In Part 1 of our guide to measuring marketing’s effectiveness, we examined the key metrics required to demonstrate overall business impact. We then explored ways to measure brand awareness. In part two, we’ll focus on further key measures for brand impact, and move on to measuring how the marketing has performed in terms of business generation.
If you haven’t yet read Part 1, we’d recommend doing so as we’ll be jumping right back in where we left off…
Once again, our aim is to prioritise the essential information needed for a board report. The data needed by the marketing team to optimise these results will be the subject of a separate article.
Report section 2: brand building (continued)
Recall and perception
Budgets permitting, you can delve a little deeper than the top-level awareness metrics we mentioned in Part 1. By asking the right questions, you’ll gain a better understanding of how your target market perceives you against the competition. You’ll also discover how persuasively your offer and marketing messages are resonating.
Recruiting respondents can be achieved either by leveraging your advertising and PR relationships with publishers, or through social media platforms, using a service like Liveminds.
Another vital source of feedback about brand impact is your sales team. Regularly check in with them for on-the-ground intel on whether the brand is affecting their ability to open doors and how they’re welcomed and perceived when they meet.
Trust, recommendation and satisfaction
Your Net Promoter Score® (NPS®) is an industry standard benchmark used to gauge how satisfied customers are with the brand. Survey respondents are asked how likely they are to recommend you to their friends and colleagues on a score from 1 to 10. While this is a useful top-level metric for the board, running the survey also provides the opportunity to dig deeper. Ask questions about what customers are satisfied or unsatisfied with, and why.
Depending on the quality of your CRM data, you can also gain insight into any patterns emerging from different customer segments.
There are potential problems with an over-reliance on the NPS® measure, however, as it can suffer from bias if your sample size is too small.
It’s wise to supplement your snapshot score by monitoring review sites, social signals and feedback from your customer service team to get a full picture of how well your customers trust you and are satisfied with your products and services.
Report section 3: business generation
Revenue growth
This should show the revenue generated from customers who entered the prospecting funnel through marketing activity and were converted by sales. The report should present figures for the period since the last report, and highlight the trend over previous reporting periods. Ideally, it will split this into revenue from tracked direct-response campaign activity against brand response (originating from website leads and inbound calls).
Other growth metrics
To supplement the top-line revenue figures, include the number of customers acquired and the average order value. You may also want to breakdown the results into segments of strategic importance such as industry and regional growth.
Quality metrics
To demonstrate the quality of leads generated, measure the conversion rates from lead to sales qualification and customer. Again, present these for the reporting period as well as showing the trend over previous periods.
Performance metrics
This is where you demonstrate what the marketing spend on direct response/ABM marketing was for the period, and what was delivered in return. This should include:
– Total spend on media, production, agency fees etc.
– Return on advertising spend (ROAS), calculated by dividing the revenue generated by the total spend.
– Return on investment (ROI). This is more difficult to calculate, as it shows the amount of potential PROFIT generated from the budget as opposed to the REVENUE generated in the ROAS calculation. You’ll need to work with your finance team to gain a picture of the average profit margin for each of your products and services, matching these against the records of what has been ordered in your CRM. If you’re purely a service business, the potential profit may not match the actual profit due to overruns.
Less clutter, more clarity
As previously mentioned, there is a wealth of data you could present to the board. Our purpose here has been to suggest the core metrics that will strategically demonstrate how effective your marketing activity is.
You may choose to add other information to provide further detail, but always remember that the key to effective reporting is clarity. Don’t overwhelm your executives with data. Stick to what matters to them and avoid the temptation to try and look clever by throwing everything but the kitchen sink at it.
Need guidance putting your report together or making sense of your data? We’re here to help. Get in touch with us at [email protected].
Data. We’re drowning in it. There are so many metrics to prove marketing’s effectiveness, and it’s tempting to throw all of them into a thick report to show the science behind what we do.
But if you want to move away from showing how successful you are at measuring to how effective you are at marketing, here’s a short guide to picking the right metrics for the right job and the right audience.
The first cut is easy – decide if the report is for the board or your marketing team. If it’s for the board, the report is strategic and will therefore have three areas of focus:
1. The overall impact of marketing on the business
2. How marketing has built the brand
3. How marketing has generated business
These metrics are important for the marketing team too.
They form the benchmarks for how effective their activity is, periodically. But the marketing team will also generate more frequent tactical reports detailing the effectiveness of all the possible levers they can pull across the customer journey.
These can include reach, frequency, impressions, clicks, cost per click, downloads, opens, likes and shares. They’ll also include conversion rates for landing pages, websites and nurturing campaigns.These are the areas the team will seek to optimise day-to-day in order to impact the strategic KPIs. This level of detail isn’t relevant for the board.
In this article, we’re going to focus on the strategic report for the board, leaving the tactical stuff for another time.
Before we start, we assume that you have the necessary tracking in place to know the source of your prospects, with the ability to follow that tracking through to your CRM and measure what kind of customers they become.
If not, we have a future article planned to help you out, so stay tuned for that.
Once you’ve got your tracking in place, attributing customers to marketing is relatively simple to achieve for your direct response activity, but harder to quantify for brand building.
We’ll offer some simple solutions to this problem for you later on.
Report section 1: marketing’s business impact
Growth
For most B2B businesses who have long sales journeys, this will include booked revenue and pipeline value that is attributable to marketing within the period of the report. It will include revenue from new customers and existing customers where CRM activity has generated the business. It may also show growth in the number of customers and be broken down by segments of strategic focus such as industry and geography. To show growth trends you may choose to show figures for the current quarter as well as year-to-date and year-on-year data.
Profitability
This section of the report mirrors the revenue growth format, but shows the profit generated from the sales attributable to marketing. This is an important metric, showing the quality of customers vs. the volume shown in the revenue growth.
Average lifetime value
This requires a little more heavy lifting in your CRM data, but it’s worth it, as any increases in the rolling average will give a top-line view of how successful you are at generating repeat business.
Market share growth
This is relatively easy to calculate. First, find the annual spend in the category and location in which you operate – most sectors have analyst reports which will give you this figure. Then, express your annual revenue as a percentage of that number. If you’re midway down a crowded market, you might choose to show a share of market relative to your top ten competitors, taking the revenue figures from their annual reports.
Loyalty
Another easy metric to provide from your CRM is loyalty. First, select the customers who have bought something from you in the last 12 months (this time frame could be longer, depending on the length of your sales cycles).
These are active customers as opposed to dormant ones who may or may not be loyal to you.
From this pool you’ll select those who have been with you for over a year – any who have been with you for less time are considered new and won’t have a long enough trading history to demonstrate true loyalty.
From this pool you can show the average, longest and shortest length of relationship. Ideally, all three of these will increase year on year.
Report section 2: brand building
Let’s face it, unless you’re a major B2B corporation, most of us won’t have the budget to commission any form of brand research. There are, however, some simple and effective ways to measure your brand’s impact and growth which we’ll share here.
Awareness
One of the simplest ways to track growth in your brand awareness over time is to measure the direct traffic to your website. This figure shows the volume of visitors to your website who typed the address directly into their browser (if they did this, they were looking specifically for you and are therefore aware of your brand name).
To supplement this view, you could use GoogleAds’ Keyword Planner and GoogleTrends to measure the volume of searches for your brand name. This works if you have a distinctive brand name but would be less useful for generic brand names like Shell or Seat.
Finally, you could use social listening tools to track the volumes of brand mentions outside of @mentions and the official, owned channels.
Correlating these three measures against your brand building activity will provide a good picture of its effect on brand awareness.
BUT – and this is an important but – expectations around this data must be carefully managed through an understanding of the time scales involved in brand building.
If, say, you’ve launched a brand campaign across a number of channels, you will have planned for it to play out over at least five to six months. If the board is looking for results to show in the first few months, they’ll be disappointed, as any noticeable growth will only start to show towards the end of the five-to-six-month period. It’s important they understand that brand building is a long-term, consistent investment in growth, but over time there turns have a deeper, longer-lasting impact than the short-term direct response activity.
That’s it for the first part of this article. Next, we’ll dig deeper into further brand metrics and the essential strategic measures for your direct response and lead generation reports, so stay tuned.
If you need help with anything we’ve touched on in this article, why not reach out to us at [email protected]?
Google Data Studio is a brilliant tool that helps you visualise your data with customisable dashboards and reports. We first added to our repertoire of tools back in 2016 when Google introduced it as part of the Google Analytics 360 suite, and it’s been a firm favourite ever since.
It’s one of our most useful day-to-day tools, not only for supporting our own accounts management, but also for our client reporting. So without further ado, here’s 7 reasons why you should dive into Data Studio if you’re running paid media ads.
Spend a lot of time checking dull spreadsheets? It’s time for an upgrade! One of the key benefits of Data Studio is that it’s a highly visual analysis tool, enabling your data to easily be displayed via different charts, graphs, and tables at the click of a button.
For each element, you can choose which trends to highlight, how much information to include (e.g. ad image previews or just ad names) and which parts to make interactive in order to have the most visual impact.
Data Studio dashboards are fully customisable in every respect, meaning you can add company logos, colour schemes, and brand fonts to make your reporting a little more fun! If you’re a visual learner, the numbers are likely to make a lot more sense now too.
Most of our ambitious advertisers run campaigns across many different platforms at any one time, with each one likely having its own associated budgets, benchmarks and targets.
Data Studio has an incredible 500+ (and counting!) data source connectors so it’s the perfect place for all of your data from different places to be easily combined. You can pull in your latest engagement results from Facebook and Instagram, your average Google Analytics goal completion rate, and your company forecast spreadsheet to analyse your top-level performance at a glance throughout the month, or simply display everything you’ve got running alongside each other. Whatever you want!
Data Studio can be used for simple reporting tasks, but it also has powerful analysis capabilities. This is where calculated fields come in: you can manipulate the data to directly suit your needs.
Calculated fields can extend and transform your data by allowing you to apply calculations to create new metrics and dimensions. With calculated fields, you can answer questions that existing dimensions cannot answer. For example, whether you’re outpacing your monthly budget, or the average time on site for groups of custom geographic regions – super handy stuff.
It’s highly likely you and your team members will have different requirements for your data. You may want to simply check on how much that new Pinterest campaign is spending this month to date, whereas your colleague may want an in-depth overview of performance over the last quarter compared to the previous year.
This is no problem at all. Data Studio is easily shareable via a URL that can be opened on any browser, operating system or device. Once email access has been granted, it can also be set up to allow different users to easily flick between the views and date ranges they need to see – either at the entire report level or individual graph/table/chart level.
If attribution isn’t a consideration, Google Analytics dashboards can provide a useful starting point for data visualisation, but one of the key setbacks is that there are limits on the amount of widgets and properties you can use. So you can only have 12 graph/table/charts per dashboard and no more than 20 dashboards per property.
That may sound like a lot, but in practice this would be 2.5 each for your main source/medium paths, assuming you are only running on three advertising platforms; (all traffic), Google/organic, Bing/organic, direct/none, ‘email provider’/email, Google/cpc, Facebook/cpc, Bing/cpc.
Unlike Google Analytics, Google Data Studio has no limitations at all! So if you’ve got a lot of different data points that you need to keep track of, then Data Studio becomes your best bet.
If Data Studio seems like just one more thing you need to remember to check each day, week, or month, then scheduled exports might help reduce the load.
Data Studio can send a PDF report automatically on a regular basis via email, to up to 50 recipients, along with a customisable email message and link to the live dashboard. These dashboards can also handily be embedded into websites via iframe, as well as being fully integrated with work management platforms, such as Monday.com, to ensure your data is always close to hand when you need it.
Google Data Studio packs in a ton of useful functionality – especially for a free tool! So if you’re drowning in data and unable to see the wood for the trees, we’d highly recommend getting started with some dashboards today.
Need help getting set up on Data Studio? Contact us today and we can get your business running with reports and dashboards in no time.
GYDA Initiative is delighted to announce the acquisition of Very Good Digital and Digital Agency Coach. The acquisition, completed in January 2022, sees two of the UK’s most prominent business growth experts for digital agencies, Robert Craven and Janusz Stabik, join forces to create one of the leading business consultancies for the Agency sector.
Robert Craven says:
‘We are super-excited! Acquiring this business gives us more firepower to help a greater number of agency leaders. Janusz and his team of expert consultants bring even more breadth and depth to the GYDA Initiative team. 2022 will see us become the leading growth consultancy for digital agencies in the UK and Europe.’
Janusz Stabik says:
‘Having worked with Robert and the GYDA Initiative for three years on projects with Google Partners and consultancy clients, I am delighted that my business has been acquired by Robert, and to become Managing Partner for the GYDA Team. 2022 will be an awesome year for the GYDA Initiative and our clients!’
Launched in 2013, the GYDA Initiative is a specialist growth consultancy working in the digital agency industry. The team of been-there-done-it digital agency experts, led by Robert Craven and Janusz Stabik, helps clients to run the agency they really want to run.
Already working across 23 countries, the Initiative is tasked with one goal… helping digital agency leaders to grow and run their agencies, and to do this smarter and faster. Build the company you want to run… run the agency you want to lead… lead the life you want to live.
Robert is known for his no-nonsense approach to business growth; he has worked with agencies and platforms from London to Dublin, from Singapore to New York. He is the author of Grow Your Digital Agency, and founder of the GYDA Initiative and GYDA Member Hub. His strategy and marketing consultancies, The Directors’ Centre and GYDA Initiative, help agency owners and directors to run the business they want to run, so they can live the life they want to live.
Robert writes from experience. His work with Google Partners over the last eight years has made him the go-to expert on growing digital agencies. Working with 150 of Europe’s leading digital agencies, he has identified the key characteristics of the ‘above-average’, and how to implement this in other agencies. GYDA Initiative supports you on your journey and provides the toolkit for becoming one of the above-average.
Janusz is a consultant, coach and digital strategist who helps agencies to deliver more value to their clients and shareholders. He works to define their vision, to grow high-performing teams, to execute projects better, and to sell more of the right kind of work. With over 15 years in the digital agency industry, he’s built, grown and exited his own agency, and now works exclusively with agencies in the creative sector.
As the lead coach for the UK and Europe Google Partners Elevator program, Janusz continues to guide and advise agency leaders on their growth journey.
Janusz joins GYDA Initiative as Managing Partner. Running a team of over ten consultants, Janusz will take the business into 2022 with a real sense of purpose, resulting in our clients’ greater success.
To find out more, visit:
+44 (0)1225 851 044
Global education service provider and brand owner of TopUniversities.com, QS Quacquarelli Symonds (QS) have appointed AgencyUK as social media partner. QS is the world’s leading provider of services, analytics, and insights to the global higher education sector and famed for its university rankings, which have become the annual benchmark for universities around the world.
AgencyUK were appointed following a three-way pitch, in response to a social strategy and brand awareness brief set by the QS marketing team. AgencyUK will develop the organic social media strategy for the higher education and student communities around the world and launch a new programme of social media content off the back of it.
The pitch was overseen by Tim Edwards, Chief Marketing Officer at QS. Its purpose was to find an agency team who can support, unite, develop and promote their mission – to empower motivated people anywhere in the world to fulfil their potential through educational achievement, international mobility and career development.
The first wave of activity undertaken by AgencyUK includes strategy and creative that is based on education sector insights gathered from their world-leading independent market research and data analysis. The strategy will extend into the development of a global strategy and social media content plan rolled out in partnership with the QS global marketing team.
Tim Edwards, CMO, QS, said: “We were looking for an agency with strong strategic and creative capabilities and a track record in disrupting competitive markets. QS has grown rapidly through a combination of new product development and corporate acquisition, but we remain focussed on maintaining our market leader position, and to do so means being closer to our target audiences and continually investing in channel marketing.’’
Amy Stobie, Commercial Director, AgencyUK, said: “We are absolutely delighted to have been appointed by QS. They are a well established brand with a host of well known digital properties and a continuing ambition for growth. Our social and creative teams are well placed for reaching out to these target communities and we’re keen to get going.”
AgencyUK are an independent brand communications agency with 32 staff based in the UK. The company has demonstrated 200% growth over the pandemic period, largely attributed to the expansion of their healthcare portfolio. QS is the fifth global account win in the past 12-months.
First event: 10th February 1.30pm – 2.15pm
Bristol-based web design and development agency, Unfold has just launched a brand-new events series, Below the Fold. The series centres successful business people, giving them a platform to share learnings from their journeys. Hosted by Unfold’s founder, Harry Cobbold, these events aim to educate and inform attendees with insider knowledge and tips for success.
What it takes to get your business acquired
The first episode in the series will see Gapsquare’s Zara Nanu taking the guest seat, with Harry interviewing her on Gapsquare’s recent acquisition and what it takes to build and acquirable business.
You can catch the event on 10th February 2022 from 1.30pm – 2.15pm. All events in the series will be held virtually via Zoom for the foreseeable future. If you can’t make the date, you can register in any case and you will be sent the session recording following the event.
Register for the event here.
One of the big benefits of Bristol Creative Industries membership is the ability to self-publish content on our website. We’ve seen lots of great content published in 2021 including some brilliant business advice. Here are the 20 most popular posts of the year.
Chase Design Group examines the legacy that COVID-19 will leave for brands, and what newly adopted trends and ways of communicating should stay with us. Read the post here.
Having a strong organisational structure in place is key to growing your digital agency. Janusz Stabik explains your options and how to know which structure will guarantee employee and customer satisfaction and allow you to scale your marketing agency. Read the post here.
Carnsight Communications is one of the most prolific BCI bloggers so it’s no surprise that the business has made the top 10. In this great post, company founder Jessica Morgan outlines what her previous career in marketing taught her about public relations. Read the post here.
After the couple of years we’ve all had, the mental wellbeing of employees is increasingly concerning. Armadillo explains how the approach to mental health in the workplace needs a culture change. Read the post here.
Janusz Stabik makes his second appearance in the top 10 with tips on how digital marketing agencies can attract high-quality clients. Read the post here.
In another post from Carnsight Communications, learn five key things to remember when looking to secure engagement on LinkedIn. Read the post here.
Looking for your business to make headlines? OggaDoon shares top tips on how to write the perfect press release. Read the post here.
Brands can’t lead the conversation on social media, says AMBITIOUS in this great post. Read the post here.
“As joint leader of an independent agency, 2020 meant sleepless nights. But it provided opportunities to inspire others and galvanise our team,” says Andy Brown, chief financial officer at Armadillo, in this post outlining leadership tips for 2021 that will also serve us well in 2022. Read the post here.
How can an entrepreneur attract the perfect investor? Gravitywell outlines six qualities investors look for in tech startups. Read the post here.
Want to post your own content on the Bristol Creative Industries website? Become a member.
Some B2B brands find social media a challenge but there’s lots that you can do as this post by AMBITIOUS shows. Read the post here.
The winning agencies will be the ones with an uncompromising focus on their culture, looking at how they can support their people to be their best selves and do era-defining work, says Tonic Creative Business Partners. Read the post here.
If there’s anyone who knows about being successful at blogging, it’s Helen Savage from Blog Write Ltd. She shares some great tips. Read the post here.
OggaDoon shares a list of 10 essential features you didn’t know you could use with Google Ads. Read the post here.
Sparro House Creative Ltd outlines three tips to improve your content marketing. Read the post here.
If your primary audience is other businesses, then case studies are the perfect tool for creating authority, building trust and delivering social proof. George Devane shares some tips. Read the post here.
The phrase ‘SEO; now covers optimisation strategies and techniques on a wide range of different websites including Instagram. Varn outlines how to improve your SEO on the social media platform. Read the post here.
Leaders and managers have often received little to no training in how to have a ‘difficult’ conversation and so we end up avoiding the situation altogether until it becomes really serious. That can mean getting into performance management, grievance procedures or even worse. Jonathan Rees shares advice. Read the post here.
Chris Thurling from Armadillo provides his advice on what to consider when seeking out a marketing agency that’s suitable for your business. Read the post here.
As you prepare to hit send on your latest business mailing, ask yourself whether it would pass the ‘hover test’. Here are five easy ways, shared by Carnsight Communications, to make sure it does. Read the post here.
Please respond to our new survey about the creative industries in Bristol and Bath. It will help us design – and advocate for – future support for the creative economy in our region.
Those extra special legacy clients were the reason you were able to build your agency up to what it is today…but are they now limiting your continued growth? Hear me out.
In my experience, a lot of digital agency owners have a number of legacy clients on their books, clients they’ve worked with for years and years, with who they love and who have really positive relationships. The trouble is, these clients have been around since day-dot and all these years later, they’re still paying day-dot prices which are breakeven at best, and entirely unprofitable at worst.
This is troublesome for a few reasons, some more obvious than others.
Firstly, these clients are unprofitable and are costing the agency money – but the long-standing relationship actually means the agency owner feels beholden to them so they keep the work and grin and bear the cost of doing so – which impacts your bottom line.
Secondly, in an agency environment, the service on offer is essentially time – time spent by your employees to complete certain tasks for your clients. When these legacy clients, who are already getting an absolute bargain, start to encroach on their fair share of the agency’s team and billable time, the loss to the business compounds.
Suddenly these breakeven clients are costing money, and worse still, everyone in the team is tied up servicing them and there’s no capacity left to service the profitable ones.
I’m referring to the Pareto Principle (or 80/20 Rule). Which in this instance, means that 20% of an agency’s clients, should be generating 80% of the overall revenue.
While this is essentially just a model, in my experience the Pareto Principle absolutely rings true for digital agencies – if you have doubts, export your own client list and test this out for yourself!
With that in mind, and given what we’ve just unpacked in the paragraphs above, it’s clear that the revenue potential and the path to success lies in the hands of an agency’s top 20% of clients.
Allocating your resources (human or otherwise) to servicing those highly profitable clients, rather than the unprofitable/breakeven clients, is what’s going to grow your agency.
This doesn’t mean over-servicing these clients and doing more billable work for free. Instead, think about what your team can offer in order to maximise your client’s business. Perhaps you have a PPC team, who up until now were tied up servicing an unprofitable client – you could pitch your PPC service to your profitable client to complement the SEO work you already might be doing.
Offering more services to these clients will a) make your client’s know you have a genuine interest in the success of their business and b) generate more profitable revenue for your agency.
Raise your prices, drop your unprofitable clients & make the profitable ones feel like royalty.
Start by exporting your client list, sort them by revenue and then calculate their gross margins. You’ll be able to see quick-smart which accounts are profitable and which ones are not. From there, your next step is to raise your prices to a profitable level so that both your clients and your business are winning.
In my experience, there are three potential outcomes when it comes to proposing a price increase – so here’s my advice for every eventuality:
Everybody Says Yes – Great, now all your clients are profitable and your agency will continue to grow, and they’ll continue to receive high-quality service as you can now afford to do so.
Some Say No/Some Say Yes – Fine, losing a handful of unprofitable accounts won’t impact the profitability of your agency. The reality is, they were costing you money, so by letting them go, you’re still in the black.
The ones you have retained, have agreed to your price increase. You’re now making a healthier margin that covers the cost of any clients you had to let go of.
Even better, the time your team were spending to deliver the service for the unprofitable clients, can be reallocated so you can give back to your top 20% of clients who are generating 80% of your revenue.
Worst Case Scenario, They All Say No – Another positive outcome. These clients were costing you money and now they’re out of your hair. With fewer clients, you might have to slim some costs and reduce the size of your team – now you have a leaner agency that is easier to manage.
This might sound a little counterproductive, but you’re still guaranteed to be generating the same profit because you’re no longer losing out on the unprofitable clients.
What I’m trying to get at is, don’t fret about losing some clients who aren’t prepared to pay you the margin that a) your work deserves and b) you need in order to grow your agency. Chances are, your loyal, legacy clients will want to support your business and continue working together and will happily agree, which will cover the cost of any who might say no.
If you need any help increasing the profitability of your agency then Get In Touch with my team at Digital Agency Coach.
We’ve helped hundreds of clients achieve stratospheric growth through strategies just like this and we’d love to help you too.
Me and my team of experienced and dedicated Coaches are here to help you understand your business better and the best growth strategies for you, your agency and your team.
In a recent value-packed webinar about what the high performing agencies do, I shared the importance of knowing, understanding and keeping on top of your gross margins and the impact this has on your agency’s long-term success.
I’ve plucked out the key takeaways from the presentation and put together a valuable and actionable guide to gross margins, to help you accelerate your agency’s growth.
In this article, I’ll unpack exactly what gross margins are (and are not), what a good gross margin looks like and how to fix your gross margins if they’re not up to scratch.
When it comes to digital agencies, gross margin is a simple calculation using the direct costs of delivering a specific service and the price at which you sell it out – the gross margin is what’s left in the middle.
In a product-based business, like a chippy, the gross margin will be what the customer pays for the chips, less the cost of the potato and the labour required to peel & cut them. It might cost the chippy £1 to buy the potatoes and 50p in labour to prepare them, which means when they sell them for £2 the gross margin is 50p (or 25%).
Whereas in an agency, where the offering is service-based, the question is how much are we selling our time for and how much does that time cost?
It’s crucial you calculate your gross margin against the separate groups of revenue within your agency. For some, this might be geographically (UK vs US) or by industry (eCommerce or Lead Generation), while for others this could be the individual services (PPC, WebDev, Design etc.)
For example, if you’re an agency that delivers PPC, and you charge £1000 per month for PPC, and the salaries and freelancer fees for your PPC team are £500, then your gross margin is £500 (or 50%).
Your gross margin considers the revenue the service generates and the direct costs associated with getting the job done. What your gross margin won’t include, is all your general overheads, like your office, accountancy fees, utilities and so on. These still have to be deducted in order to understand your Net Profit.
In order to make sure there’s still plenty leftover in your net profit, you need to ensure your gross margin is healthy enough to allow for all your general expenses. If your services are unprofitable at a gross margin level, then there’s no hope for your agency to be making any money at a net profit level.
In my experience, a lot of agency owners muddle the waters when it comes to their gross margins, direct costs, overheads and net profit – which is how they end up providing unprofitable services and losing money.
The key learning here is that your salaries and contractor or freelancer fees must be attributed as direct costs to the associated service, not in your general overheads. Remember you can also factor in partial salaries of team members such as account managers, who spend only a portion of their time on chargeable client work.
This enables you to look at your services objectively and understand which ones are actually profitable. Rather than taking note of a huge gross margin number on your P&L sheet that tricks you into thinking your services are 95% profitable because you haven’t calculated the wage bill.
Now to the bit we’re all here for – what does a good gross margin actually look like, what should you be aiming for in order to grow your agency and become one of the high performers?
In our experience, agencies with gross margins anywhere above 50% are doing great. North of 60% and you are doing brilliantly. On the contrary, if you’re numbers are anywhere less than 40% then you have some serious work to do to ensure your agency is still profitable once you get to your net profit.
Now that you’ve calculated your gross margins and know exactly what each of your services is generating, you can take an objective view about what’s actually making your agency money (and what isn’t for that matter).
For any services that are underperforming – ie. the cost (salaries & tools) associated with delivering them are higher than the revenue they bring in, you need to ask whether you can fix them. If you can increase your prices and/or decrease your costs by making the service more efficient and your team more productive and grow your gross margins back up to 50-60%, then brilliant.
If you can’t make these changes, then it’s time to drop the service and refine your offering to focus on the services that are actually generating a healthy gross margin. Without taking this action, your agency won’t be growing anywhere.
Digital Agency Coach is a team of coaches, consultants and mentors servicing digital agencies across the globe. Led by me, Janusz Stabik, we’ve helped hundreds of agencies transform their agencies to achieve more revenue, more profit, more time and less stress.
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The new ‘Intro to Game Art’ short course will give you an insight into the world of game art, exploring the range of roles and essential skills needed to get you started when exploring a potential future career in game art. There is a host of exciting modules that your tutor will guide you through, including:
Planning and producing work to a design brief.
Working in the games industry
Concept art for computer games
Modelling for computer games
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