Agency profitability: The do’s and don’ts of profitable agency operations
With threats of a recession looming, pristine margins and maximum agency profitability are not only important to the growth of today's digital agency, they’ll be critical for survival. But as an agency owner, if you've ever been left scratching your head, guessing and stressing at what decision you should make to move the needle, you’re not alone.
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In this article, we cover some of the do’s and don’t when it comes to success and profit generation for your business, in an industry where a traditional P&L won’t always suffice. Read on to learn more about the sure-fire strategies to profitability, as well as the mistakes to avoid when it comes to operating sustainably.
Do: Employ data-driven decision-making at your agency
According to renowned agency profitability expert and Parakeeto Co-founder and CEO Marcel Petitpas, most agencies achieve less than 50 percent of their true profit potential. If you feel like you don’t have a strong handle on your data, you could make assumptions and potentially make a choice that’s detrimental to your agency and your team.
It’s important to take a role in understanding the factors that lead to your agency's total profits. Petitpas suggests looking at four primary metrics all agency owners should have a strong understanding of:
- Agency gross income (AGI): The revenue that agencies bring in from clients
- Delivery costs: The cost of team hours and resources to complete client work
- Delivery margin: If you subtract delivery costs from AGI, you are left with “delivery margin”
- Overhead: Costs of operating the business like your building lease, software subscriptions, supplies, accounting, hardware, and more.
Learn more about calculating the key metrics for agency operations in: How to think more profitably as an agency.
Don’t: Underestimate the impact of your best-fit customer on agency profitability
Performing foundational work to determine who your ideal clients are can not only shape the price point and service level you should be setting, but it can have a tremendous impact on your bottom line as well.
For example, if your team has time to spare, it might make more sense to take on smaller-budget projects. In this case, it’s better to make a little money than none. You can afford to be a bit more lenient on price rather than let those hours spoil.
On the other hand, if your team is already working at full capacity, you may be in a position to let go of or turn down clients who may not be able to afford your services without discounting.
Petitpas says that too many agencies use their instinct to make these types of decisions when they should be looking at the numbers first.
Do: Ask the right questions when it comes to your agency’s revenue
There’s a whole host of questions you should be asking yourself as an agency owner to achieve peak profitability.
- For what positions would we hire next and what’s the timeframe? Does the candidate we have in mind have the skills needed for the role?
- What if this deal closes?
- What if this deal falls through?
- What if we get started on this contract later than we had originally scoped?
- Are we making money on clients and projects, and if so, how much money are we making?
- Which projects and clients are the most profitable for us?
- Which projects and clients are the least profitable for us?
- Are we estimating our projects accurately?
- Did this project use as much of our time and resources as we originally scoped?
If you’re not already asking yourself some of these questions, you may be leaving money on the table.
Don’t: Get sloppy with time and cost tracking
Using detailed and accurate time tracking is one of the fastest ways you can improve project estimation and your overall agency profitability. It’s important for your team to get on the same page with how they are tracking time. The naming conventions you are using for different tasks are also important, and it’s critical you reach alignment on the importance of logging work in your project management software.
By getting accurate data, you can have better, more informed discussions in your project retros—meetings that recap the wins, losses, and opportunities of every major project your agency works on.
The goals for these meetings are to compare estimates and actuals for all projects. You should discuss where things are and are not going to plan and why. Draw out ideas from the team about opportunities for improving a process or scoping the work and translate those decisions into action items and engage your team in implementing them.
You don’t have to overcomplicate the process. By starting simple and tracking by time, project, and role, you’ll be off to the right start. It will help your team ease into compliance if time tracking has been sloppy in the past.
Read more on the fundamentals of project estimation in: Project Estimation, Done the Right Way.
Adjust operations for agency profitability
By taking the time to understand the metrics your agency needs to be tracking, you can identify areas of improvement and opportunity. If you can dive into the actions, inefficiencies, and outcomes that influence the profitability of your agency, you can adjust your strategy, processes, and mindset to scale.
Vendasta recently partnered with Parakeeto to put together an in-depth playbook for agency profitability. If you’d like to learn more about Petitpas’ prescription for agencies amid economic uncertainty, you can download your free copy by clicking the banner below.