How to Increase Marketing Agency Profit
In continuation of our series on the stages of digital agency growth, we now talk about the most important measure of success for any digital marketing or advertising agency– profitability.
Let's be honest, an agency isn't going to be profitable for the first few years. You're going to be spending all that "profit" into scaling the business, even going as far as having a net negative. It's a tough business model, but having a profitable agency sure does pay off. This blog is here to teach you how you can achieve that dream.
But of course it’s important to understand that achieving good financial health is not something that happens overnight. However, if agencies are to make this their goal, they must employ strategies that support this goal.
If your agency aspires to increase its gross profit margin, then this article might be great for you. To start off, let’s define what exactly is profitability. How is it measured and what strategies can help digital agencies increase theirs?
What is Profitability?
You already know it, right? Profit = Revenue- Costs
To calculate profit, you simply must subtract from its Revenue (total income) the amount it spends as Costs (acquired assets and ongoing expenses). So by definition, profit is a “financial gain” earned by a business and is determined by the simple subtraction of costs from revenue, but is profit synonymous with profitability?
While profit is an absolute number representing the financial gains generated from the agency’s projects and other income-generating activities (after all costs), profitability on the other hand, is the agency’s capacity to generate profits from its operations. It is the digital marketing agency’s capacity to derive profit from its revenue in excess of all costs. It is an ability that is necessary for any business to possess so it can survive and eventually thrive.
Due to the extreme importance of being profitable, agencies must look into ways to strengthen theirs. What are effective strategies to increase profitability? Let’s find out in the next sections!
Strategies to Increase Your Digital Marketing Agency’s Profitability
When it comes to strategies for increasing profitability, a lot of metrics come into mind. From implementing more aggressive marketing and sales strategies to increasing the number of your service offerings, there is a good number of options you can choose from.
1. Increase Revenue
Revenue is best defined as the money that is earned from your regular business operations. It is the amount that often shows up in your income statements. One of the strategies for increasing your agency’s profitability is increasing your revenue, and how exactly can you do this? By doing two things.
Raise your prices
It’s as simple as that. To increase your revenue, you have to raise the prices you’ve set for your services. With the rising inflation, this would seem easy but you’d be surprised by how many business owners would tell you that even after years of running their own business, they still find raising prices fairly difficult.
Even the most assertive business owners have a hard time discussing rates and pricing. To increase your agency’s revenue however, raising prices for selected services might be necessary every now and then. Especially when the process of accomplishing these select services also include spending on utilities and other things that are heavily affected by the rising inflation.
When an agency is compelled to spend more on the accomplishment of a task and its clients can’t subsidize the expenses incurred, then the agency will eventually be facing huge losses, which will also affect its revenue and profitability.
(If you need any help figuring out how to price your services/products, this article on pricing might be able to give you some insights on the matter.)
Get rid of bad clients
We all keep a record of transactions and interactions with clients. Whether in person or via other mediums, our records show us who among our clientele are good and who can be better.
Good clients bring in more revenue, deal with you on the up and up, and treat you and your staff kindly and respectfully. Good clients are not always the accounts that require the easiest tasks but they definitely make the work easy. Bad clients on the other hand, can be demanding, dishonest in their dealings, terrible at paying, and take up so much of your time.
If you are looking to increase your agency’s profit margin by increasing revenue, then it might be a great idea for you to weed out bad clients, and bring in new clients that meet your standards.
Look into your record of transactions and invoices, talk to your staff, and make a decision.
2. Reduce Costs
Another strategy for increasing your agency’s profitability is reducing costs.
Cost is essentially the amount of money that has to be spent in order to get something done, like completing projects for legacy clients. In business, it is the total amount of expenses that are incurred in the production of goods or services by any individual or organization.
In the context of digital agencies, two major kinds of costs come into play.
Variable Cost - Hire Freelancers
First you have your variable costs, this pertains to expenses incurred by an agency in order to deliver on projects signed on with clients. The more clients you sign on with, the more outputs you will have to create and complete.
To keep up with the rising number of signed agreements, digital agency owners hire more people. Hiring more means more overheads.
If the goal is reducing costs, keep in mind your variable cost– HIRE FREELANCERS.
Doing so would allow you to get your projects accomplished without having to worry about the expenses of having a handful of permanent marketers (with full benefits, government expenses, etc.) onboard.
Another expense cutting method would be to experiment on how they get paid. Hourly rates are expensive, and depending on the hire, could be detrimental to their productivity. Decide whether a worker should have compensation based on time (hourly) or effort (output).
Content marketing for example would save you money if on an hourly rate, but would compromise on quality if not based on output. That's because content creation has a certain level of creative behind it.
So, bottom line of this tip, if the job requires more creative and management level thinking, then an hourly rate may not be wise for cost-cutting.
Fixed Costs - Cutting Overheads
The concept of variable cost is of course, related to Fixed cost. While Variable costs’ rise and fall directly affect the amount of an agency’s production, Fixed costs or your overhead costs are the exact opposite.
An agency’s Fixed costs don’t change based on the number of projects they have. Fixed cost can be your office lease, utility bills, and monthly salaries and benefits for hired employees. Some even have a fixed budget for marketing. If you're looking to push for less expenses, consider allocating more funds to email automation or boosting social media posts for example, as opposed to expensive PPC like Facebook ads or Youtube ads.
To reduce costs, look into your overheads. Like the number of regular employees you have. Some agency owners come with an entourage of 25 people, and most of the time, less than half actually perform well, even in the best of situations.
3. Improve Efficiency
As you discern which overhead costs to drop, one important factor to consider is efficiency.
The thing about running a business such as a digital agency is that it requires the owner to be as dynamic as possible. You are required to wear so many different hats, and although you try, you are never really enough. So you bring in more people to help you out.
However, you have to consider the benefits and the level of efficiency they bring by being onboard the ship that you are captain of.
Luckily, there are ways to determine efficiency. Let us tell you how!
Improving efficiency of systems in place
A digital agency can be home to the most creative people, and the most adorable geeks. While their creative juices make the workplace ultra fun, at times, creative people can fall into periods of unproductivity. This is bad news for the big bosses.
To keep your creative teams from falling into bad habits that may cripple your agency, implement rules that will not restrict their creativity, but will keep them from wasting time and resources.
Have strict rules for deadlines, implement social media breaks so the hours allotted for work can be hours that are dedicated solely for thinking and working. Design a work-flow that promotes creativity, accountability, and productivity.
Implement effective tracking and measurement tools
Now this is what’s great about living in this era. There are a ton of time tracking apps that measure a worker's billable hours. They vary on functionalities too. Some tools give you insights on efficiency and productivity of each employee, others allow you to monitor them, and their screens during work hours.
What’s great about these tools is they promote transparency, accountability, and discipline among your employees. Whether they are working in the same office, or remotely.
Resource planning tools can be a great aid in boosting the efficiency and productivity of your team. One good example of a resource planning tool is Smartoo which features resource scheduling, project planning, and business insights – all of which allow you to gain insights on the current capacity of your team.
Clearly, there is no single surefire way to scale. Growing your agency, achieving economic success for your business can’t be done by just one single step and doing it again and again.
Scaling involves employing a set of strategies, such as the ones we’ve listed above. Scaling means increasing your agency’s profitability, and increasing profitability involves increasing your revenue, reducing costs, and improving your agency’s efficiency.
What is the best way to bring in and keep your agency's dollars?
Who can tell for sure? Tips that work for one can be detrimental to the other. What we know for sure, is that implementing all these strategies simultaneously will give you a better shot at scaling.