PUBLISHED AUGUST 2020
How Digital Agencies Grow
A detailed look at the strategies and industry average growth rates for digital marketing agencies and software development shops.
Understanding the mechanics behind digital agency growth allows us to identify weaknesses and optimize growth strategies.
We examined the data we gathered from owners of digital marketing and digital service shops over the years and used it to create this framework of how a typical digital shop grows.
We found most shops grow by increasing the number of projects and clients that they manage rather than by landing larger or higher priced projects.
Most firms don’t see significant advantages from scale.
The average 18-employee digital agency onboards ~2 clients a month.
These lead to an average annual revenue growth rate for digital agencies of ~15%.
How Digital Agencies Grow
Larger Firms Have More Clients
Please prepare yourself for an earth shattering finding:
As agencies grow the number of clients they work with increases.
Growth = more clients. Who would have thought?
On its surface, that seems like an incredibly obvious statement, but if we look a bit deeper, this tells us something a bit more profound about how agencies grow. Our data shows that there is a strong linear relationship between the size of an agency and the number of clients it serves.
This indicates that most agencies grow by securing a greater number of clients with project sizes that are similar to ones they typically manage. They don’t grow by increasing average deal sizes or by increasing prices.
Therefore, employee growth is a necessary requirement for revenue growth. This leads to significant challenges for agencies. We believe this is the biggest reason why we see so many small agencies dominating the landscape. (Head over to our Digital Marketing Agency Industry Report for an in depth look at the trends shaping the industry.)
The majority of firms price their services on an hourly basis. Even if they package the hourly rate as a retainer (client buys a monthly basket of hours) or as a fixed fee (agency assumes risk/reward), the basis for these is an internal hourly rate. Because revenue is linked to employee growth, and pricing is often linked to an hourly rate, the only way for a large swath of the industry to grow is by adding more employees.
By combining this with what we know about how firms charge, it is obvious why there are such significant growth challenges in the 20-50 employee range.
Because of this, most digital shops don’t see significant benefits from scale.
New Clients Per Month
If firms grow by adding similarly sized clients, how many does a typical firm need to onboard each month? We recently asked agency owners this exact question. The results fit expectations, that larger firms would onboard more new clients each month. The results also fit with the linear relationship we found between agency size and the number of clients served.
Possibly the most interesting takeaway from this was the finding that an average firm with 18 employees is able to sustain its growth by adding 2 new clients a month. Below, we evaluate two lead generation strategies (inbound and outbound) to give us an idea of the amount of activity necessary to drive growth.
The conversion rates for each step will vary significantly from agency to agency. The values we used above are within ranges we have seen from digital shops we have worked with. This guidance suggests that digital agencies employing inbound strategies need to drive 10k+ visitors per month to their landing pages. Those employing outbound strategies must send 1-2k emails each month. These activity levels should allow an agency to grow at industry average rates.
We created a repeatable revenue generation guide to help digital agencies achieve these numbers more easily.
For more data on average email conversion rates, both Mailchimp and Hubspot published some great data on this. Wordstream put together a detailed analysis on PPC and landing page conversion rates that’s worth checking out.
How quickly do digital agencies grow?
Since 2017 the average digital agency grew their revenue at about 15% annually.
Growth rates differ across company sizes. Studio-sized firms, those with fewer than 10 employees, tend to grow the slowest. This seems counterintuitive. It should be easier for smaller firms to achieve higher growth rates as they are growing revenue on a smaller base.
Viewing this in conjunction with our analysis from above, growing a firm by adding more similarly sized projects would be more difficult for smaller firms than it would be for larger ones, due to the relative cost of adding talent. The cost to add a new team member is the same regardless of company size so it is easier for a larger firm with more revenue, profit, and cash reserves to absorb the additional cost. (For a better idea of employee compensation levels, check out our digital shop salary estimator based on proprietary research from over 1,000 salaries.)
Firms in the 10-50 employee range tend to grow at or just above industry averages. This makes sense as they make up the majority of the firms in the industry.
Agencies with over 50 employees show a surprisingly wide variance in growth rates. We believe a large portion of this variance is due to the sizable acquisition market that becomes available to firms around the 50-employee level.
Monthly updates on our latest proprietary research, thinking, and updates designed to give you the information you need to build a more successful agency.