Digital Marketing Agency
We’ve updated our classic report with new research from the first half of 2019. New data on revenue growth, profit margins, agency sizes and quantities, and much more is now available to guide your strategies for 2020.
The agency landscape is changing rapidly but new avenues for success are becoming available.
If you’re like most agency managers you’ve probably noticed the agency landscape changing more quickly over the last few years.
In the early 2010s it seemed almost easy to build a successful agency. Adwords, and Facebook ads let you target your client’s prospects like never before. Designing for the internet and smartphones was a new frontier that let you differentiate your client’s brands in an entirely new way. Inbound marketing was all the rage, and if you did it right you created a magical flow of seeming endless leads for your clients.
Now, targeted ads, responsive design, and robust inbound strategies are simply the costs of playing the game. Agencies are constantly being asked how they can do more for their clients.
This report will provide you with a better understanding of the various shifts happening across the agency landscape. Let it help inform your strategy and execution. It doesn’t look like it’ll get easier any time soon.
Agencies grew an average of 15% Y/Y in 2018.
Digital spending should continue to grow 10-15% Y/Y through 2021.
Video is the fastest growing segment.
Agencies are facing multiple challenging market shifts that are impeding growth and margin expansion.
~90% of agencies have fewer than 50 employees.
Profits are up! Most agencies generate 18% net margins.
Agencies are still overly reliant on referral-based lead generation.
Let’s Make Your Growth Easier!
There has been significant growth in new small agencies over the last year.
Digital agencies operate in a highly fragmented market.
This is due to few barriers to entry. Almost anyone can spin up an agency in a few months.
Agency revenue has grown ~15% in this same time frame.
Over the last year, there has been significant growth in the number of new agencies. Our estimates put this growth ~23%. As we stated last year, we expected to see increased competition in this space, but this growth is impressive for an industry that has grown revenue by ~15% in the same time frame. This furthers our view that we’ll see increased competition among smaller firms.
Outside of the large agency networks like WPP, Publicis Group, Dentsu Inc, Interpublic, and Omnicom Group, the digital marketing industry is highly fragmented. Over 73% of agencies are firms of less than 10 employees. About 21% have between 11 and 50 employees. Combining these shows that 94% of digital agencies have fewer than 50 employees.
Most of the large firms (>150 employees) in this industry are comprised of agency holding companies. These are firms who own multiple smaller independent agencies that specialize across different focus areas. These allow the holding companies to work with many clients who could be competitors by distributing them across their network of agencies. 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 who 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.
Key Themes & Drivers
A continued shift to digital spend provides a boost to top line growth.
Acquisition opportunities can aid growth and round out service offerings.
Exit opportunities for specialized firms and multiples are healthy.
Inhousing is putting pressure on agencies to differentiate and deliver.
A shift from retainers to projects is making revenue more unpredictable.
New consulting entrants are attacking the upper end of the marketplace.
Talent retention and acquisition remain a challenge.
Brands demand a transparent ROI.
Growing Digital Spend
Best Practice Implementation
In-housing of Marketing Spend
Shift From Retainer to Project-based Billing
Changing Marketplace with Sophisticated New Entrants
Talent Retention & Acquisition
Return on Investment Transparency
Agencies can work with anyone, but some industries are growing their marketing spend faster than others.
Consumer packaged goods far outspends others but energy is one of the fastest growing.
Pricing & Billing Strategies
Most firms employ a combination of multiple pricing strategies.
Value-based pricing seems to be the holy grail of pricing methods, but it’s often the most difficult to implement.
Agency Revenue Profile
Most agencies are still overly reliant on referral-based lead generation.
30% of agencies bill $101-150/hr.
Specialist agencies tend to command a higher hourly rate.
The majority of blended agency billing rates fall in the $101-200 per hour range. However, our research has shown that these vary widely based on the location of the agency, the types and sizes of clients served, and the types of projects worked on. Smaller market, generalist agencies tend to operate on lower billing rates while larger market, specialist agencies tend to command higher hourly billing rates.
The average agency’s profit margin has improved from 10-15% to an average of 18%.
Agency margins are influenced by numerous business levers. The most impactful is often the billing rate. The average agency margin is clustered closely around 18%. Similar to the billing rate, this is heavily influenced by the size, the location of the agency, the types and sizes of clients served, and the types of projects worked on. In addition to those factors, the agency’s cost basis (primarily employee costs) will have an effect on margins. Agencies with employees located in higher cost of living locations will have a higher cost basis than those in lower cost of living locations. This is typically offset by a higher hourly billing rate.