I get asked a lot about inbound agency profitability. What’s our net profit margin? What’s a good goal to set? How to improve net profit to get to that goal? All wonderfully smart questions for inbound agency owners to be asking.
More importantly, what are the three or four major initiatives you want to consider working on to improve net profit, no matter what the numbers?
Before we get started, it’s worth discussing how important inbound marketing agency profits are in the larger scheme of things. If you’re getting compensated at a reasonable and regular rate, meaning you’re taking CEO level compensation out of the company every single month and you can still afford everything you want to do within the agency including hiring, training, recognition, rewards, software, you get the idea, then company profitability is all about strategy.
In other words, if you can afford to pay for everything you need at the agency, whether you make additional profit or not, is totally your call. For tax reasons, it might make the most sense to break even, making no profit. But for the rest of this article, we’re going to assume that making as much extra money as possible is your goal.
Why Would I Want To Make 10% To 20% Profit?
Just like the reasons for not making a profit, there are reasons for making your inbound marketing agency profitability, priority one. The best reasons is to stock pile cash for a rainy day. Basic business rules say you should have between three months and six months of total monthly expenses in the bank at any time.
This helps you weather a slow sales month or two, make a new hire a month early or get through losing a big client. All situations you’ll eventually face if you run your agency long enough. The extra cash on hand makes this much, much easier.
If you’re making 10% to 20% a month and you don’t immediately need this money, over time it will collect into a nice nest egg to help in the event of an emergency or even a simple speed bump.
Another great, long-term reason for wanting to sustain regular profitability is wanting to sell the business at some point in the future. When we value potential acquisition candidate agencies, we look back at the last three years of profitability and create an average that is used in the multiplier applied when calculating business valuation.
Selling the business doesn’t necessary mean to an outside interest. It might mean selling it or a portion of it to your employees or bringing in a partner. Either way the more profit and the longer that profit is sustained the higher the value of the business and the higher the payments.
Let’s dig into the different levels of profitability and what might be required for an inbound agency to deliver those levels. Keep in mind that, in my experience, an inbound agency is going to be less profitable than a traditional ad agency simply because the revenue streams are different. No media commissions means all your revenue is going to be labor generated. I applied this perspective for the levels outlined in the article.
Why 1% to 5% is OK
A lot of agencies, inbound agencies specifically, struggle to make any money. The result of this is inconsistent compensation for the owner or owners. You take money when its available and don’t take money when it’s not. At a minimum, this is something you want to eliminate. As the CEO or whatever your title, your agency MUST produce enough extra money for you to be compensated fairly month in and month out.
Once you get this working consistently, then you start looking to put 1% to 5% of overall revenue into the profit category. There are some very straight forward ways to move from zero profit to a couple of percentage points. Your best option is to raise prices 5% across the board. Keep expenses from increasing and increase prices—mission accomplished. A modest price increase like this will be barely noticed by your current clients and no new client should pass on working with you because of an increase of this level.
Why 6% to 10% is GOOD
Each of these levels is going to require you apply several improvement techniques, so I’ll build these in the same way you would apply them. After you increase prices, to get up to the next level, you should look at new and highly profitable revenue streams.
One excellent example of this is software sales commissions. HubSpot pays a commission on all new HubSpot clients you help them sign. Look for other software relationships who also pay you a commission for tools you help them sell.
CMOs are in control of almost as much technology budget as the CIO these days. The marketing and sales departments are purchasing a wide variety of software tools and they’re looking for agencies to help them select, install, configure, manage and even optimize the tools over time. This gives you a chance to add both commission revenue and additional opportunities for services revenue.
Increase pricing and add new revenue that doesn’t require any associated costs and you’re in the 10% range.
Why 11% to 15% is EXCELLENT
To climb up into this level I’m going to suggest adding another two-part improvement approach. The first is aggressively looking for and expeditiously addressing efficiencies in the agency. An example of this might be around content creation. At our shop, we regularly curate original blog article and social media post copy from original long form content. This means less back and forth with clients and a lot less effort on our part. We still charge a blended rate for content but this costs us a lot less.
If you can find a handful of areas like this to improve efficiency without having to reduce what you charge the clients, you ‘ll push up your net profit numbers consistently. Make sure you target areas that occupy a big portion of operating costs, content and website development are two historically great areas to start looking for gains.
The other area that might surprise you is new client selection. Yes, selection. If you pick the right clients, you’ll make higher profits. Clients who respect you and your agency, will be more profitable. They’ll take less energy, they’ll move more quickly, they’ll get better results and they’ll be happier. The better you are at picking the right clients, the higher your profit margins. Bundling efficiencies with more selective client selection help you get to the next level of profit.
Why Anything Over 15% is BRILLIANT
Inbound agencies hovering around 15% should be happy and proud. But if you want to get up and over, pushing towards 20% profit margin is going to requires some heavy lifting, in my opinion. This is where a serious delivery redo might be required and why we decided to move to Agile and Scrum in 2016. The improvement to our bottom line was dramatic. Not quite the marketing promise of twice the work for half the effort, but we did see a reduction in operating expenses of about a third, while keeping the revenue supported consistent.
An effort like this might take a year of work to resolve any challenges, teach the team, change behavior and then let the numbers fall to the bottom line.
Applying these techniques is going to take time and the impact on your business is going to take time too. Set realistic profit margin improvement goals. Perhaps in March your goal is to 5%, then in April 7%, May 9% and by July 10% is your goal. Make sure you can sustain the new profit margins. You don’t want anything to be a one hit wonder. After you’ve consistently delivered at the new level, now look to push through and get to one of the other rungs on the ladder.
Start Today Tip – If you want your agency to be more profitable, start with the goals. Where do want to be and by when? Set reasonable and realistic goals. Building a company that puts 15% to 20% to the bottom line, month over month is a major accomplishment. It’s hard work, which is why so many agencies don’t perform at that level. The harder the work, the more impressive the accomplishment. Pick from the list above, line them up and knock them down one at a time. Want to get started this week, raise your prices. It’s the fastest and least complicated way to higher profitability.
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