The Advertising Agency Profitability Field Guide

When Meghan Trainor co-wrote the popular song "All About The Bass," she didn't expect to make a dime. The 2014 song about loving your body the way it is went Diamond and launched the singer and songwriter to international fame.

As an advertiser, you know profitability sometimes has more to do with marketability than anything else. Too often, agencies let business details slide as they focus on the profitability of clients over their own agency.

When it comes to advertising agencies it's not about that bass — it's all about those margins.

Profit margins, that is.

(Yes, we went there.)

Before we explore improving your profit margin, we need to consider if your current profit margins are accurate.

What's Your Advertising Agency’s True Profitability?

The average marketing agency earns a net profit margin between 6 and 10 percent — with digital agencies reporting even higher margins around 20 percent. Corporate advertising agencies, in some cases, report margins as high as 40 percent.

There is a ton of room for growth in the marketing field. If your agency is in the lower range — between 6 and 15 percent — there is a good chance a few strategic changes will improve your margins considerably.

What's Your Advertising Agency’s True Profitability?

 

But, before we talk about how to improve your agency's profitably, let's talk about how you calculate that profitability.

The standard profit margin calculator looks like this:

Sales - Expenses / Revenue

If you sell burgers, that is pretty easy to calculate, right? Total sales minus how much you spent on food, rent, lights, and labor divided by revenue.

For advertising agencies, things get more complex. You've got to consider unbillable hours, employee turnover, and the variable costs of buying ads. A few other factors to keep in mind when calculating your advertising agencies' profitability include:

  • Variable cost per project: For example, a recurring client costs you less in advertising or lead gen versus a one-time project.
  • Variable revenue per project: Your profit margins for a PPC campaign might be higher than a print campaign, for example.
  • Revenue per employee: Do you know which employees make you the most money? This can help you determine who may need more training or just isn't a good fit.
  • Profit per client: The old 80/20 principle says 80 percent of your revenue will come from just 20 percent of your clients — do you know which clients make up your 20 percent?
  • Billable vs non-billable: Are you accurately tracking all billable hours and accounting for non-billable hours — and how is that impacting your profitability?

Ideally, you would build your own profitability equation to factor in things like project cost, whether work is one time or recurring, and the salary of the person who worked on a specific project.

If building your own equation feels a bit overwhelming, try this detailed agency profitability calculator by Lemonstand, which has spots for additional overhead costs and specific types of clients, such as PPC, one-time projects, and recurring clients.

8 Strategies to Increase Advertising Agency Profitability

You've got a handle on how to measure profitability; now how do you improve it? The easiest solution is to increase sales, but more sales can't help you reduce bloated processes and streamline workflows.

Here are eight strategies to increase your agency's overall profits — without focusing on selling more.

Track Your Time — Yes, All of It

Non-billable hours can eat through your profit margin if you aren't paying attention.

The best way to get a handle on billable hours versus non-billable hours is to carefully track your time — literally every moment — for at least a few weeks. While it might not be sustainable to track every second for every employee forever, a few weeks of detailed tracking will give you insight into where you are wasting time.

For example, in useless update meetings or unproductive brainstorming sessions. Tracking can also reset productivity and help folks stay on task.

Ditch the Update Meetings

You want to make sure your projects stay on track, but weekly or even bi-weekly update meetings waste hundreds of dollars a week — and that eats into your profitability.

Here's a look at how much one 45-minute status meeting costs the average company:

Ditch the Update Meetings

 

All for a meeting that could have been carried out over email or a chat program like Slack.

If you want to improve profitably, it's time to put an end to the status update meeting. Meetings should always have a clearly defined agenda and goal. Consider using a meeting management tool to make planning those meetings even easier, so your staff can focus on clients rather than getting visitors signed in at reception or chasing down a room with a smartboard for a presentation.

Get a Handle On Overhead Costs

Overhead costs might seem fixed, but they don't' have to be. Lowering costs like rent, utilities, and software can improve your bottom line fast. Start by considering whether you are using your office space efficiently and look for ways to reduce those costs if possible.

If not, consider renting out an under-utilized conference room or desk. Or, sell unused electronic equipment like printers and old computers. Are there subscription services you aren't utilizing to their potential? Just a few tweaks to overhead costs can drastically improve your profit margin.

Calculate Your Inefficiencies

Instead of worrying about making more money, look for ways to reduce resource waste. What manual tasks are slowing your company down? When possible, assign a dollar amount to these inefficiencies so you can calculate exactly how much they cost your company each quarter.

Then, look for ways to improve those inefficiencies using tools, such as AI, to streamline manual processes such as managing some aspects of ad spend, recording expenses, or accounts payable.

Reduce Scope Creep

It happens to all of us — one quick client question turns into hours of hypothetical talk. Or, a small favor turns into an hour of work that wasn't included in the original project. Even if you bill for the hours, it might not account for the extra research and resources.

Say it with me: "That is outside of the original scope of our project, but we'd be happy to take that on for $X." Now keep that phrase handy whenever clients start asking for work that is outside your original contract.

Use Templates to Streamline Workflows

If you spend time doing the same task over and over again, create a template that you can copy and paste.

Even if you are only spending five minutes creating a new spreadsheet, that is five minutes you could have spent on more strategic work — and if you create a new spreadsheet every week that is four and a half hours a year you've wasted.

Now multiply that times the number of employees at your agency, and you can see how quickly those five minutes can cost big money.

Nurture Repeat Customers

Keeping customers will always be cheaper than finding new customers. Invest time and resources in nurturing repeat customers so they come back to you over and over again. Consider offering regular feedback, resources, and holiday gifts to let those customers know they matter to you. Keeping communication open and transparent can instill trust in your agency — and increase the lifetime value of each client.

Audit Your Sales Pipeline

The most straightforward path to increasing your advertising agency's profitability is to get more customers. Most advertisers focus on this path, which is why we looked at a few less-obvious strategies first.

To be honest, all the sales in the world won't help improve profitability if you spend all that revenue on an office that is far too large for your current business size.

If you do want to increase sales, however, start with a sales pipeline audit. How do customers find you? What process do they follow? Are the landing pages easy to navigate? Do the forms work? Are you following up with leads quickly or leaving them to go stale? An automated follow-up process could improve your sales rate with little to no extra work.

TL;DR

The best way to increase profitability isn't to make more sales — it's to save time and money by ditching inefficiencies and using AI-powered solutions so you spend less time taking care of manual tasks like visitor management and more time on billable tasks.

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