Increasing profits should be a primary financial concern for all businesses, including marketing agencies. A marketing agency averages a net profit margin somewhere between 6.0% and 12.0%, which means there’s plenty of room for growth.
No agency is powerless to overcome poor margins. That’s an area where a CPA like me can help. Consider several methods that can help lift lagging profit margins.
Gross Profit vs. Net Profit Margin
Gross margin can either be shown as a dollar figure, so a nominal figure, or a percentage. You may also find gross margin referred to as gross profit. Presented as a nominal figure, the formula is:
Gross Revenue – Variable Selling Expenses = Gross Margin
To calculate the gross margin percentage, the formula is:
Gross Margin / Gross Revenue = Gross Margin Percentage
Why is gross margin important?
If the agency sells another dollar of services, how much of that will it get back, not including fixed costs?
Net margin, on a nominal basis, is calculated as:
Gross Margin – Fixed Expenses = Net Margin
Like gross margin, net margin can also be expressed as a percentage. The calculation is as follows:
Net Margin / Gross Revenue = Net Margin Percentage
Generally, net margin is calculated pre-tax.
Net margin is essentially your net income. Unlike gross margin, net margin is not going to vary based on the setup of the chart of accounts. Net margin includes all of the expense accounts, whereas, gross margin is only going to include the expense accounts which are deemed variable with sales by management. In other words, gross margin can almost be whatever you want it to be.
Strategies For Increasing Your Marketing Agency’s Profit Margin
Benchmarking against the industry is a rational way to find areas of improvement. The key benefit of the practice is that it allows your enterprise to discover the precise areas where you’re under — or over-performing — in the industry.
Learn To Have Consistent and Evolving KPI Development
Which are the KPIs that your organization should you always pay attention to first? If you don’t know off hand, it’s time to give the subject some thought.
You’ll need to develop a system to establish goals and KPIs that are specific for your company. That’s a challenging proposition, but it helps lay the foundation for the future. You can’t possibly earn your highest profits unless you know the numbers.
Want to learn more about KPI development? Check out this blog post for a deeper dive.
Be Careful About Freebies
You may be tempted periodically to throw in a free service. It’s possible you’ll figure the client is paying a hefty amount and the task won’t take long. However, it’s a dangerous practice that results in fewer dollars in your pocket. If this type of generosity ever becomes an ingrained practice, you will have a tough time sustaining growth. It’s better to nip it in the bud early, to focus attention on increasing revenue, client satisfaction and innovation.
From a selling standpoint, offering things free is a sign of weakness. Customers will sense that you’re overanxious to sell and may back off. That’s why “too low” prices on services is a double-edged sword. It hurts credibility while depressing both the top and bottom lines.
Track Anything and Everything
Any work or materials must be in your costs, or you will lose sight of profitability. Profitability should be tracked in total, but your agency should also consider tracking profitability by client and service. You’ll need a reliable platform and integrated apps to keep an eye on everything. It’s worth making integration a central tenet because that’s what makes data management and analysis powerful. This is why cloud accounting is such a powerful thing.
Pay Attention to Data and Bill For The Value You Deliver
Measure marketing so your clients understand the value they’re receiving, and so you can be adequately paid for the value you are delivering.
Pretty simple, right?
Pay attention to the data within your agency and also within your industry. In doing so, it’s helpful to work with professionals who will help you make the most of that informational power. Find somebody who can give you good data or help you compile data. That person also needs to be able to explain what that data is telling you, and can help you make strategic decisions based on that data.
Data is the new currency. The more data you have, the better your ability to make strategic decisions that are data driven, the more profitable you’re going to be, and the more competitive advantage you are going to develop. That is information, that is power, that is something that you can use to drive your margins higher.
Make Justifying Value a Core Principle
Indeed, customers will always look for the best deal. You will need to maintain competitive pricing to pick up new clients. However, if you can justify the value you bring to the table, you will be able to attain higher prices. Clients who are looking for a better price are not accepting your value proposition. Quantifying the value you drive is an effective way to justify your pricing.
Nobody is price conscious. Everybody is value conscious. Companies that charge the lowest prices do so when a service is undifferentiated or can’t deliver value.
Patience and Focus Will Win the Day
It is important to keep track of margins in any business, and marketing agencies are no exception. Not only should you keep track of your agency’s net margin, but focus on gross margin, too. The way you setup your chart of accounts will impact the latter, but not the former.
Benchmarking marking agency profit margins is a worthwhile exercise, however it’s not an end-all-be-all. Instead, it should assist in providing context around what “good” looks like, but not define it.
Finally, it may be a good idea to talk to a CPA like me to make sure your accounting system is setup properly and also to identify areas of opportunity to increase your profitability.
For a more in-depth look at how you can maximize the profit margins of your marketing agency, check out the below episode of YouTube Live. In this episode, I also show some benchmarking data that you can use to compare your agency to the industry.
Is Your Marketing Agency Ready For Outsourced Accounting?