Drive Growth With Agency Profitability KPIs

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QUICK SUMMARY:

Agency profitability KPIs guide agencies to new levels of success by breaking down big picture revenue goals into smaller indicators of financial progress. Most commonly organized into operational, client satisfaction, service-based, and financial KPIs, they act as a foundation for the creation of strategies that help agencies scale. In this article, we’re sharing the role of KPIs in an agency setting, and how to know which KPIs to focus on in order to grow the business.

There’s no denying that you love what you do: You’ve got a great team, you’re working on interesting projects, and the dynamism of the marketing industry never fails to garner your excitement.

You also want to ensure you build a sustainable and profitable business.

Sure, you probably have plenty of other goals and objectives based around items like streamlining your sales process and lengthening the average client lifespan. But when you get down to it, all of those other goals boil back down to the same thing: making your agency profitable. 

Agency profitability Key Performance Indicators, or agency profitability KPIs, are your secret weapon to track business development and customer satisfaction behind-the-scenes so you can make the changes and improvements you need to make. 

In this article, we’re sharing why agency profitability KPIs matter, common agency KPIs, and how to implement them at your agency. Let’s get into it!

Understanding Marketing Agency Profitability

The first step to increasing profitability at your agency is to understand its influencing factors. Marcel Petitpas, co-founder and CEO at Parakeeto thinks of marketing agency profitability like this:

  • Agencies charge money for their services—this is the revenue you make.

  • Your Pass Through Expenses, such as outsourced work like printing budgets or ad purchases, are subtracted.

  • The result is your Agency Gross Income (AGI), or your agency’s “take-home” pay (adjusted gross income).

You also want to know your Delivery Expenses (the expenses you incur when providing your primary services) and your Delivery Profit (the money left over after deducting delivery costs from your AGI).

Keeping an eye on all these numbers will assist your team in developing the strategies that will help you optimize and improve each one.

Know your numbers! Understand deeply about the cost of doing business and delivering the work at your desired level. Once we understood our processes, workflows, and staffing needs for every project and initiative, we were able to price our services with profitability.

Rodrigo Campos, Founder & CEO, Splurge

Agency Gross Income (AGI) and Delivery Margin

According to Petitpas, your Delivery Margin is the metric that’s most important to know when it comes to measuring agency profitability. Your Delivery Margin is the ratio of Delivery Cost to Agency Gross Income (AGI) that your business earns in a given time period or across a given section of work. Here’s how to find it:

  • Formula: Delivery Margin = (AGI - Delivery Cost) / AGI

How can you tell if your Delivery Margin is any good? It depends on the scope. Agency-wide, it’s hard to be profitable if your Delivery Margin is under 50%. A healthy margin is between 50-60%.

Per-project or per-client, a healthy margin will look more like 60-70%.

Wherever you’re at, if you can improve your Delivery Margin, you’ll increase your profitability. 

Three Levers To Improve Delivery Margin

Petitpas highlights three primary metrics you should focus on if you’re looking to improve Delivery Margin.

  • Average Billable Rate (ABR): ABR defines how efficiently your team earns your revenue. Boost your ABR by raising the price for the same product or service without increasing its scope, or by reducing the amount of time needed to produce the same product or service without lowering the price. 

    • Formula: ABR = AGI / Delivery Hours

  • Average Cost Per Hour (ACPH): Your ACPH explains how you’re going to do the same work at the same prices while spending less money. The idea is to create better processes and SOPs to make better use of junior talent. A healthy ACPH should be around ⅓ of your ABR.

    • Formula: ACPH = Total Payroll Cost & Benefits / Total Hours

  • Utilization: Utilization calculates the average capacity that is used for revenue-generating activities over a certain time period or within a specific section of your team. Increase your agency utilization rate by selling more work to keep the team busier, or decrease your team’s capacity to better align with available delivery hours. 50-60% is a good utilization rate

    • Formula: Utilization = Delivery Hours / Capacity

Importance of KPIs For Agency Profitability

You might be wondering: How do agency KPIs play a role in tracking all these numbers? Let’s take a closer look.

Understanding KPIs vs. Metrics

Agency KPIs and metrics are sometimes used interchangeably. But these are actually two separate terms with different meanings and different benefits:

  • Metrics are raw data points. They measure specific activities or processes, like the number of website visitors, social media followers, or conversions you obtain from a blog post. While metrics provide helpful information, they can be overwhelming if they aren’t contextualized.

KPIs, or key performance indicators, are selected metrics that align with your agency’s key business objectives (for example, conversion rate). KPIs provide insights into how well your agency is performing against your goals. They offer actionable data to guide decision-making.

Metrics vs KPIs Graphic

The Role of KPIs in Agency Profitability

KPIs play a valuable part in helping you keep your agency a more profitable business. Two of the biggest areas where key performance indicators boost an agency’s profitability are in helping to track your progress, and helping you make smart, informed decisions.

  • Tracking Progress: KPIs allow you to see your agency’s performance over time in order to monitor trends, identify areas for improvement, and celebrate success. For example, use KPIs to monitor client acquisition cost and customer lifetime value (CLV), ensuring that marketing efforts are cost-effective and generate a high ROI. 

  • Making Informed Decisions. Use data obtained from KPIs to make strategic adjustments to pricing, resource allocation, customer acquisition cost, service offerings, and other elements of your business. Tracking the average billable rate, for example, helps marketing agencies identify underperforming projects and adjust pricing strategies (such as acquisition costs) accordingly. 

Continuously monitor key performance indicators (KPIs) and adapt your strategies based on data insights. Stay agile and responsive to market changes, client feedback, and industry trends to optimize Time to Revenue.

Omar Muñoz, Co-Founder, REInvestor SEO

Identifying the Right KPIs for Your Agency

When it comes to choosing KPIs, there isn’t a one-size-fits-all approach. The most effective KPIs will be the ones that are directly aligned with your agency’s specific goals and challenges. 

For example, here are a few KPIs you might consider for your creative agency based on where you are right now:

  • State of Growth. A startup marketing agency might prioritize KPIs related to new client acquisition and brand awareness. A mature agency, however, will likely focus on client retention rate and profitability metrics.

  • Service Offerings. An agency looking to expand their service offering might track KPIs pertaining to the number of services they offer, or the rate at which new services are adopted. 

  • Internal Challenges. If your agency struggles with project overrun, you may want to focus on measuring KPIs related to time tracking, project management, and resource allocation.

By ensuring that decisions, roadmaps, and KPIs are set collaboratively, we foster a sense of collective commitment and accountability. This approach has not only improved our client retention by making everyone feel they are in the same boat, but it has also enhanced the overall effectiveness of our client engagements.

Sergio Bisio, CEO, SB8 Group

Common KPIs for Agency Profitability

There are a handful of basic KPIs that it’s good for every successful agency to track, regardless of your current size or status. These include financial, client-focused, and operational KPIs that, when taken together, will help you get a bird’s-eye view of what’s happening at your agency and the steps you need to take next.

Setting goals for managing resources involves establishing clear objectives aligned with the overall strategic direction of the organization. This may include goals related to optimizing resource utilization, improving efficiency, reducing costs, enhancing team productivity, and supporting the successful execution of projects and initiatives. 

These goals should be specific, measurable, achievable, relevant, and time-bound (SMART). Once goals are established, regular monitoring and evaluation are essential to determine whether they are being met. This involves tracking key performance indicators (KPIs) related to resource utilization, project timelines, budget adherence, team productivity, and other relevant metrics. By regularly reviewing progress against established goals and KPIs, adjustments can be made as needed to ensure that resource management efforts remain on track and aligned with organizational objectives.

Gia Ching, Managing Director, GCC Consulting, LLC 

Financial KPIs

  • Net Profit: Your agency’s bottom line, or the total revenue from client projects and services minus all agency expenses.

    • Formula: Total revenue (from client services) - total expenses (salaries, software, rent, etc.)

  • Gross Profit Margin: The percentage of revenue remaining after deducting direct costs associated with delivering client services.

    • Formula: ((Revenue from client services - cost of delivering client services) / revenue from client services) x 100

  • Days Sales Outstanding (DSO): The average time it takes to collect payments from clients, indicating cash flow efficiency.

    • Formula: (Average accounts receivable / total credit sales) x number of days in period

  • Monthly Recurring Revenue (MRR): MRR is a KPI most commonly tracked by SaaS businesses, but some marketing agencies are now shifting from project-based to subscription-based pricing models. For these agencies, tracking predictable income from ongoing client retainers and subscriptions will be beneficial. 

    • Formula: Calculate the sum of all recurring monthly retainer and subscription revenue.

Operational KPIs

  • Leads to Opportunities: The percentage of qualified leads converting into sales opportunities, reflecting lead generation and qualification effectiveness.

    • Formula: (Number of sales opportunities / number of qualified leads) x 100

  • Operating Cash Flow: Cash generated from the agency’s core operations, which are crucial for managing day-to-day expenses and investments.

    • Formula: Operating income + depreciation - taxes = increase in working capital

    • Note: Examples of changes in working capital include increases or decreases in inventory, accounts receivable, and accounts payable. These directly impact the cash flow generated from operations.

  • Estimated vs. Actual Project Time / Estimated vs. Actual Project Cost: Measures project management efficiency by comparing initial estimates to actual project time and costs.

    • Formula: (Actual project time or cost / estimated project time or cost) x 100

Client Satisfaction and Loyalty KPIs

  • Client Retention Rate: The percentage of clients who continue working with the agency over a specific period, reflecting client satisfaction and value provided.

    • Formula: ((Number of clients at end of period - Number of new clients acquired during period) / Number of clients at beginning of period) x 100

  • Client Satisfaction Score (CSAT): A measure of client happiness with the agency’s services and overall experience.

    • Formula: (Sum of all client satisfaction ratings) / (number of client responses)

  • Net Promoter Score (NPS): A measure of client loyalty and their willingness to recommend your agency to others.

    • Formula: (% of promoters, or clients who would highly recommend your agency) - (% of detractors, or clients who would not recommend your agency)

  • Customer Lifetime Value (CLTV): Customer lifetime value is the total revenue generated from a single client during their entire relationship with your agency.

    • Formula: (Average value of client projects) x (average number of projects per client per year) x (average client relationship length in years)

Service Offering KPIs

  • Number of Services Offered: This might include tracking the total number of distinct services the agency offers (e.g., SEO, PPC, content marketing, social media management), or measuring how many new services have been added over a specific period.

  • Client Adoption Rate of New Services: Tracking adoption rate might mean tracking the percentage of existing clients who adopt newly introduced services, or measuring the revenue generated from new services compared to overall revenue.

  • Service Utilization: Service utilization is tracked by determining the usage rate of each service offered, indicating which services are most and least popular.

  • Cross-Selling Rate: This KPI is valuable for agencies looking to increase upsell or cross-sell opportunities. Typically it’s tracked by measuring growth in the number of clients utilizing more than one service.

  • Service-Specific Revenue Growth: The easiest way to track this KPI is to monitor revenue growth for each individual service, and then compare the numbers year over year.

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Implementing KPIs at Your Agency

Ready to get started? Here’s how to help your team become comfortable working with agency KPIs, and ultimately making your business more profitable. 

Steps To Set up KPI Tracking

Once you’ve identified the priority KPIs your agency wants to track, identify the sources from which you’ll collect data for each KPI. This might involve your:

In many cases, gaining a truly accurate view of your KPI performance will require combining, comparing, and contrasting information from several sources. Luckily, AgencyAnalytics integrates with more than 80 marketing platform integrations (including CRM solutions like HubSpot, HighLevel, and Salesforce), making it easy to see big picture results without wasting precious time manually pulling data. 

A collection of client communication integrations for AgencyAnalytics

Track agency KPIs by seamlessly integrating data from more than 80 marketing platforms for a truly holistic big picture perspective on agency profitability KPIs. Try AgencyAnalytics free for 14 days!

The easiest way to track agency KPIs is to create custom white labeled dashboards that automatically populate the data in real-time. With AgencyAnalytics, agencies utilize the Smart Dashboards feature to create dashboards in 11 seconds flat, and add custom permissions to guide who has access to what information.

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How To Communicate KPIs to the Team

Next, get the entire agency on board by openly sharing the selected KPIs with your team. Explain why each one is important and how it connects to your agency’s overall goals. Make sure you’re also clear about how each employee’s individual work contributes to the agency’s broader performance on these metrics.

That said, it’s not enough to simply share the KPIs once–as an agency owner, it’s important to regularly share progress updates towards your targets. Use visual aids, such as charts and graphs, to present the data in a way that’s clear and digestible. 

Address areas that need improvement to see better agency profitability, and be sure to celebrate successes. Did your sales team knock the cross selling rate out of the park? Highlight this win in front of the whole team.

Analyzing KPIs To Improve Performance

As you track marketing agency metrics and KPIs, you also need to schedule weekly, monthly, and quarterly reviews of their performance to stay on top of trends and make timely adjustments.

Look for patterns in your data. Are certain KPIs consistently improving or declining? Are there any sudden deviations from the norm? Don’t just observe the numbers. Dig deeper to understand the underlying reasons behind performance fluctuations. 

For example, if you notice a dip in your client retention rate, there could be a subjective reason (declining client satisfaction) or an objective one (changes in marketing conditions).

Based on your analysis, formulate specific strategies to address areas for improvement and optimize overall agency performance. For instance, in seeking to improve retention rate, you might implement new client onboarding processes or adjust your service offerings to better meet evolving client needs.

Adjusting KPIs Over Time

Your agency KPIs can and should evolve along with your agency. Reevaluate your KPIs periodically to ensure they’re still relevant and aligned with your goals and challenges. Consider adjusting if:

  • Your Agency Undergoes Significant Changes: These might look like expanding into new service offerings, adopting different business models, or experiencing rapid growth.

  • Your Priorities Shift: As your agency matures, your focus may shift from client acquisition to profitability, or from brand awareness to client retention.

  • New Challenges Emerge: Unexpected market shifts or changes in client behavior may require you to track new KPIs to address those rising challenges.

Clearly communicate any KPI changes with your team to ensure everyone knows your reasons for adjustments, the significance of the new KPIs, and updated goals associated with new KPIs.

Conclusion

As your agency continues to grow, your KPIs will remain a valuable marketing tool, helping you get the information you need to close more deals and see customer success.

Ready to jump in? Use AgencyAnalytics to help. Our customizable dashboards present all of your marketing data in one place so you can access the agency profitability KPIs you need anytime. 

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Written by

Hailey Hudson

Hailey is a full-time writer and content marketer based in Atlanta who specializes in providing unique insights into the worlds of wellness and digital marketing. A storyteller at heart, she is a self-admitted nerd about all things digital.

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