Key Metrics for Growing Digital Agencies
The Critical KPIs Your Digital Marketing Agency Should Track
Metrics That Matter
Monitoring the right metrics can make growing a digital agency significantly easier. By regularly monitoring them, and asking the right questions, they can reveal where you should focus your team. One of the biggest challenges we see owners face is deciding what to track. The sheer number of items you can track in your business is daunting and many of the KPI guides seem like they were written by people who have never actually managed a business with them. We created this guide to fix that. We will be covering the three core areas (Revenue Generation, PM/Operations, and Finance) and the KPIs you need to be tracking in each. If monitor and improve in these areas, it will have a profound impact on your agency’s growth.
For this guide, we covered the revenue generation metrics and then we reached out to subject matter experts in finance and operations to get their takes on the core metrics growing firms need to be tracking. Covering digital project management and operations, we have Rachel Gertz from Louder Than Ten. They are the preeminent training firm for digital agencies, departments, and product studios. For the core financial metrics, we turned to Ryan Watson from Upsourced Accounting, a digital-first accounting firm focused on growth-minded agencies.
Revenue Generation KPIs
Referral-based Lead Generation
Since most firms are overly reliant on referral-based lead generation, it is important that we look at how to measure this. To grow a business this way, owners need to be intentional about growing their referrals. Tracking the following will give you a good sense of how healthy this lead generating channel is:
- Total referrals coming in each month and growth
- Total unique referral sources and growth
Procurement-based Lead Generation
RFPs are here to stay, for a while at least. Our research shows this channel becomes more important and grows as a percent of total revenue as firms get larger. Therefore, it is critical to track these core metrics to measure success:
- RFPs submitted per month
- Average RFP value
Inbound Lead Generation
We are seeing a growing number of firms adopting inbound tactics for lead generation. Being successful here takes time (12-24 months for most) and there are numerous factors to that success. The main metrics to track here are:
- Total monthly organic traffic and growth
- Time on page
- Form conversion rates
While many agencies are hesitant to lean into outbound tactics, doing this right can drive significant growth. The key here is to manage activity levels. When it comes down to it, sales is a numbers game so generally the greater the activity the faster your firm grows.
- Calls / emails per week per sales representative (new accounts)
- Pipeline accounts engaged per week
- New qualified leads per week
Funnel Conversion Rates
The focus for this section is to understand how effective your firm is at moving leads through your sales and marketing funnels. Because there are so many funnel variations, we are not providing specific KPIs to track here. The best way to measure this is to track conversion rates for each stage of your funnel. Focusing on improving the stages with the lowest conversion rates will drive the most significant revenue growth.
Closing and Beyond
KPIs here concentrate on sales and account management. At this stage you have moved leads to prospects, and you are now focused on moving them from prospects to clients and from clients to advocates. The important pieces of information here are:
- Quote to close ratio
- Lead to sales ratio
- Average lead to sale time (in weeks)
- Average purchase size
Project Management / Operations KPIs
Project Timeline vs Drag
Do your projects start and finish on time? When you work on your products but can’t launch them, it prevents your org from generating additional revenue, protecting unspent revenue, and it costs money in the form of labour and related expenses. This is called the cost of delay and it’s often overlooked because companies get stuck focused on utilization and hourly billing rates instead of looking at overall monthly burn rate (revenue in vs expenses out). The lower the drag, the faster the project gets paid or completed, the better your organization’s revenue or health. You should aim for less than 10% drag on your projects to reduce these gaps and maximize your project launches.
For example, think of a $100,000 project that started out on a three month timeline where launch gets delayed by three months. If you have a fixed price on your project and only get paid when you deliver the work (something we’d caution you about), you must book your team longer to do the work without receiving more revenue to offset labour costs. Your team is spending time wrangling stakeholder expectations or waiting for the next project that you now have to sell to make up for the revenue dip this project lag will create. The project delay would cost the same as the project budget and the project value would barely be worth the paper agreement it was printed on.
When a three month project drags on, it becomes unprofitable and doesn’t allow you to cover your monthly expenses. You must now book more work more quickly to cover the drag and the labour costs you’ve scheduled which has an associated cost of sale and sunk cost for resourcing.
Your budget is the amount of money allocated to do work in a given time frame and/or to build a given scope. Aim to set realistic budgets that have ranges of +/– 50% before you cement your final numbers in the sales process (unless you can renegotiate once you do confirm your scope or are completely certain about the project scope and complexity before you begin). This is called a rough order of magnitude estimate and will enable you to get a high-level scope with less up front risk. Otherwise set a fixed base fee for doing up front research to assess the complexity, risks, and full scope of the project during the discovery process. Work towards becoming 90% confident about your estimates. This takes practice and regular review of past project data, but when your estimated budgets get closer to your actuals, you can keep tabs on things like when to book your next project, whether or not you can afford to bring on contractors, or whether you need to reallocate teammates to your new project. If you keep going over budget, make sure you’re tracking how much and how often. This data is vital for telling what the problem is, but not why it’s happening. You should be aiming for consistently less than 10–15% budget overages on your projects because these overages will start eating into your profit, allocated budgets, and expenses. While the data is scarce, in our digital agency world, it’s common for projects to have a cost or time overrun of 50% or more. Think of how much of that money needs to be ‘borrowed’ from the next project to make up for that revenue gap.
For example, imagine your project budget goes over by $10,000 on a $100,000 project. You have gone over budget by 10% and this will eat into any project margin and potentially your profitability as a company. Being on time but over budget can mask the effort of a team that is working late nights, something we call hope creep.
Task Completion or Burndown
How many tasks have you completed and how many are left? This quick calculation gives you a gut check that you can then compare to your timeline progress. The fancy name for this comparison is called earned value management, and you can glean it from dividing your completed tasks by your backlog to determine your percentage completion and then multiply by the project budget to see how much of it you’ve burned through. You can also determine your team velocity by dividing your total number of cards or story points (if you do Agile story pointing) by the number of cards or points you completed in each sprint. This is called a burndown chart. When graphing this slope, you want to watch for curves that go flat (stalled progress), snake upward (new scope is added), or create visual steps (scope needs to be broken down further). If you consistently have more tasks left over than can be completed after months of ongoing planning, you are overestimating how much work you can complete in your sprint.
For example, if you have 100 tasks to complete and you’ve completed 20 of them but used up more than half your timeline of 12 weeks, you are 20% through your project backlog. You would likely need another 24 weeks to finish if you kept tracking at that speed. If you are pricing in weeks but haven’t rescoped or re-estimated your project, you’ve spent 50% of your budget and are tracking to exceed your budget by 150% (or almost $250,000). Yikes.
Number of Active Projects
How many active projects is your organization working on? It’s great for you to have insight into how many projects exist in total, but obviously, if you work at a huge organization, you may not be able to access this info or it may be irrelevant to your own team. Either way, your organization should be tracking this (and ideally sharing it with staff regularly in the form of revenue or profit losses and gains which encourages a team approach to helping the company stay healthy). You can focus attention on your project or client portfolio or ‘book of business’—all the projects you manage.
You’re looking to find out if, when you add additional projects to your project load, your own project management time gets maxed out or actually gets used more effectively. If you and your team have too many projects running at once, you may notice you regularly overrun on schedule or budget. This is an indicator that you need to increase the budget of each project and/or reduce the focus of the team which will positively impact your organization’s health.
There is no magic number, but we suggest that your team focus on no more than 3 core ‘big rocks’—projects that take a high amount of effort but also yield a high impact at any given time. These are often medium to large projects that run at a longer duration. You can pepper your week with other less important project tasks, but don’t be surprised if you can’t get to them. You can typically get 3–5 major tasks done per day, so focus your effort on high impact, low effort projects and tasks where possible.
Aiming to run three projects per team without distraction helps you more predictably plan when your next project can start and allows you to stagger your resources if you can’t build a dedicated team. This also helps you smooth out your cashflow and ride out dips during lower months.
Number of Surprises
This is a more experimental metric we’ve tried with our own clients and apprenticeship partners with great results. Surprises are mostly bad unless they bring you closer to your goals or you expect them. Otherwise, whether they spring from leadership, stakeholder changes, or misalignment in expectations, surprises can derail your projects, kill trust on your team, and shake even the most sturdy processes. The best surprise is no surprise at all, and you can measure these quantitatively. Aim for zero. If your number goes down over time, you’re making significant improvements to your team communication.
Gross Profit Margin
Gross profit margin measures how much profit you make on each dollar of sales after deducting the cost of service labor and other out of pocket project costs. It measures both your team’s efficiency and the strength of your rate per hour, and it is the single most important metric for agency owners to manage. In order to get an accurate read on margin, it’s important that revenue be recognized on an accrual basis, not cash. Accrual revenue is recorded when the work is performed (not when the cash is received), and it smooths out distortions in the data caused by chunky, upfront or milestone billing. gross profit margin measures how much profit you make on each dollar of sales after deducting the cost of service labor and other out of pocket project costs. It measures both your team’s efficiency and the strength of your rate per hour, and it is the single most important metric for agency owners to manage. In order to get an accurate read on margin, it’s important that revenue be recognized on an accrual basis, not cash. Accrual revenue is recorded when the work is performed (not when the cash is received), and it smooths out distortions in the data caused by chunky, upfront or milestone billing.
Thoughtful consideration of gross margin can help diagnose a number of business challenges, and can offer a clue into possible solutions:
- If gross margin is low and employee utilization is low – the business needs to drive additional revenue or re-evaluate its current staffing levels
- If gross margin is high and employee utilization is high – the business may need to consider recruiting / hiring. In this situation, employees may be overworked, which is both unsustainable for the team and a limitation to onboarding new work.
- If gross margin is low and employee utilization is high – the business likely needs to evaluate their pricing. If employees are working at full capacity and margins are still low, then you’re not earning a sufficient return on your team’s labor, and you need to increase pricing.
A healthy agency should target a gross margin range of 50-55%.
Forecasted Cash Flow
Cash flow is the amount of cash a business brings in minus the expenses paid out. Most agencies can measure historic cash flow – after all, all you need is a bank statement – but not forecasted cash flow.
A weekly or monthly cash flow projection provides the prospective look on cash flow that a small business needs. It allows the business to predict what the next 8-10 weeks of cash looks like and to anticipate any gaps. Once cash flow gaps are identified, the business determines ways to fill the gap – i.e. slow pay accounts payable, incentivize upfront A/R payments, pursue one-off project work, or secure a line of credit.
In order to estimate future cash flow, a business must understand the following: balance in accounts receivable, future pipeline, the monthly burn (i.e. total operating expense and any fixed recurring COGS), and owner distributions.
As a general rule, businesses in a growth stage should have enough cash on hand to cover 2-3X months of burn.
Employee utilization measures the amount of time an employee spends on billable hours compared to the total hours worked. As your team’s hours are your primary factor of production, the first step to profitability starts with ensuring those hours are being used to generate revenue (i.e. billable) and not sitting idle. Employee utilization measures the amount of time an employee spends on billable hours compared to the total hours worked. As your team’s hours are your primary factor of production, the first step to profitability starts with ensuring those hours are being used to generate revenue (i.e. billable) and not sitting idle.
The first step in understanding utilization is to start by tracking hours. Accurate time tracking is key to this equation and is a necessary evil in a service-based business. Utilizing a time tracking software is highly recommended as they are a dynamic tool that can provide key data. However, if a business is in the startup phase, time tracking can be completed on something as simple as a spreadsheet.
- Step one: all employees should track billable hours and non-billable hours.
- Step two: develop target utilization rates that are in line with businesses goals.
- Step three: calculate employee utilization by taking total billable hours divided by total hours worked.
How do I calculate employee utilization?
An employee has 40 hours available in a week, which is equal to 2,080 hours per year. Let’s assume that the employee receives two weeks of vacation, leaving 2,000 available hours. If the employee has approximately 1,600 billable hours, that means that the employee has a utilization rate of 80%.
How do I know what my target utilization rate should be?
Utilization targets will vary by role and seniority. There is no one size fits all benchmark, but for production level staff we see utilization in the range of 70-90%, for account management we see utilization 60-80%, and for partners and senior management we often see utilization much lower (if not 0). Again, these will depend on your growth and the nature of your work. Even if your team is not fully utilized today, it’s important to make sure that at your target utilization you’re charging enough to generate a sufficient gross margin (e.g. 50-55%) and net margin (20%).
Metrics In Practice
None of these metrics will help unless you use them to take action. There are plenty of dashboard applications that you can use to aggregate this data. We recommend meeting monthly to review these core KPIs with management. For many of our clients we recommend dedicated time for partners to work on their businesses. These working sessions begin with a quick review of the pertinent KPIs and then working on changes to improve them.
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