Is your digital marketing agency profitable on purpose, or by accident? At Digital Agency Coach we’ve worked with hundreds of agency owners over the years, some of whom were unaware of their profitability stats.
Many agencies end up being profitable by accident, as a positive consequence of the year’s work. In this article, we share our insights on turning an intentional and deliberate profit.
As a busy agency owner, it can be easy to prioritise managing the day-to-day operations and allowing your profitability to become an afterthought. With this mindset, it’s difficult for you as an owner, to have that profit-oriented, strategic mindset that is key to growing your agency.
At Digital Agency Coach, we always recommend approaching profitability with intention and purpose. This approach can feel foreign and a little acquisitive at first, but it’s important to remind yourself that it’s completely genuine and moral to design your business in such a way that it earns you money.
Having a profit-driven mindset enables you to reinvest into your business, enhance the quality of your service and grow your agency.
When it comes to an agency’s profitability, there are typically three different degrees of intent and three defined profit groups as an outcome.
Agencies who generate anywhere from 0–12%* profit are generally doing so by accident. These agencies usually no profit strategy in place and the year-end results are unpredictable and often speak for themselves.
Those digital agencies turning anywhere between 13–22%* profit, are almost always doing it on purpose. The closer the number lies to 22%, the more deliberate and considered the profit is. The lower the number, the less intentional their outcomes have been.
And as for those generating a profit percentage anywhere north of 22%*, we classify those guys as purposeful, profit machines. These digital agencies know their services, their clients, their team, and their business like the back of their hand. Their sales pipeline and financial systems are geared toward driving high volume, quality leads which convert.
*These figures are general only, actual profit margins will depend on the agency size. Large organisations with substantial overheads typically will have tighter margins.
Address these six top-line areas and improve your agency’s profitability today.
Take a close look at your gross margins. If they’re outside the range of 50–60%, unfortunately, you’re not profitable enough. Your gross margins are calculated by taking the overall revenue of your agency, less the sum of those direct salaries and/or contractor and freelance fees required to deliver your particular service.
As a service-based business, your agency sells time — utilisation looks at how many billable hours you have available to your clients. If you are operating at less than 72% capacity, there is scope to improve your profitability by maximising your utilisation.
These can be either your employees or clients. If you attract and retain poor performers, this will lead to inefficiency and low profits within your agency. It might be that you need to address some of those long-standing, legacy clients from your start-up days, or certain team members who are less efficient than others. The solution? Try raising your fees or developing the skills and/or expertise of your employees.
Usually, those agencies who fall into the 0–12% profitability category, have no insight or oversight on their financial or sales reports and forecasts. Having a robust sales pipeline and reporting structure in place will allow you to understand when, where and how you can maximise your revenue and minimise your expenses — which we know will lead to a direct increase in your profitability.
For digital marketing agencies within the UK, it’s recommended you charge £90 per hour as an absolute minimum for your services. At Digital Agency Coach, we advocate charging anywhere between £100 — £150 an hour and ensuring you bill all for those all hours at your full rate in order to maximise your profitability.
Is the service you provide right for the current market? This is a big question for web design agencies who are competing against the likes of Wix and Squarespace. These ‘done-for-you’ website builders have significantly devalued the product to where it’s now within the reach of many small businesses and small budgets. As a specialist agency with a highly skilled team, you need to be bold and honest with yourself and ask if there is a future within your market. If the answer is no —you have to innovate and change with the times.
Remember, it’s perfectly moral and genuine to gear your agency to become a profitable, money-making business. As a business owner, you are doing your customers, employees, and your market a disservice if you are unable to reinvest your profits back into your industry.
Ready to begin? Start by asking determining which of the three levels of profit and intention describes your agency. If you’re turning a profit anywhere south of 20%, it’s time to change your mindset and address these six ways to increase your profitability.
Watch Our Free Video Class: Profit On Purpose (7min) & kickstart your journey toward profitability
I'm an ex-agency founder now coach and mentor to digital agencies and trusted by Google and Forbes to deliver agency growth programs across the globe.