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Boosting your agency profitability: A comprehensive guide
Published:May 01, 2024

Boosting your agency profitability: A comprehensive guide

Creative agencies are an interesting thing.

On one hand, an agency is a relatively easy business to start. With some skills and an internet connection, many tech-savvy folks could spin up a one-person creative firm and start taking on clients.

But what happens when that one turns into some, and suddenly you’re a new small agency owner with a complex business model and no idea how to scale it?

Growing an agency isn’t like growing a product-led business.

There are labor costs, other variable expenses, and an ebb and flow of clients. Defining profitability in your unique situation is hard enough — how are you supposed to grow that profitability to keep up with economic, competitor, and client pressures?

The guidance and strategies we offer today will help new or potential agency operators achieve and increase agency profitability.

Why is agency profit critical?

Generating profit as an agency owner is core to keeping the lights on at your business and food on the table at home.

But beyond that, what’s the point of protecting and expanding your profitability?

Well, it’s crucial for a lot of reasons:

  • Attracting top talent: A profitable agency can offer competitive salaries, benefits, and growth opportunities to build a team of formidable experts and create a cycle of growth.
  • Building a sustainable business: Nobody wants to live on the razor’s edge. Profitability helps ensure the long-term success of your agency, eliminating stress for you, your workers, and your client base.
  • Investing in growth: Profit equates to resources to invest in technology and skilled leaders who can steer your team into new markets and opportunities for growth.
  • Providing top-notch, competitive service: A profitable agency that can build, onboard, train, and retain an excellent team is well-equipped to provide high-quality service delivery that sets it apart from competitors.
  • Enjoying flexibility: Want to try out a cutting-edge new service offering? Test the waters in an unknown market? Profitable agencies don’t just have more flexibility to try new things and get ahead of the curve — they can also be more adaptable when negotiating contracts. Greater flexibility makes engaging in experimental partnerships, rewarding pro bono work, and more possible.

In other words, profitability isn’t just about making money. It’s about building a resilient, growth-oriented, enjoyable agency that consistently delivers value to your clients, employees, and stakeholders.

A gray trees contains icons listing the reasons agency profit is critical, such as 'enjoying flexibility'

What makes running a profitable agency difficult?

It’s common for agencies to branch out and bill on a flat fee or retainer basis rather than just an hourly billing structure.

And it makes sense, because newer pricing models have the potential to lead to higher profit for the same number of hours worked. But, as with any pricing strategy, there is some risk.

If you don’t estimate a project accurately, if unforeseeable expenses or timeline stretchers crop up, if a client requests something outside the original scope — you’ll likely lose money. When you collect fees ahead of time, added expenses may have to come out of your agency’s pocket.

An agency can be profitable if it uses a fixed-fee approach. You just need to set a realistic profit goal, stay informed of all the expenses that impact that goal, and work to safeguard your agency’s profit margin in changing times.

Let’s start at the beginning: setting your goal.

What’s a healthy average profit margin for an agency? (New data)

The dynamics of operating a digital agency stayed the same for quite a while.

However, the times are changing.

Inflationary pressure has increased expenses across the board, and competitors are flooding the market as the barriers to entry lower.

In the “before times,” digital agencies typically allocated around 45–50% of their revenue to the cost of goods sold (COGs), including labor, and 20 to 25% to operating expenses. With this setup, they could usually achieve a pre-tax net profit margin of 25 to 35%.

But now, per Promethean Research’s Digital Agency Industry Report, approximately 55% of revenue needs to go toward COGs and 25 to 30% toward operating expenses. Today, a good pre-tax net profit margin goal is around 17%.

A comparison of the financials of a typical agency, then and now, as horizontal bar graphs

How to measure agency profitability: Net profit margin

For newer agency owners, the simplest way to think about profitability is this: How much did clients pay you, and how much of that went back into running your business?

That difference is your net profit margin (pre-tax).

Here’s how to find it so you can benchmark your agency against modern metrics and track its growth and success.

Step 1: Find total revenue

Begin by tallying up all sources of income for your agency. Include all revenue from client contracts, partnerships, commissions, etc.

Step 2: Calculate operational & overhead costs

Next, factor in all the expenses necessary to run your agency.

Technically, operating expenses are those incurred during normal operations, things like office supplies, software subscriptions, computers, and desks. Overhead expenses are expenditures necessary for running your business, such as rent, utilities, and insurance.

You don’t need to worry about separating these out for this calculation. Just add up everything you’re spending money on that isn’t labor or advertising.

Step 3: Compute the cost of client acquisition & labor

It’s time to roll in the costs of acquiring new clients: marketing, advertising, and promotional events. Factor in all labor expenditures on salaries, other wages, and employee benefits.

Figuring out the cash equivalent of employee benefits can pose a challenge. Generally speaking, benefits may cost around $21,585 per worker per year. But the actual number depends significantly on the benefits you offer, your location and industry, and more.

The best way to get an accurate number is to talk to the HR company or person administering the benefits. Accuracy will only become more critical as your agency grows.

Step 4: Finally, determine net profit (pre-tax)

Now, subtract everything from revenue. No, you don’t have to separate labor and advertising from operational and overhead costs in two phases, as we did above — but it does make the process less overwhelming.

Here’s the formula you’re going to plug it all into:

Net profit margin = revenue – (operations + overhead + labor + acquisition)  

Now translate that into a percentage using:

(Net profit margin / revenue) x 100

The resulting number is your net profit margin as a percentage.

You can track this metric and compare it to the current agency standard (17% at the time of writing) any time you want to assess your profitability, competitiveness, and growth.

(Bonus: If you feel like wading into more advanced formulas for measuring different elements of profitability, such as agency gross income (AGI), delivery margin, and more — this guide takes a deep dive.)

Boxes show the formulas for calculating net profit margin as a number and as a percentage

8 strategies for agency profitability optimization

So, you’ve calculated your profitability and aren’t happy with how it’s holding up against modern benchmarks, your personal goals, or year-over-year performance?

Let’s unpack several actionable strategies to help you boost agency profitability.

1. Consider a value-based pricing model

In a cost-based pricing model, an agency arrives at a price by adding its profit margin to its estimated costs for the project. By contrast, in value-based pricing, you charge according to the value you bring to your client’s business.

Of course, a value-based pricing model can be met with doubts and questions from clients, like “Are you sure you’re working fast enough?” or “Why are your costs what they are?”

Here’s a simple formula you could use:

Your price = number of new customers generated x 10% of customer lifetime value for the client

It’s a shift for both parties and takes some getting used to, but clients may feel more comfortable paying a heftier sum when they know it’s based on how well you generate value for customers.

2. Use past project data for more accurate future pricing

Sample project overview shown in 7pace for monday.com. The page shows each task's owner, status, timeline, and more

Creative agencies can use data from robust project-tracking features to enhance future project scoping and pricing:

  • Budget usage: By reviewing past project budget estimates vs actuals, agencies can identify trends in budget allocation, cost overruns, and areas of unexpected expenses. This analysis helps in setting more realistic budgets and scopes for future projects.
  • Employee time spent: Analyzing employee time-tracking data from previous projects provides insights into resource utilization, task completion times, and potential bottlenecks. This data enables you to allocate resources better and avoid under- or overstaffing.
  • Scheduling: Comparing project completion dates with their target dates helps you understand factors that contributed to project delays or early completions, allowing for better scheduling and timeline management in future projects.
  • Revisions: Project management apps are great for tracking client feedback, often leading to revisions. Analyzing this data helps agencies identify common client preferences, pain points, areas for improvement, and the time needed to address these needs.

3. Plan ahead to guard against scope creep

Last-minute, out-of-scope changes, requests, and pauses from clients disrupt projects and cost you money.

Rather than giving into scope creep, here are some strategies to manage client expectations effectively or make the most of their requests.

Preventative measures:

  • Involve clients early in the process to mitigate late-game alterations.
  • Emphasize to clients the thought, experience, and expertise that has gone into each decision on their project.
  • Establish a structured change request system to dissuade off-the-cuff feedback.
  • Use your contracts to define the number of revisions within the project scope and communicate the costs for extras.

Upselling opportunities:

  • Offer more expensive packages that allow additional revision rounds for clients seeking greater control.
  • Provide premium-priced services like one-on-one design sessions, where clients can give real-time feedback.

4. Turn patterns into profit

Speaking of scope, is there a recurring pattern of additional services clients consistently ask for? Instead of viewing these requests as inconveniences, consider them valuable opportunities to enhance your agency’s profitability.

One strategy is to package these frequently requested services as add-ons you can upsell to clients. By clearly defining these add-ons and showcasing their value, you create new revenue streams while satisfying client needs.

Another approach is to incorporate these services into your packages and adjust your prices to accommodate them. Pricing this way may preempt scope creep later and provide a clear justification for the price increase.

5. Track and boost individual utilization

The 'Edit Time' page in 7pace lets you adjust tracked times and add comments

Utilization rate is how much of an employee’s tracked time is billable.

To calculate an employee’s utilization rate, apply this formula:

Utilization rate = (billable hours / total available hours) x 100

Total available hours refers to all working hours within a specific period, excluding things like holidays and vacations. Billable hours are those dedicated to client projects, while non-billable hours are those spent at work but on non-revenue-generating tasks like administration, training, etc.

While there’s no universal standard for an ideal utilization rate, professional services companies’ benchmark is around 71%.

If you’re finding employees are consistently under this rate, or whatever goal you’ve established, there are a few things you can do:

  • Make sure you (or your sales team) are landing clients and projects that align with your skills.
  • Discuss utilization with project managers to make sure tasks are equitably distributed.
  • Consistently communicate about utilization rate expectations and celebrate improvements. By setting a good example of open communication, you can encourage workers to invest in utilization and look for solutions if they find theirs slipping.
  • Cut down on administrative tasks that may keep employees from billable work, like meetings, chasing down resources that should have already been in the brief, etc.

That said, don’t be comforted by consistently sky-high utilization rates. Those could be a signal that burnout is on the horizon.

6. Remain diligent with operating and overhead costs

Here are a few common expenses to keep an eye on to keep costs in check:

  • Software subscriptions: Cloud-based apps can streamline business operations. However, the monthly fees and regular increases can escalate quickly. Periodically reassess to ensure you still need all the features you’re paying for.
  • Vendors: You can’t cancel some costs entirely, but you may be able to negotiate them down. Suppliers are often amenable to supporting small businesses by offering discounts, extending payment terms, or establishing flexible monthly payment arrangements. It can’t hurt to ask!
  • Marketing: As your business expands, your marketing expenditures typically follow suit. Regularly scrutinize marketing channels and campaigns to gauge the ROI and if it’s worth it for your agency.

7. Focus on smart hiring

Your business is only as strong as its weakest link.

Your human capital, aka your team, is the link that takes you from contract signing to delivering the great work that retains customers and wins word-of-mouth marketing.

When it comes time to attract and sign new hires, think about what you have to offer and how you offer it. Can you provide a flexible work environment? Can you emphasize thoughtful benefits and opportunities for growth?

Prioritize talent that shows an aptitude for learning and aligns with the culture you’re trying to build at your firm. They should be able to learn the job’s intricacies quickly and gain any required skills later.

8. Partner up to expand your services, not expenses

In 2021, most agencies that met their revenue goals and saw growth added new service offerings [PDF]. 

Why? Because, just like you, clients don’t want to have to piece together business solutions from ten different agencies and software providers.

Become a “one-stop shop” to enhance your value proposition to clients by partnering with other agencies or vendors to provide services complementary to your core offerings.

For example, a website design agency may want to partner with a content marketing agency or freelancers to extend its relationship with clients beyond launch day.

How will you invest in your agency’s profitability?

Navigating the complexities of running a profitable agency requires strategic planning, data-driven decision-making, and a proactive approach to client management. Time tracking and project management are pivotal in achieving profitability by providing insights into resource allocation, project timelines, and cost management.

7pace Timetracker for monday.com offers professional, integrable, and scalable timekeeping — and works seamlessly with monday.com’s project management platform.

With the right apps and strategies, agencies can streamline their time-tracking processes, improve project efficiency, make informed decisions, and boost profitability.

When every minute and every dollar counts, you don’t have time to waste. Install 7pace Timetracker for monday.com and start your free trial today.

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