The average profitability of PR agencies slipped in 2016, with firms now reporting lower average profit than recent years past, according to an annual survey conducted by New York-based merger and acquisition consultancy Gould+Partners.
Average PR agency operating profit was 15.2 percent of net revenues in 2016, according to the 2017 Best Practices Benchmarking Report, which analyzes the factors affecting agency profitability and profiles agency growth by size, region and specialty. This year's findings reveal a dip from 2015’s average PR agency operating profit of 15.3 percent, 2014’s 16.2 percent and 2013’s 15.8 percent.
Average staff pay was also down: revenue per employee was $184,069 in 2016, a dip from $185,624 the year prior.
The findings boded more optimistically for larger agencies: PR firms boasting net revenues of more than $25 million reported an average operating profit of 18 percent in 2016; firms accounting for between $10 and $25 million in revenues achieved profitability of 17.4 percent; firms in the $3-10 million range netted 14.6 percent.
By comparison, firms earning under $3 million in revenue netted only 14.3 percent in average operating profit, according to the survey.
Perhaps just as troubling: while total overhead and operating expenses averaged 25.9 percent for all firms surveyed — more or less consistent with previous years’ findings — they were highest for firms earning under the $3 million mark, suggesting that the tightest cost management is occurring at the firms achieving the most. For firms earning under $3 million, overhead and operating expenses averaged 27.9 percent, compared to 26.1 percent for firms earning between $3-10 million, 25.4 percent for firms earning between $10-25 million and 24.8 percent for firms earning more than $25 million.
Firms in the under $3 million bracket also averaged the highest turnover — 27.7 percent — of firms in any other group in 2016, compared to an overall turnover rate of 22.1 percent.
“What clearly stands out, consistent with our other studies, is that bigger is better,” Gould+Partners managing partner Rick Gould told O’Dwyer’s. “As PR firms grow and improve their infrastructure, their labor costs will be relatively reduced and profitability will increase.”
Firms specializing in healthcare, tech, consumer, financial/investor relations and sports/entertainment ranked highest in 2016; firms focusing on digital, travel, public affairs and real estate bottom out this year's survey.
Geographically, the Benchmarking survey provided other surprise findings. In the U.S., average profitability in 2016 was highest for firms located in the Northwest (22.5 percent), followed by the Midwest (18 percent) and Southwest (16.5 percent). New York City and its surrounding area, typically considered North America’s PR mecca, ranked fourth in the nation, at 16.3 percent.
The survey also found that, for the fourth year in a row, Canadian firms remain more profitable than their U.S. counterparts, with the eight Canadian firms participating in the Gould+Partners survey averaging an operating profit of 23.4 percent.
Gould said Canadian firms have consistently exceeded 20 percent in the annual Benchmarking survey.
Gould+Partners’ 2017 Best Practices Benchmarking Report, now in its 30th year, polled more than 100 prominent PR agencies throughout the United States and Canada.