Steering Digital Agencies: It’s a Numbers Game.
Introduction.
Starting and growing a digital agency can be extremely challenging. Like parenting, from zero to one is probably the most difficult period, and the work and the worrying usually do not stop after that. Speaking from personal experience, as a father of two beautiful daughters and involved in several agency startups in the past: it literary is backbreaking work. But both roles are gratifying if you get it right.
This article is not about raising your child. That is an oversaturated topic on the world wide web, and based on my experience, the main tactics are food, love, and keeping them safe. This article is about the numbers agency owners should know by heart to steer and grow their businesses, divided into three categories:
- Key Performance Indicators (KPIs) for Agencies;
- Financial Metrics for Agencies Success;
- Client Satisfaction and Success Metrics.
It’s lights out, and away we go.
1. Key Performance Indicators (KPIs) for Agencies.
As an agency owner or manager, monitoring the right KPIs can provide valuable insights into your business’s overall health and performance. Let’s explore some of the essential KPIs that you should be tracking:
1.1. Revenue Growth Rate.
The revenue growth rate is a fundamental metric that measures the percentage increase in your agency’s revenue over a specific period. It indicates the overall financial health and success of your agency. A steady and positive revenue growth rate signifies that your agency is on the right track.
To calculate this, use the formula:
Revenue Growth Rate = ((Current Revenue - Previous Revenue) / Previous Revenue) * 100
1.2. Client Acquisition Cost (CAC).
The CAC is your agency’s average cost to acquire a new client. It includes various expenses related to marketing, sales, and promotional activities. Lowering your CAC while maintaining high-quality clients can boost your agency’s profitability.
To calculate CAC, use the formula:
CAC = Total Marketing and Sales Expenses / Number of New Clients Acquired
1.3. Customer Lifetime Value (CLV).
CLV represents a client’s average revenue throughout their relationship with your agency. It helps you assess the long-term value of your customers and identify opportunities to increase their loyalty. Increasing CLV through excellent service and upselling can lead to higher profits and sustainable growth.
To calculate CLV, use the formula:
CAC = Total Marketing and Sales Expenses / Number of New Clients Acquired
1.4. Employee Utilization Rate.
The employee utilization rate measures the efficiency of your agency’s workforce. It indicates how much time employees spend on billable tasks compared to non-billable activities. A high utilization rate suggests that your agency is maximizing its resources effectively.
To calculate the utilization rate, use the formula:
Utilization Rate = (Billable Hours / Total Hours) * 100
1.5. Client Retention Rate.
The client retention rate is a crucial indicator of client satisfaction and loyalty. It measures the percentage of clients who continue working with your agency over a specific period. A high client retention rate demonstrates that your agency delivers value and builds strong relationships.
To calculate the retention rate, use the formula:
Client Retention Rate = ((Total Clients at the End of Period - New Clients Acquired) / Total Clients at the Start of Period) * 100
1.6. Return on Investment (ROI).
ROI measures the profitability of your agency’s investments, such as marketing campaigns or new technology. A positive ROI indicates that your investments generate returns and contribute to your agency’s growth.
To calculate ROI, use the formula:
ROI = (Net Profit from Investment / Cost of Investment) * 100
2. Financial Metrics for Agency Success.
Beyond the KPIs mentioned above, several financial metrics are crucial to your agency’s success. Here are some key financial metrics to focus on:
2.1. EBIT.
EBIT stands for Earnings Before Interest and Tax. It is a commonly used method to determine the potential profitability of a company. However, it does not provide an exact measure of the profit that will be earned. Nevertheless, it is a reliable benchmark to gauge your performance compared to others in the industry and to track your agency’s progress, ideally in an upward direction. Amid the pandemic, agency owners have honed their business management skills and achieved remarkable success.
For agencies with 50 or more employees, a minimum EBIT of 12% is expected. However, a strong EBIT score is currently around 25%, and it’s crucial to note that some highly successful and growing agencies have EBIT scores of over 45%. This highlights the fact that there is always room for improvement, even for profitable businesses.
EBIT = Net Income – (Interest + Taxes)
2.2. Core Capital Target.
To ensure a successful and secure business financially, there are certain essential factors that you must consider. These include having 2-4 months’ cash in your bank account, avoiding debt accumulation, ensuring that you and your team receive market-rate salaries, and aiming for earnings before interest and tax (EBIT) of at least 12% if your agency has over 50 employees. Failing to meet these benchmarks can pose severe risks to your business. Therefore, it’s imperative to prioritize meeting them to guarantee the safety of your agency.
2-4 months' cash in the bank
No debt
You pay market rate salaries
EBIT at least 12% (50+ FTE)
2.3. Gross Profit Margin.
The gross profit margin is the percentage of revenue that exceeds the cost of goods sold. It reflects your agency’s ability to control production costs.
To calculate the gross profit margin, use the formula:
Gross Profit Margin = ((Total Revenue - Cost of Goods Sold) / Total Revenue) * 100
2.4. Operating Profit Margin.
The operating profit margin measures your agency’s operational efficiency and profitability by assessing how much profit you generate from core business activities. Improving your operating profit margin requires optimizing internal processes and reducing overhead costs. A rate of 60% or more leads to a net profit of 25% by the end of the day. If below 30%, consider adjustments like focusing on a specific area or market segment.
To calculate the operating profit margin, use the formula:
Operating Profit Margin = (Operating Income / Total Revenue) * 100
2.5. Accounts Receivable Turnover.
The accounts receivable turnover indicates how quickly your agency collects payments from clients. It measures the efficiency of your credit and collection policies. A high turnover suggests that your agency manages its receivables effectively, improving cash flow.
To calculate the accounts receivable turnover, use the formula:
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
2.6. Debt-to-Equity Ratio.
The debt-to-equity ratio assesses your agency’s financial leverage by comparing its debt to equity. It helps determine the level of financial risk your agency carries. A lower ratio indicates that your agency relies less on debt financing, reducing financial risk.
To calculate the debt-to-equity ratio, use the formula:
Revenue Growth Rate = ((Current Revenue - Previous Revenue) / Previous Revenue) * 100
3. Client Satisfaction and Success Metrics,
To achieve long-term success, an agency must prioritize client satisfaction. Happy clients not only provide repeat business but also become advocates for your agency. Let’s explore the critical metrics for measuring client satisfaction and success:
3.1. Net Promoter Score (NPS).
NPS is a widely used metric that gauges customer loyalty and satisfaction. It involves asking clients how likely they are to recommend your agency to others on a scale of 0 to 10. Clients are categorized into promoters, passives, and detractors based on their responses. A high NPS indicates that your agency has a strong base of satisfied clients who are likely to refer others.
To calculate NPS, subtract the percentage of detractors from the percentage of promoters:
NPS = Percentage of Promoters - Percentage of Detractors
3.2. Customer Satisfaction Score (CSAT).
CSAT measures the satisfaction of individual clients with specific interactions, projects, or services. It typically involves a post-interaction survey where clients rate their satisfaction on a scale. A high CSAT score indicates that your agency consistently delivers excellent service.
To calculate CSAT, use the formula:
CSAT = (Number of Satisfied Clients / Total Number of Survey Respondents) * 100
3.3. Client Churn Rate.
Client churn rate tracks the percentage of clients who stop working with your agency over a specific period. A high churn rate can indicate dissatisfaction or issues with your services. Reducing churn should be a priority.
To calculate the churn rate, use the formula:
Churn Rate = (Number of Lost Clients / Total Clients at the Start of Period) * 100
So, what's next.
Digital agencies need to discuss these numbers frequently. Monthly would be preferable. And hire a financial expert to calculate the numbers and create a dashboard with real-time information on this critical information. It's your agency. As I explained: it's backbreaking work and probably differs from your expertise. But it's vital for your future success.