If there's one thing experience has taught me, it's that there's more to growing a healthy, valuable agency than revenue, employees and customers alone. What really matters is profitability: the ability to grow your agency in a smart, sustainable way - and make money in the process.
Improving profitability is easier said than done. So, to help you on your own journey towards healthy growth and sustainable profitability, I reached out to the smartest minds in the digital agency ecosystem, and asked them a deceptively simple question:
What is your #1 tip for improving agency profitability?
James Costa, Founder & CEO, Phuse
"The biggest tip I share with other agency owners about this is delegating what you’re not good at.
For me it was delegating finances (invoicing, cash flow, dealing with accountants) and project management — having people who not only enjoy those tasks but also are also good at them meant that I could focus on what I’m good at (strategy) so the company can grow.
Too often agency owners think they can do everything (primarily because they have done everything), but don’t realize how much more productive and effective they can be by delegating. It takes confidence and trust in people, but has helped to improve every number in our business, including profitability."
Karl Sakas, Sakas & Company
"To increase agency profitability, you must increase your agency's Billable Ratio — that is, the percentage of time that your team spends on client-billed work.
I recommend a target of 60%+ agency-wide, but individual employees' targets will range from 0% (for sales and operations) to 50% (for project managers and account managers) to 80% or more (for Subject Matter Experts like designers, developers, and copywriters).
Even if you don't bill hourly, every agency's "inventory" is ultimately its employees' and contractors' time. When I see agencies with low or negative profit margins, it's almost surely a sign that Billable Ratio is closer to 30-40% than 60%. Fixing this takes time and effort, but isolating the problem is the first step."
Peter Caputa, VP Sales, HubSpot
"If there's one thing I taught our agency network to do at HubSpot since we started our partner program in 2009, it's to define and follow a sales process.
Too many agencies wait for buyers to show up, let buyers define what they should buy and are eager to provide quotes prematurely.
On the flip side, our fastest growing and most profitable agency partners define their ideal client, standardize their service offerings, walk away when a prospective client isn't a fit, and only write contracts (not proposals) once the prospect has agreed to move forward. Agencies who don't do this give us all a bad name.
To attempt to fix this problem for everyone, we made this sales process training available to all for free. Now, there really is no good reason to not define a sales process and follow it."
David C. Baker, ReCourses, Inc.
David is an author, speaker, and advisor to entrepreneurial creatives, helping them build smarter businesses.
"Be positioned with such deep expertise that your insight warrants a premium because you are not easily interchangeable with another firm, and then use objective value pricing not tied to hours and not designed to get the work but to enable you to dive into a client’s situation sufficiently to actually make a difference and keep them begging to pay you well again."
Max Traylor, B2B Marketing Advisor & Inbound Agency Coach
"My #1 tip: take the intellectual property you have - the process and tactics you currently use to deliver marketing services where you make 15-20% on a good day - take that intellectual property and turn it into a "knowledge product" - a strategy template where you make 75% margins.
Scale your strategy product, and charge a premium to those that need your help executing that strategy. Knowledge is the most profitable and valuable thing you can sell, your clients should have to beg for you to provide services."
Jason Swenk, Agency Coach & Consultant
"The #1 thing agency owners can do is to charge what they are worth. I hear constantly that agency owners are too busy, and that is the tell-tale sign of not charging enough.
You first need to look at the past value you deliver to your clients, as well as the prospect's expectation for solving the problem they have and position your pricing accordingly.
Charge FREAKING MORE than you are now!"
How to Make Your Digital Agency Profitable
Dave Paolicelli, Director, Definitive Logic
"Transform what you're selling and how you sell it!
Aside from all the usual process efficiency, cash flow improvement, and cost reduction tactics, another route to better agency profitability is to adjust both your offerings and your pricing model to allow much higher margins. This is especially the case when trying to tighten an already very tight belt that might have a negative effect on your people.
For example, most agencies deliver at least some services - or aspects of a service - that have become routine, yet they still bill them out at an hourly rate. This "time and materials" work can be wildly open-ended, putting most of the risk on the customer. They sometimes aren't certain what they're getting or what they'll pay. A shift from capabilities-based services to a more outcome-based services model can reduce your customer's risk and make it easier for them to buy, giving your agency a path to greater profitability through higher margins.
The key here is to identify degrees of predictability in your engagements and package offerings around common needs with common work products using a prescriptive approach. Then, you set a fixed price over a fixed duration to deliver that value at higher margins. To be clear, this doesn't work for all services and may not apply to your entire service-mix, but almost every agency has an opportunity to do some of this.
That's an abbreviated version of what can be a bit more complex, but the results can transform an agency's entire business."
Phil Climie, Account Executive, Unbounce
"Take the time to examine your most successful (and least successful) accounts.
Doing this will enable you to identify which work is generating the greatest return for your agency.
Targeting and focusing on accounts with needs that match your strengths will result in longer lasting, healthier and more profitable relationships."
CEO/Founder, Belighted | CEO/Founder, Scale
"A few years ago, we grew our agency too quickly. We took on more projects, and more employees - but when the extra work was finished, we realised we didn't have enough to keep everyone busy.
With hindsight, it's clear that we didn't do a good enough job of tracking our agency's key resources. A few years later and we're generating the same revenue as we were then, but crucially, we've done it with a smaller (and more profitable) team.
So my hard-earned tip for improving agency profitability is a simple one: make sure you pro-actively manage your resources, and don't neglect your agency's people, projects or profitability.
- People: In agencies, people are both your biggest cost, and your biggest source of revenue. They're your most valuable assets, so to improve profitability, help them to be as productive as possible. That means hiring the right people at the right time, putting their skills to good use, sharing their knowledge with the entire agency (even building a knowledgebase to re-use processes and ideas from past projects), and helping them to develop new skills.
- Projects: Not all customers are created equal, and it's important to try to identify your best customers, in terms of profitability, enjoyment, and how well they align with your vision for the agency. Nurture relationships with the best customers and let go of the others.
- Profitability: It's easy to get fixated on revenue, but (as we discovered) profitability is more important. Try and monitor as many KPIs as possible: utilisation rate, profitability per customer/employee/project. The more data you have, the easier it to spot trends, and identify the type of work that's most profitable for your agency.
If that sounds complicated, don't worry: we created a simple, streamlined tool to help you manage your agency's resources and improve your profitability."
Matthew Barby, Global Head of Growth & SEO, HubSpot
"When it comes to building profitability within an agency, organisational design is an incredibly important part of the puzzle that you have to nail. Over the years that I spent in the agency world I've tried all kinds of setups, but without doubt the biggest drain on profitability is rushing in and hiring people where you think you need them, but actually the answer is more about doing more with what you have.
Agencies, no matter how good they are, have a relatively short life-span with clients. Most campaigns are seen as a success if they last as long as a year. With this in mind, it's difficult to make big resourcing calls with such uncertainty in cash flow for the immediate to mid-term future. This is where utilising freelance specialists on a project-by-project basis can provide a leaner structure to operate around, whilst minimising financial risk for the company.
Content production is a particularly good example of this. At one point, I had no in-house writers in the whole agency but we would produce a TON of content every month. Instead of hiring a bunch of writers, we brought in content strategists that could build the overarching strategy and then work with our pool of topic specialist freelance content creators to roll out a campaign. Not only was it fiscally beneficial to us but we were able to have specialist input around a sector/topic instead of having to spend a ton of billable hours getting up to speed internally."
Peter Levitan, CEO, Peter Levitan & Co.
"While there are many things that can reduce agency profitability, I have always concentrated on three areas.
- Manage your costs. This may sound like a simple concept. But, you would be surprised how many agencies do not do this. Need an example, why did you buy that nice couch for your reception area? Or worse, the ping pong table. By the way, I made this mistake. The worst part was listening to my staff NOT work.
- Only pitch accounts that meet your agency’s new business goals and client criteria.
- Do not overwork jobs. Yes, do a great job. But, time management is critical. Moving pixels around on early comps will kill your bottom line."
Mark Kelly, Digital Marketing and Agency Growth Consultant
"If I had one specific tip for agency owners / senior teams it would be: measure everything (or ‘actively listen’ to your organisation and the clients it serves).
You can do that internally with some great job / time and resource management tools. And externally via informal client conversations or more formally with client satisfaction surveys. Spot where you over service / under charge for your time and expertise. And do that for work in progress (so you can re-quote if a project scope changes mid flow). And those client conversations will alert you if you’re under servicing and have a potential wobbly client on your hands. Remember the adage about the cost of recruiting rather than retaining a client etc.
If you don’t measure you’ll never have the insight to grow profits."