant statistics and insights, we are uniquely qualified to advise and counsel our clients on what is needed to grow and become best in class. Consulting Digital and Public Relations Firms to a new level of success is our specialty and privilege.