There is a core group of KPIs that provide insight into the health of your agency that every owner should track. Benchmarking these financial metrics for marketing against peer-group averages can help you decide where to focus your effort for the most significant impact.
Key Financial Metrics for Marketing Agencies
Monitoring the right metrics can make growing a digital agency significantly easier. One of the biggest challenges is deciding what to track. The sheer number of KPIs is daunting. But there are some essential areas of your business you should regularly review to stay on course.
Indicators to watch closely include:
- Gross Margin. Gross Margin is a measure of how efficiently your agency turns revenue into profit. The formula to calculate it is (Net Sales – COGS) / Net Sales. The result is the percent of revenue left after paying for production. Comparing your gross profit to industry averages can give you a sense of how efficiently you’re managing your production staff (developers, designers, marketers).
- Utilization Rate. While this is more of an operational metric, it’s a huge driver of your gross margins. In fact, it’s so critical that we wrote an entire post on understanding your agency’s utilization rate. Your utilization rate is a measure of how much time your team spends on billable work versus the total hours worked. Unfortunately, it’s enabled by the almost univerisally hated task — time tracking.
- Effective Hourly Rate. Once you have a handle on your employee utilization rate, you can calculate your hourly rate. The baseline for billing, your effective hourly rate, is found by dividing your adjusted gross income by the number of hours worked. Monitoring this metric and comparing it to your advertised rate will provide insight into what you’re actually earning per hour of work. Not measuring this rate correctly can be a cause of lower than expected profit margins.
- Free Cash Flow. Cash flow is the most important number for your business. Building a Free Cash Flow forecast model will force you to become intimately familiar with what drives your cash flow. This data allows you to take action early to cover any potential shortfalls. It also provides some insight into how much cash is approprate for you to keep on hand in the business. Free Cash Flow is calculated by taking your net income, adding back any non-cash expenses (depreciation and/or amoritization), subtracting any increases in working capital, then subtracting capital expenditures. Your forecast period will depend primarily on your visability into your sales pipeline and your average engagement length. Most agencies are able to reliably forecast out the next three months.
- Overhead. Calculated by adding up your monthly fixed cost that doesn’t generate income and dividing the total by your Adjusted Gross Income, overhead should be between 20% and 25% of your budget. Typical overhead line items include rent, utilities, insurance, technology, and software subscriptions.
- Lead Generation. Knowing where your revenue comes from gives you insight on where to invest your resources for the largest impact. You should track referral, procurement, inbound, and outbound leads. And you should be intentional about it. Look at unique referral sources, your average RFP value, total organic traffic, pipeline engagement, and new qualified leads to determine your reach. If numbers don’t support your growth goals, you can quickly adjust marketing and outreach practices.
- Lead Conversion. Your conversion rate measures how effectively you move leads through your marketing and sales funnels. You should track information about how many leads become prospects. You also need to know how many prospects convert to clients.
- Labor Costs. Pay close attention to your labor costs compared to your Adjusted Gross Income. You should allocate 55-60% of your revenue on salaries and benefits.
- Service Mix. The outlook for digital agencies is promising. Track your active projects and what services you regularly provide. Knowing this information can help you determine which of your products and services are most sought after and potentially where to adjust to make the most of the current environment. Sustainable organizations typically have a healthy mix of three to five distinct services. But those firms also guard against stretching their resources too thin. Specializing along a few core services that boost one another’s value is the key to building a reliably growing agency.
Financial Metric Reviews
Monitoring the right metrics regularly, and asking the right questions, can reveal where you should focus your team. The data will tell a story about your current financial and operational situation and inform your agency roadmap.
Suggested monitoring timelines are:
|Effective Hourly Rate||X||X|
|Free Cash Flow||X||X|
Monitor metrics weekly that you can quickly take action on to course correct, if necessary. The quarterly metrics help you avoid surprises and identify risks and potential threats. Then you can take action, based on what you learn. Those metrics you review annually help you track your progress against industry benchmarks and influence your strategic planning.
Leveraging Your Financial Metrics
Measuring and reviewing financial metrics becomes impactful to your agency as you find ways to meaningfully integrate the metrics into your daily operations and strategic direction.
Ways to get the most from your data include:
- Know Your Endgame. Begin with where you want to go. Then select KPIs that measure and monitor if you are headed in the right direction.
- Keep It Simple. Narrow your KPIs to 10 or less. Focus on the measures that help you most.
- Assign a Champion. If no one is accountable for an outcome, action will likely lag. Make sure someone is staying on top of results to make tracking count.
- Do Some Digging. Systematically dive into the “why” behind the metrics. Create action plans to solve root causes if necessary.
- Use a Dashboard. There are plenty of applications that you can use to aggregate and trend data quickly and accurately. Google Sheets is great early on, and programs like Klipfolio can help more mature organizations.
Promethean Research Gives KPIs Perspective
Selecting the most salient agency metrics can be challenging. We gather data on the core benchmarks owners should track and have traditionally included this in our strategy engagements. We’re now offering this benchmarking as a stand-alone service updated for 2022. Click the link to purchase the service and schedule the review call.