We had a great week onboarding four new members to our team. We went over everything from agency vision, growth plan, to how we measure our experiential marketing.
My key message was this: part of running a successful agency is taking the time to track and analyze key metrics that can help gauge the health of our business.
Some of these are obvious and essential to any business owner, but in the agency world we have a few that can really speak to what we do every day. Paying attention to these metrics keeps our agency humming along.
#1 Income. Clearly you are tracking this metric; otherwise you were already ballin’ when you opened your agency as a “pet project.” The rest of us agency folks need to pay attention to client income trends. Is this number growing or shrinking? Particularly, is it declining while hours spent working are increasing? That’s not a good thing for your agency.
#2 Staff-cost ratio. Payroll is an expenditure you’re keeping a close eye on. Marketing agencies require talented, experienced, creative staff to provide the innovative services clients demand. Yet the percentage of payroll expenditures against gross revenues, for instance, can be telling about agency health. While many businesses aim for payroll to represent only 30% of gross revenue, an agency could easily reach 50%. Here’s why… the "elevator assets" aka people on the payroll are the ones producing the revenue. There really isn’t any other substantial costs like there are in other industries.
#3 Hourly rate. In addition to knowing what hourly rate you are earning from various clients, you can track your labor billing rates against industry norms. Since agency labor rates are based on considerations such as agency reputation, pricing policies, services provided, market forces, value provided, opportunity cost, and negotiated rates, you’ll want to review the competitiveness of your hourly rates.
#4 Overhead rate. Overhead is usually about 30% in the agency world. That’s a pretty big blanket statement considering there are many factors contributing to overhead variability at agencies. These include agency service type, business practices, location, and the period for which you are calculating the rate.
#5 Profit margin. #5 should have been # 1 to me. Profit margin is the metric you want to manage against. An increase in revenue doesn’t matter if you can’t manage costs. This metric highlights your ability to increase revenue while managing costs i.e. grow a healthy, sustainable business. Anyone looking to grow an agency pays attention to their profit margin.
In the agency world, we can get caught up in the creative and developing engaging experiences for our clients. Still, there have to be people on your agency’s operational side regularly reviewing finances and tracking these key metrics which provide important insights into agency health.
Please share any metrics your agency uses to keep everything humming along.