Updated for 2024
Digital Agency Industry Report
Digital agencies are able to generate an above-average level of net income, they have few, if any, barriers to entry, and the market as a whole is growing at a rapid pace. This makes digital agencies an attractive industry for many participants.
Executive Summary
An Attractive Industry
The digital agency industry is one of the more attractive ones for several reasons. Since 2015, participants have grown at an average rate of 13% and earned an average net margin of 15%. This, along with near-zero barriers to entry, has attracted a steady stream of new participants.
Despite its attractiveness, the digital agency industry is not without its challenges. Many of the industry’s best practices are underdeveloped or poorly disseminated. However, the average level of sophistication has been steadily increasing in recent years, challenging owners to pay closer attention to how and where their firms operate. This is evident in the increasing number of agency leaders who are tracking more advanced metrics like utilization rates, a sign of the industry’s evolution.
This report offers an overview of this dynamic sector, identifying growth drivers, profitability drivers, and structures of digital agencies. Our research encompasses over 45,000 digital agencies across more than 20 countries since 2015, utilizing online surveys, interviews, and secondary research sources. The insights we present are based on proprietary data collected by Promethean Research and other secondary sources.
This research, combined with additional data we’ve gathered, enables us to guide our digital agency clients more effectively. We strive to uncover opportunities, refine strategies, and design new pathways to success in an ever-changing environment. Join us as we delve into the heart of this rapidly evolving industry.
Top 10 key themes & drivers
Digital agencies are driven by the needs of their clients. At large organizations, digital strategy will be directed by C-level executives and/or Vice Presidents of various functional groups. At smaller firms, owners, CEOs, or presidents will direct the strategy, with VPs and/or directors influencing them. These needs have evolved as various industries become more competitive, especially as digital capabilities have moved to the top of priority lists.
Below we explore the top 10 key themes and drivers that are shaping the digital agency industry.
01. A growing market
The number of digital agencies in the U.S. has grown 54% from 2018 to 2023. The average size of an agency has also increased. We’re seeing a shift from 73% of the market in the 0-10 FTE range in 2018 to 64% in 2023. Most of them have grown to the 11-50 FTE cohort that now makes up 27% of the market, up from 21% in 2018.
02. Digital spend growth
As the broad umbrella that is “Digital Transformation” continues to expand, opportunities for agencies offering digital solutions grows with it. Companies are investing significant portions of their budgets across digital transformation initiatives. Digital investments are no longer relegated to websites, IT enablement, and some digital marketing spend. They’re now found organization-wide. Things like customer experience (CX), business process automation (BPA), data enhancement, cloud enablement, business model transformation, and cultural/organizational transformation are all areas firms are investing in. This provides a general uplift to the entire digital agency industry, and we expect it to continue for the foreseeable future.
03. The advent of artificial intelligence
After OpenAI released its GPT-3 model in 2020, a flood of natural language content tools hit the market. Based on our survey data, over half of digital agencies were using some kind of AI assistance by the end of 2022. Everything from coding to content creation is being affected. It’s too soon to tell just how this will play out, but it has the trimmings of a sizable industry shift.
04. Unequal agency maturing
Fragmentation and high employee turnover in the digital agency industry lead to sizable opportunities. Best practices aren’t easily created or disseminated throughout the industry. This lack of industry cohesion allows an individual organization to significantly outperform its peers by simply implementing a few key best practices.
05. Shifting agency margins
The economics of running a digital agency have shifted over the last few years. This has been due to two significant shifts, the first being inflationary and demand pressure on service pricing, and the second being margin pressure from historically high salary shifts. The general guidelines for digital agencies used to be: 45-50% of revenue spent on cost of goods sold, 20-25% of revenue on operating expenses, and then a pre-tax net income of 25-35%.
The two shifts above have slightly offset one another, but for now, it appears that the salary pressure has had a slightly greater impact. We now see the following breakdown as standard for a digital shop:
- 55% of revenue spent on COGS
- 25-30% of revenue spent on Operating Expenses
- 17% pre-tax Net Income.
We believe the growing competition has also played a role in the downward pressure on margins. What this means is that shops are going to have to increase their level of sophistication to compete successfully. Things like time tracking, managing utilization rates, service mix optimization, and targeted industry focuses are becoming table stakes.
UPDATE: Our recent research into how artificial intelligence impacts digital agencies has shown the potential for significant margin expansion. Learn more here: Artificial Intelligence is Disrupting Digital Agencies.
06. Talent Retention & Acquisition
Agencies life is typically characterized as “work hard, play hard,” but if you ask the average employee, they’ll say it leans more towards the former than the latter. This, along with average agency salaries just above the U.S. median salaries, makes employee retention a challenge. Some shops have moved to the “churn-n-burn” approach, which has serious negative long-term consequences.
Talent acquisition is a difficult challenge, as evidenced by the consistently large number of job openings at U.S. agencies. The high industry fragmentation makes building a good reputation difficult, which in turn makes it harder to attract applicants. Once they are attracted though, work-life balance, compensation packages, promotion potential, etc., all play a part in the ability of an agency to retain a candidate. Unfortunately, at a large number of agencies, these are not robust enough and work against the firm during the hiring process.
07. Remote workforce, offshoring, and nearshoring
Digital agencies have always been at the forefront of remote work. Many have been mostly or fully remote for years before 2020. This gave many of them an advantage when the forced global remote work experiment happened that summer. For those that didn’t have those processes in place, remote work was a struggle at first. After a few years of this, most shops have their processes worked out to support a semi-asynchronous workforce.
This crash course in async work exposed many shops to new workforces they didn’t have access to before. Offshoring and nearshoring are now used by a large percentage of the industry. This is helping offset some of the salary pressure many shops have been under, but it comes with unique costs. Getting the async communication and processes right is critical to being successful here.
08. The start of the 4-day workweek
At the start of 2022, a group in the UK piloted a six-month trial of a 4-day work week. 32hrs and no loss of pay for employees. When the results arrived in early 2023 they were pretty shocking.
- Companies continuing with 4 day week: 92%
- Number of staff leaving job: -57%
- Improved physical health: 37%
- Improved mental health: 43%
- Absenteeism: decreased
- Reduced Burnout: 71%
- Reduced Stress: 39%
- Hiring: easier
While not as drastic as the remote work shift, I expect to see a gradual transition towards a 4-day work week for digital agencies over the coming years. Agencies have typically been towards the front of employee benefits, and this seems like a significant win for both employees and management. Our survey in the first quarter of 2023 shows that even forward-thinking digital agencies are still very new to the practice.
09. In-housing of marketing spend
CMOs are constantly working to strike a balance between their internal capabilities and the value they gain from agency help. Lately, brands seem to be placing a greater emphasis on building their internal talent pools, which is placing downward pressure on agency growth.
The main force opposing this in-housing is the advent of new capabilities. Brands pay for capabilities. Did a new social media company explode on the scene? If so, brands will soon hire outside help specialized in navigating that new area. The same thing can happen in AI/ML areas, or ad targeting, etc. As these capabilities become commoditized (think general social media posting), they get in-housed or outsourced to the cheapest alternative.
The rate of change of new capabilities dictates how strong this in-housing force plays against agency growth. For now, it seems like new tech is enabling new capabilities faster than companies can create capable in-house teams.
10. A shifting fragmented marketplace
There are a few forces influencing this:
First, there are very low barriers to entry to set up a digital marketing firm. The demand for specialists ensures that top-tier talent will always have the option of setting out on their own. This option, coupled with the challenging working environment at many agencies, makes “working for yourself” an attractive option to many.
Secondly, M&A activity in this industry has remained steady over the last few years. We believe that this is due in part to the third force, limited benefits to scale. M&A in this industry tends to favor strategic capability additions rather than scale benefits.
Finally, there are limited benefits to scale for the digital marketer. After an early point, cost reduction opportunities become negligible, and the perception of working with a large monolith can actually be seen as a negative by brands. Low employee tenure also plays a factor in lower retained agency knowledge. It is difficult to benefit from employee learnings when they aren’t around long enough to pass them on to others.
The significant new entrants in the space over the last 10 years have come from the large consulting players. These firms already have deep ties with the CFOs, the CTOs, and the COOs, and now they’re expanding their business into the CMO’s budgets. The consulting firms are entering the agency space primarily through strategic acquisitions of both general agencies and small specialized shops.
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Digital Agency Composition
Sizes & Types
Digital agency size cohorts by full-time employees in the United States and Canada
Source: Promethean Research
From our last check in 2023, we estimate that there are just over 45,000 digital agencies in the United States and Canada. The general distribution of digital shops in the United States skews heavily towards the smaller side. Companies in the 1-10 employee range make up 64% of digital agencies. Those in the 11-50 employee range make up 27%, with the remainder being shops with >50 employees. Digital marketing agencies tend to skew the smallest, followed by web dev shops and mobile devs.
Most of the Enterprise firms (>250 employees) in this industry are comprised of agency-holding companies. These firms own multiple smaller independent agencies that specialize across different focus areas. By distributing clients who could be competitors across their network of agencies, the holding companies can work with many clients who could be competitors. This lets the holding company avoid any conflicts of interest while still providing a diverse set of creative solutions.
The small and medium-sized firms (<50 and 51-150 employee firms) are typically single agencies that can offer more services as they become larger with respect to revenue. The smaller agencies tend to be specialty shops, while the medium-sized firms tend to be more full-service. Then the larger firms return to specializing, primarily based on the industries served.
The Typical Agency Structure
Four functional areas of an agency
Agencies have four core functional areas: Revenue generation (Revgen), Production, Support, and Leadership.
Revgen’s role is to… generate revenue. This consists of marketing, sales, business development, and account management.
Production’s job is to do the thing your revgen team told the client you will do. This functional area houses your developers, designers, marketers, copywriters, project managers, etc., who work on or manage client projects.
Support roles act as the facilitation layer for the business. They include accounting, human resources, legal, and managers.
Finally, Leadership’s job is to set the mission, vision, and goals for the firm.
Functional Areas & Growth
When shops are small (<10 FTE), they usually rely on the owners to fill most of the functional roles. Owners will handle all of the revgen duties, a significant portion of the production duties, along with their leadership duties. They’ll outsource most of the support roles until they get bigger.
As they grow, shops bring in dedicated talent to fill functional roles that were previously done by the owners, outsourced, or neglected.
What follows is a look at the relationship between a firm’s size and when it will hire a dedicated employee or vendor to handle various roles.
We break this down into what agency owners/partners do, what employees typically do, or what’s outsourced. We then indicate how this changes based on the size of the agency. When there are multiple dots, it’s common for that activity to be handled by any of the options at that specific agency size.
Here’s a look at the relationship between the size of a firm and when they’ll bring on a dedicated employee or vendor to handle various roles.
Revenue Generation
Studio
(0 – 9 FTE)
Small
(10 – 24 FTE)
Medium
(25 – 49 FTE)
Large
(>=50 FTE)
New lead generation
P
P / E
P / E
P / E
Closing qualified leads
P
P
P / E
P / E
Brand management
P
P / E
E
E
Content creation
P
P / O
O / E
O / E
Public relations
O
O
O
O / E
Advertising
P / E / O
P / E / O
E / O
E / O
Account management
P
P / E
E
E
Business development / partnerships
P
P
P / E
P / E
P = Done by a partner
E = Done by an employee
O = Outsourced
Production
Studio
(0 – 9 FTE)
Small
(10 – 24 FTE)
Medium
(25 – 49 FTE)
Large
(>=50 FTE)
Value delivery
P / E
E
E
E
Production team management
P
P / E
E
E
Project/product management
P
P / E
E
E
P = Done by a partner
E = Done by an employee
O = Outsourced
Support
Studio
(0 – 9 FTE)
Small
(10 – 24 FTE)
Medium
(25 – 49 FTE)
Large
(>=50 FTE)
Monitor, store, and analyze financial information
P
P / O
P / O / E
P / O / E
Employee attraction, onboarding, retention, and operations
P
P / O
O / E
O / E
Operational and legal policies, contracts, and agreements
O
O
O
O / E
Production team management
P
P / E
P / E
P / E
P = Done by a partner
E = Done by an employee
O = Outsourced
Leadership
Studio
(0 – 9 FTE)
Small
(10 – 24 FTE)
Medium
(25 – 49 FTE)
Large
(>=50 FTE)
Mission, vision, and goals
P
P
P
P / E
Strategy creation
P
P
P
P / E
Roadmap design and implementation
P
P
P / E
P / E
P = Done by a partner
E = Done by an employee
O = Outsourced
Agency Revenue Profile
Average annual revenue growth 2015 – 2023
Source: Promethean Research
From 2015 to 2020, the average growth rate of agencies in our surveys was 13%. In 2021, the average growth rate almost doubled to 25% due to the enormous demand for digital solutions by corporations. In 2022, we saw revenue growth slow back down to 15%, which is much more in line with historical trends. When the results of 2023 came in, it was clear that this was the worst year for agency growth since we began tracking. The slowness that began in 2H22 spilled over into 2023 (and, from the sounds of it, through 1H24 too).
Contrary to expectations, larger shops tend to grow more quickly. Studio (<10 FTE), Small (10-24 FTE), and Medium (25-49 FTE) sized shops all tend to grow around 12-15% a year. This changes when we look at Large (>=50 FTE) shops. They tend to grow 31% faster than average.
RevGen Structure
Digital agency revenue generation org. chart
Source: Promethean Research
In a standard shop of 25 employees, the responsibility of revenue generation typically falls on a partner, the CEO, or sometimes 1-2 salespeople (a Sales Development Representative – SDR, and a closer).
There is typically a marketing professional who manages design and content direct reports, but there is rarely a formalized lead generation process.
Sales processes are also typically bare bones. When they are built out, they consist of a/some lead gen professional(s) (aka sales development representatives) and, at larger organizations, dedicated closers (account executives).
Our research has shown that account management can fall under sales, but it usually lives under operations. Many account management programs are underdeveloped and spawn out of project management programs when an agency grows past about 10 FTEs.
Business development is typically under the CEO’s responsibilities, but we have seen cases where there are dedicated business development professionals who report directly to the CEO.
Revgen Investment & Primary Lead Sources
The average digital agency invests 7.1% of its revenue in sales and marketing activities. This includes everything from salaries to media spend. Unfortunately, this isn’t sufficient to meet the lofty growth goals set at annual strategy meetings.
In a typical digital shop, whether it’s dev, marketing, or design, they will derive most of their leads and revenue from referrals. While referrals can be a great way to start, relying on them for the majority of a firm’s revenue generation presents a few challenges. The first is their lack of predictability. Second, they typically come from people with similar networks, which limits the ability to grow project scopes with new referrals. Finally, there’s little to no control over the referral’s quality, which can jeopardize relationships.
By no means are referrals bad. They’re an excellent way to grow a business, but what separates companies that can break through the 30-50 employee plateau is often a strong revenue generation engine.
Hourly Billing Rates & Pricing Methods
Average hourly rate bands for digital agencies 2023 & 2024
Source: Promethean Research
Pricing was a huge discussion point throughout 2022, but as pipelines dried up in 2023, much of the mad dash to raise rates slowed. 22% of the agency leaders in our survey reported an increase in their agency’s hourly rate from 2023 to 2024. This is almost half of the amount who reported raising their rates from 2022 to 2023.
65% of the agencies in our survey now price their services in the $150-224 range, with 30% pricing in the $175-199 range.
Fixed fee
The most common way to price services is with a fixed fee structure. This model estimates the cost of a project and then adds a margin to arrive at a fixed fee the client will pay. This type of model includes retainer-based billing and progress-based billing.
This model works best with clients who have a set budget they’re unable to exceed and need to know project costs beforehand. Both parties assume risk with these types of arrangements, as both cost overruns and savings are absorbed by the agencies. Fixed-fee models also may limit agency revenue growth as the option to add additional services typically isn’t available until the contract renewal time.
Value-based
Pricing services based on the value an agency’s work generates for a client is the goal for most agencies as it aligns the agency’s and client’s goals more than the fixed-fee model and can generate substantial profits for the agency. Agencies typically experience pushback when selling this model, as value-based prices can be much higher than cost-plus pricing. This model is best employed by experienced, proven agencies that can point to successes to help clients understand the return on investment.
Hourly Rate
This is the simplest pricing model and is often employed by firms in their early stages. Here agencies price their services based on the costs and time required to perform those services and then bill on a periodic basis based on the time incurred. There can be a blended “firm-wide” hourly rate charged or different rates based on the skill level of the individuals working on the project.
The hourly rate model has the potential to incentivize inefficient practices and can misalign the agency’s incentives from the client’s. Even if an agency uses another pricing method on the surface, many resort to an hourly calculation to ensure profitability.
Performance-based
This is where agencies (typically marketing agencies vs. dev or design) will charge a fee based on the change in a particular performance metric that they influence. This metric is often sales, but it could also be something more targeted that the client’s measuring like page views, social engagement, leads generated, etc.
Revenue Per Employee
Revenue per full-time employee 2015 – 2023
Source: Promethean Research
Revenue per employee, a common efficiency metric for digital agencies, has been trending upward since we began tracking it back in 2015. The average agency made $172k per full-time employee in 2023.
As artificial intelligence tools become increasingly ubiquitous, we expect to see additional efficiency gains at agencies over the next few years.
Positioning & Service Mix
Service mix shifts
Source: Promethean Research
Agencies continue to offer a broader suite of services than they used to, with the average shop offering 6.4 distinct services. This is down slightly from the 6.6 services offered in 2022, but up from 2021 (5.7) and 2020).
Agencies that expand their services tend to grow significantly faster than those that reduce their services, but those that shift their service mix (not expanding or reducing but changing focus) tend to grow the fastest. We believe that the agencies that are shifting their service mixes are doing so to respond to opportunities in the marketplace. They are shifting their services to better align with what the market is demanding, and this is allowing them to grow at above-average rates. With the sizable change that’s happened recently, this appears to be a winning strategy.
Should Agencies Specialize?
Average digital agency specialization rates
Source: Promethean Research
Up through 2021, we saw a steady march toward specialization. At that point, about half the agencies in our surveys self-identified as specialists, either by vertical, service mix, or both. It used to be much more common for an agency to focus on a specific industry niche vs. a specific service mix, but this all changed in 2022. That year, we saw a massive jump in agencies specializing. This continued in 2023, with 83% of agencies specializing by service mix or industry. Of that, 79% specialize by service mix, and 51% specialize by industry. As we have seen across multiple surveys now, specializing results in significantly faster growth rates.
Digital Agency Profitability
Average digital agency net profit margin 2015 – 2023
Source: Promethean Research
Agency margins are mainly influenced by two levers. The most impactful is often the billing rate. Closely behind billing rates is an agency’s utilization rate. These two levers have the most significant impact on an agency’s profitability.
The average profit margin for a digital agency in the U.S. since 2015 is 15%. Studio (<10 FTE) sized agencies are typically the most profitable. After a shop grows past 10 FTEs, net income margins fall slightly to an average of 15% for Small (10-24 FTE), and then they fall further to an average of 13% once an agency grows above 25 FTEs. This places digital agencies as one of the more profitable types of businesses.
The most significant expense for an agency is employee costs. Salaries and benefits make up almost all Costs of Goods Sold and a significant portion of Operating Expenses.
After employee costs, app and tool costs make up the next largest segment. According to our 2023 Digital Shop Tools Survey, the average agency spends 3.7% of its revenue (minus any passthrough spend) on tool costs.
Compensation & Salaries
Salary growth by functional group
Source: Promethean Research
Salaries are by far the largest component of running a digital shop. Identifying correct market rates is made more complicated by many factors, the most critical of which is a severe lack of transparency. Between 2019 and 2022, salaries for most positions rose 25-35%.
Non-Salary compensation has grown even faster than salaries since mid-2019 as digital shops use them to both attract and retain talent in this challenging labor market. This includes things like bonuses, options, and profit-sharing.
The rapid salary growth that occurred during the pandemic has cooled. In 2024, we still saw low-double-digit gains for Operations and Developer roles, but these were significantly less than in previous years. Account Manager and Business Development / Sales salaries have stagnated or declined slightly since our 2022 checks.
The average employee is expected to bill 25hrs per week and work another 13hrs on non-billable tasks for a total expected weekly commitment of 38hrs.
This distribution of billable to non-billable hours is highly dependent on the position type. Internally-focused marketers and Business Development / Sales employees are expected to bill the fewest hours weekly, with many not being required to bill any. Production employees (Designers, Developers, and client-focused marketers) are expected to bill the most, around 30hrs/week.
The average combined compensation for an owner in our 2024 survey was $267k, up from $242k in 2022. Similar to 2022, half of the compensation came from salary, while the other half was comprised of dividends, withdrawals, bonuses, or other cash compensation.
Firm size correlated with greater compensation until agencies grew above 50 full-time employees. Studio shop owners took home an average of $192k, Small shop owners earned $305k, Medium shop owners $335k, and Large agency owners received an average of $226k.
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