You’ve already been offering your agency’s services for a hot minute now, and you’re working with a bunch of awesome clients.
But when you look at your financial statement at the end of the month, you see the figures hanging at the end of your profit report by their anemic, brittle little fingernails.
Or maybe you’ve been staring at an aspirational financial target for quite some time now. With bloodshot eyes. And wondering why you haven’t reached it yet.
Now you scratch your head and question your entire life’s choices.
Ugh. Why isn’t it working?! What’s the problem with my calculations? Where have I gone wrong?
Your digital agency is a business that needs to earn a profit to operate. But looking at the same amount monthly isn’t a pretty sight if you’re trying to scale.
Dry your eyes. We can fix this!
In this article, we’ll show you how you can maximize your marketing agency’s profit and you’ll get the best tips from the leaders in the industry.
What Is an Agency’s Profit Margin?
You may have heard of the term. But haven’t entirely grasped the concept.
The profit margin is the number you get as a result of the profit (sales minus operating costs) divided by the revenue.
This tells you the connection between the number of sales you have in relation to the expenses you have while selling.
You can analyze your digital agency’s profitability just by looking at its profit margins. It’s one of the most common ways to measure your business’s financial health.
But more on that one later. Let’s get into benchmarks next.
Digital Marketing Agencies’ Profit Benchmarks
Is your digital agency’s profit margin a good one? Where do you stand as compared to other companies?
An average marketing agency earns a 7-10% profit margin for small digital marketing services, with 5% as a low margin and 20% as a high margin.
Large digital enterprises offering marketing activities even account for a 40% profit margin.
If you haven’t met these figures yet, does that mean that your digital agency is already doomed to fail? Is it really required for digital marketing agencies to have a good profit margin?
Allow us to clear the air and dispel your fears.
The Importance of a Healthy Profit Margin
Having a healthy profit margin is not just an answer to your well-meaning auntie’s question “How’s the business doing?” It’s also an indicator of your agency’s overall financial performance.
Securing healthy profit margins gives your investors, employees, and clients a sense of security, knowing that your marketing agency is stable and isn’t on a verge of bankruptcy.
When you track and report your gross profit margins regularly, this also helps you identify (and fix) a money-draining leakage. Low margins can be indicators of poor agency management or a lack of projects in the pipeline.
Having a healthy profit margin also helps make major company decisions, like changes in systems or processes, additional staff compensation, or confidence in expanding the business.
How to Calculate Your Profit Margins
If you’re not into all that math, trust us, this valuable metric is easy to compute!
PROFIT MARGIN = (Revenue – Expenses) /Revenue x 100
First, you need to get the sales amount that’s listed in your income statement. Then, add the total expenses.
Total expenses are the costs of doing business that you’ve incurred during a given period. This includes overhead costs, employee costs, operating costs, and other expenses during business operations for a certain amount of time.
All right. Now that your calculator is dusted off, what’s the next step?
Divide the figure by the revenue amount and multiply by 100 to get the percentage.
For example, let’s say you have $300,000 in revenue for January and you have spent $2700,00 in total for all the expenses during the same period. You can calculate the profit margin: ($300,000-$270,000) /$300,000 = 0.1 x 100 = 10%
There are two types of profit margins and differentiating them can help you monitor the overall profitability of your business.
The net profit margin includes all the costs in the total expenses plus the loans, taxes, and single-purchase figures.
On the other hand, computing the gross profit margin is less complicated because its expenses only include the costs made to produce results for specific clients — like white labeling costs or media buys.
7 Tips to Improve Your Agency’s Profit Margins
High-profit margins mean your digital agency is performing well and may even be better than your competitors. But what happens when your figures are on the low side?
We’ve got you covered. Check out these tips to help you boost your marketing agency profit margin.
- Strategize your pricing methods
Calculating your services may be one of the many effective ways to increase your profit margin. One way to do it is to adjust your price point. Or use pricing strategies that won’t negatively, but positively, impact your customers.You may opt to use either competitive prices based on market value. Or opt for value-based pricing if your customers are willing to pay more f0r quality and they perceive your offer as high value.Regularly check on your pricing and assess if your present method is still profitable for your agency.
- Make sure your sales are profitable
Another factor you’ll want to monitor to increase your profit margin is the sales team and processes.
Are your marketing campaigns cost-effective? Is your sales pipeline and closing rate generating enough to grow your marketing agency? Do the team members consistently fulfill their unique roles to make it all happen?
Perform an audit of your current sales objectives and policies to make sure they’re aligned with your goal to increase your profits.
- Set up project and engagement scopes profitably and protect the scope
Scope creep. Ugh. It gets the best of us when we least expect it. But that doesn’t have to be the case all the time.
You may already be going beyond your budget just to focus on profitability. But that’s counterproductive.
Keeping an eye on the usual suspects behind scope creep, like unforeseen costs, and resolve them before the scope starts a’creepin’.
Revisit your scope and reinforce boundaries with team involvement and customer buy-in. Communication is one of the solutions to preventing scope creep and ultimately, setting up realistic and profitable scopes with clients from the get-go.
- Focus on customer service and retention (and check client profitability)
Both existing clients and new customers are sources of sales. But if you acquire new ones, will it cost you more than retaining your present client roster? Checking on your clients’ acquisition cost and lifetime value can help you identify if your target audiences and customer lists are still delivering the profit margins you need. Collect feedback from your profitable patrons and pamper them with excellent customer service. It will not only help you win great testimonials to expand your customer base, but also encourage them to choose you over any other digital agency.
- Streamline operations and use technology effectively
Profit margins also include the amount of time spent on following procedures and seeking approvals before finishing a deliverable.
So, troubleshoot your operations to establish a one-stop-shop workflow that runs smoothly and save bucketloads of time.
What if you’ve already optimized your processes but still can’t keep your profits up?
Using the best technology for your unique processes ensures that you spend less time on repetitive tasks. It also reduces your operating costs.
Incorporating automation into your workflows and using efficient, reliable tools enables your team to focus on increasing productivity instead of repetitive tasks that suck up limited time and bandwidth.
- Train staff to increase productivity, bridge capabilities gaps, and increase billable hours
When you’ve ticked off all the operational and marketing expenses and your profit margins are still lower than expected, it’s time to revisit your employees’ productivity.
Up-skilling your staff to meet capability requirements, instead of hiring new people (more on this below!) will help you reduce non-billable hours and focus on the billable ones.
That way, you only pay for the time they consume to produce business output.
Carefully managing your resource schedule helps you religiously track everyone’s time an also decreases the chance of unwanted leaves and unplanned overtime.
You don’t want to make sick leave a recurring template because your personnel is no longer motivated to work, right? Right?! Right.
- Hire slow and fire fast to maximize talent and keep overhead efficient
Looking at your human resources and monitoring utilization rates will ensure you only have the best talent on your team. Are you willing to keep one person and let a whole team suffer because of inefficiency?
In the vein, hiring someone because they’re your only option — instead of being selective about who you hire — results in forcing them into a role they can’t, or aren’t willing, to fit into.
It’s all about keeping your overhead costs within budget and making room for the right talent at the right digital agencies.
Overview of Strategies to Maximize Profits
You’ve done it all and begun to notice changes in your company reports. Ruh roh. Now what?
It’s time to share our top strategies for achieving even higher margins and maximizing profits for your business.
Here are some tips to scale your marketing agency and keep your success on a roll:
- Evaluate your business processes to check if you’re ready to take your agency to the next level. Perform surveys and ask for feedback to identify possible risks and keep your team members engaged and excited for the upcoming phase.
- Establish and solidify your business identity with consistency and efficiency. You want your employees to be affiliated with a long-standing agency and your investors confident with their funding.Would you like your future clients to purchase because of pressure from hard sales and cold calls? Or because you’re well-established and they trust your existing clients’ testimonials? We all want the latter.
- Optimize your productivity with the appropriate tools and ditch unused subscriptions. Learn how to keep track of where everyone is at whether have a remote work culture or flexible-hour setup.It not only fosters accountability and teamwork, but also maintains focus on the scope and budget.
Examples from Successful Businesses
From advertising agencies to software development teams, here are a couple of best practices from successful agencies. You’ll notice that these strategies upped the company’s profit margins up and scaled them in a short period of time.
Let’s take a look at King Digital Entertainment.
They’re the makers of Candy Crush, an online game that was popular in 2012 with over 300 million active players.
The brand started in 2003 as a small web-based company. But with the rise of mobile gaming in 2010, they developed the smartphone game and secured 12X revenue growth but only 6X growth in costs.
How did they do that?!
They discovered a business development stage between finding a market that fits their product and retaining that market advantage despite competition.
They also focused on giving users a full gaming experience with in-app purchases. This allowed the company to reduce its operational costs since the units are bought inside the game.
They also dove into an enormous market with the same gaming needs and ability to pay, which automatically went to the agency’s revenue while decreasing overhead costs.
Another company we all know, Netflix, has been radical with its human resource measures to hire only the best of the best which strengthened overall performance.
This helped the brand build over 29 million subscribers in the U.S. alone. Today, the company has presence in over 190 countries for the past 7 years.
How did they do that?!
Netflix guiding principle is to only hire people who understand and support the company’s interest and vision. With this, they made it possible to have a highly-productive work environment. And the business was ruthless in letting go of individuals who weren’t a good fit and risked causing problems in the long run.
Unlike most companies, Netflix is willing to tell the truth about their employees’ performance and required skills and offers generous severance packages to personnel who deserve them. This keeps the rest of the team efficient and cuts employee costs, better providing for the present payroll.
To sum up, an agency’s profit margin is a powerful metric that lets you know how your business’s financial health is doing.
By keeping these numbers up, you can identify areas for improvement, avoid scope creep, and boost your overall capabilities to grow and scale.
Apply the following tips to improve your overall profit margins:
- Strategize your pricing
- Ensure profitable sales
- Protect your project or business scope
- Check on your clients’ profitability
- Streamline business operations with the proper technology
- Increase your employees’ productivity and billable hours
- Hire slow and fire fast to reduce overhead costs
After optimizing for profitability, you can start to concentrate on figuring out the best ways to maximize revenue and agency growth.
Need a little agency Miracle-Gro? ScaleTime’s strategies are the hot shi$ you need to scale this marketing agency biotch and make it grow.
Let ScaleTime guide you in assessing current processes, metrics, and tech to know what your gaps and strengths are!