I get asked this question a lot. What financial numbers should we expect from my inbound marketing agency?
What net profit percentage is correct? What gross profit percentage should we be shooting for? What client load should a team be responsible for? How much should we be investing in our own inbound marketing? How much revenue per employee is right?
There are a lot of financially oriented metrics you need to have your finger on.
The major challenge with these numbers is what’s normal? What’s average for our industry? What are the best agencies doing? What about the worst? Our industry is new. No, digital agencies are not new but inbound agencies are new. If you want to compare your agency to digital agencies, no problem. Here you go. There are excellent resources available to you here.
But if you want to compare your inbound agency to other inbound agencies, that’s going to be more challenging.
Inbound Agencies Carry More Labor
When you decided to go all in on inbound, everything sounded great. Long term relationships with clients, retainers instead of project work, more strategic relationships with bigger clients and better lives for agency owners. What you didn’t know is that inbound agencies have to crank out a lot of work every single month and the more you crank out the better the results. The challenge is you need people to crank out the work.
Even when you realize that inbound marketing requires a set of regular, rinse and repeat functions plus the more traditional creative application of strategy and thinking you end up with labor heavy teams designed to do everything your clients need and this can be expensive.
Typically inbound agencies have higher than average labor costs as a percentage of overall revenue and typically higher than average revenue per employee numbers. Both of these numbers can be reduced with highly efficient processes as long as that doesn’t limit the creativity and out of the box thinking clients need to get results.
Inbound Agencies Don’t Have Media Commissions
Many traditional agencies make significant revenue from purchasing media for clients and getting a commission. Online media, TV media, radio media and print media typically pay between 10% and 20% commission on everything purchased. This produces a very nice revenue stream for an agency that typically requires very few resources to support. A single media buyer could produce $1M in media commissions over the course of a year.
Most inbound agencies don’t purchase media, don’t recommend clients purchase media and don’t have the infrastructure or tools to efficiently purchase media even if their clients wanted to purchase it. This means 100% of the agency revenue comes for services and this too contributes to higher than average labor costs when compared to revenue.
Inbound Agencies Are Still Looking For The Upper End On The Value Chart
Traditionally client companies have assigned a high value to creative work and a relatively low value for day to day tactical execution. Creating a series of ads can garner high dollars. Building a series of landing pages, or sending out two emails, or even building a website are all commoditized services that comes with lower value figures. Inbound agencies are still getting good at explaining the value associated with these tasks and charging enough to do this work well.
The same energy gets applied to creatively creating ad campaigns that gets applied to inbound campaigns. Those landing pages need to be designed strategically for conversion, the copy needs to be written for conversion and with emotional response in mind, the website needs to have a page by page flow that connects visitors and converts them into leads. The value conversation is the same, yet what we charge is still dramatically different.
Inbound Agencies Are Notorious For Over Servicing
Most of the agency owners who have decided that inbound is how they’re going to grow realize that clients want leads. Clients are buying the promise of leads and like responsible agency owners we’re all working hard to get clients leads. In some cases, that requires us to over service in an effort to get leads at or even beyond a client’s initial expectations.
Without the right controls, over servicing can erode all your net profit on a client engagement quickly. In some cases, making it impossible to recover. Now you have an unprofitable client for the rest of the engagement. It's important for you to have the financial controls and reporting to flag these quickly, manage appropriate and make sure your clients are not taking advantage of your team or your commitment to getting them results.
Inbound Agency Financial Metrics
Here are some ways to keep track of your key financial metrics and make sure your business is operating profitably. First, look at gross profit and net profit margins by client, by team and by tactic. You should probably be shooting for around 60% gross profit and 15% to 20% net profit targets on clients, teams and tactics. By tracking these three different ways you’ll quickly identify clients who are below target, teams who are below target and tactics that are below your profit target.
Now you can respond accordingly either firing the client or increasing their fees, training your team to be more efficient or replacing the team and fixing tactical execution or even shuttering unprofitable tactics all together.
When it comes to other metrics like revenue per employee, inbound agencies are usually between $100,000 and $120,000 annual revenue per employee. Highly successful non-inbound agencies can do around $200,000, so you see the difference. One way to increase this is charging more and helping your clients understand the value side of the equation. The more you charge, the more falls to the bottom line and the more you have to invest back in your team so they get clients better results.
The last number you probably want to look at is utilization. This is the percentage of time your team is billable. This is important, but we’re starting to see this as an old-school number. What you really want to track and measure is the work shipped to clients and the impact that work is having on their results. So I could tell you that your team needs to be 70% billable over the course of a month, with the other 30% going to learning or internal meetings.
But really, you want to make sure the team is able to quickly deliver work to clients. Work that impacts the performance of their program. So you need numbers that track that and you need to make sure your programs are performing and simple lead numbers do that very well.
The bottom line is inbound agencies look different, act different and have different numbers than traditional digital agencies. Your best bet is to set goals for your agency that require you to push the business to grow month over month and challenge your team to constantly be improving. If you’re able to produce a 5% net profit, work to make that 7% next month and then 10% the month after that.
This is how you grow your inbound agency so it’s more about you and what you’re doing as opposed to comparing you to other agencies either inbound or non-inbound.
Start Today Tip – You need a scorecard. You need an operations scorecard, a client scorecard and you need a financial scorecard. Pick a handful of key metrics in each of these areas and track them for 30, 60 and 90 days. Once you have a baseline, now you strategically pick and choose the most important numbers and work diligently to move them month over month. Focus on improving your own business instead of comparing your business to other businesses.
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