Agency profit and agency profitability: Advice from an industry expert

If we had to sum up agency teams in a word, “resilient” seems like the best fit. From securing business and retaining clients, to working against tough deadlines–the pace is often intense, and the predictability… less than stellar. 

Of all the aspects of working in an agency, though, maintaining a healthy agency profit and agency profitability is among the most stressful.

In this article, we’ll talk about the intricacies of building and maintaining a profitable agency.

Since that’s a big topic to cover, we’d better get started. 

Defining agency profit and agency profitability

Agency profit definition

Agency profitability definition

There are different agency metrics you can use to track profitability at an agency. For example, you can use agency client profitability, project profitability, return on assets (ROAS) or overall agency profit margins. 

How to calculate agency profit and agency profitability

Formula for agency profit

Profit = Total revenue – Total expenses

Example: Let’s say your agency makes $30K in revenue one month and has expenses of $10K for that month.

Example calculation: Profit =  $30,000 – $10,000 = $20,000

❗️Total expenses include direct and indirect costs such as:

• Cost of services sold
• Operating costs
• Interest
• Taxes 

Formulas for agency profitability

We mentioned above that there are various profitability metrics like ROAS and project profitability, but the simplest way is to calculate overall profitability is in terms of gross profit margins and net profit margins, using these formulas:

Gross profit margin formula

Gross profit margin = (Revenue – Cost of services sold) / Revenue x 100

Example: In this example we’ll also say revenue is $30K, but out of total expenses we’ve identified that cost of services sold was $5K.

Example calculation: Gross profit margin = ($30,000 – $5,000) / $30,000 x 100 = 50%

❗️Cost of services sold includes direct costs associated with service delivery like:

• Salaries for team members who work billable hours
• Freelancer and contractor costs 
• Advertising spend on clients’ behalf
• Cost of creative assets like video and images and 
• Specialized software licence costs for client work

Net profit margin formula

Net profit margin = (Net profit / Revenue) x 100

Where Net profit = Revenue – Total expenses

Example: Let’s say your agency makes $30K in revenue in a month, and has total expenses of $8K.

Example calculation: 

Net profit = $30,000 – $8,000 = $22,000

Net profit margin = ($22,000 / $30,000) x 100 = 73%

By tracking these, you’ll have a multi-faceted view of your agency’s financial health, including a gauge of how well you’re managing costs relative to earnings. 

The importance of agency profits and agency profitability

Next, let’s explore the impact of agency profits and agency profitability at agencies.

To get a first-hand account of the impact these factors make on agencies, we spoke with agency veteran Rob Sayles. Rob’s a seasoned consultant when it comes to all things agency success, and profits and profitability are no exception. 

Why agency profit matters

Rob tells us that “fundamentally, agency life is incredibly fast-paced. And, if you ask any founder or leadership team, incredibly stressful. Why are we making ourselves wake up at four o’clock in the morning with massive stress and anxiety and going doing this stuff day in day out?

It’s not just about the creativity, it’s not just about the passion, it’s about running a business.”

So, that’s where agency profits come in. Keeping an eye on this important when running an agency business, no matter what stage. Here’s two key reasons why:

1. Looking strong for an exit: If your agency is established and performing well, a substantial profit is usually attractive to external investors or potential acquirers. 
2. Having a buffer: On the flipside, if your agency goes through a rough patch for whatever reason, a healthy profit gives you the safety net you need to keep things afloat until the situation improves. 

Why agency profitability matters

While agency profit can be thought of as money in the bank, agency profitability demonstrates the efficiency and sustainability of your agency’s operations. 

Here are 3 key reasons that elaborate on why this matters: 

1. Allows for ongoing improvements : Keeping a close eye on profitability helps stakeholders assess long-term viability, and the state of cost management within the agency. This allows the business to identify areas for improvement, and to address any inefficiencies as soon as possible. 
2. Gets your agency out of survival mode: If your agency’s lacking in the profitability department, you’ll get stuck in survival mode, according to Rob: “If you’re not profitable, you’re fighting [fires] and it’s a race to the bottom on commodity pricing. And it’s stressful. You’ll probably lose your best clients and you’ll very likely lose your best talent.” Profitability gives you the breathing room you need to grow, and therefore allows you to maintain a high quality of work that keeps clients happy. 
3. Supports reinvestment opportunities: It’s unlikely that agency owners get into the agency world to get rich quick, especially in early stages. Reinvesting in the business will be a bigger priority at first. When asked about agency profitability Rob spoke to us about how you can use a healthy level of profitability to reinvest: “Profitability is essential to growth, stability, and agility. If you’re not profitable, you can’t reinvest in better talent, innovation, or technology.”

If your agency profitability seems less than ideal at the moment, one course of action is to increase your revenue. Looking for some new tactics in that regard? Explore our free eBook on the topic: 

4 ways to improve profits and profitability at agencies

1. Assess your approach to resource management

It’s just as important to make sure you’ve got the resources and people you need to complete your agency’s projects on time and within budget. 

Proper resource allocation and team assignments—such as assigning the right team members to projects based on skill, availability, and cost—ensures that work is delivered efficiently without overextending budgets. 

In Rob’s words: 

“Ideal resource management improves the client relationship while also improving efficiency and profitability.”

Here are some factors all good resource management processes include:

• Proper visibility over how resources are being allocated
• A clear understanding of resource availability
• An overview of how your forecasted allocation relates to your actual allocation
• A solid clash management method to prevent overbooking

2. Evaluate your client fit

According to Rob, a lot of agencies fall into the trap of having “client relationships that are transactional, rather than strategic.” 

Put simply, agencies can be tempted into accepting and working with clients on a short-term basis for the sake of a quick dollar. Instead, he recommends working towards ongoing partnerships that deliver consistent results and recurring revenue. 

3. Optimize your project management

“A key factor that makes a positive impact on agency profits and agency profitability is really good operational and project management. If you are not good at shaping, managing and delivering projects, you will completely trash [your] profitability.” 

—Rob Sayles

Poor project management leads to scope creep, which leads to the project costing more than originally projected, narrowing the profits and level of profitability your agency can achieve. 

In Rob’s words, “An agency is built on people exchanging time for money, fundamentally.” By optimizing your processes, you can keep projects start and end dates on track, to hit deadlines without overshooting your budget. 

4. Consider value-based pricing

There’s been vibrant conversations in many industries about dropping the billable hour model entirely. Take the sparkling reviews of Shaun Jardine’s book on ditching the billable hour in the legal profession. Or Chris Do’s ongoing education about the revolutionary potential of value-based pricing for designers.  

Rob praises value-based pricing as a good option for enhanced agency profitability. However, he acknowledges its shortcomings too. It’s not a simple transition for agencies. Many agencies simply don’t know how to shift from a billable hour mindset, and more find it difficult to justify what they charge without associating time spent on the effort. 

However, for the agencies that can pull it off, Rob gives a compelling example of why value-based pricing is so, well, valuable: 

“Say you’re doing a rebrand for a major corporation and you’ve put a time-based $100,000 price tag on it. You might get a profit margin of 20% out of that. If you put value-based pricing on that, you could perhaps put a value of $1,000,000 on that.” 

This means that agencies focus less on the amount of time and effort put into the campaign ($100,000), and instead negotiate the cost by focusing on the expected impact of the campaign and the revenue the client will see off the back of it ($1,000,000). By doing this,  you can position yourself to charge more and therefore make larger agency profits.

Addressing agency profits and profitability for different agency types

Digital agencies

According to Rob, digital agency profit and digital agency profitability are  particularly affected by the ever-changing landscape of (often expensive) technology that clients need these agencies to use. 

To operate the specialized tech clients ask agencies to use, the agency needs to hire or contract out to specialized talent. That also adds costs and shrinks profits.

To combat these expenses, Rob recommends factoring these costs into what they charge clients so that their profits don’t take the hit direction.

In terms of talent, he recommends agencies open their roles to remote workers to widen the talent pool available to them. With this wider pool to choose from, you can find the right skillsets and also potentially secure talent team members at a more competitive salary. This can help reduce people and resource management costs, in turn improving profitability.

Marketing agencies

While digital agencies often offer services like website builds or ecommerce management, marketing agencies (as the name suggests) offer services specifically related to advertising, distributing, or bringing awareness to what the client sells. These agencies offer traditional (offline) services and digital (online) services, or a combination of both.

Marketing agency profit and digital marketing agency profit are affected by the unpredictability of their work. It’s difficult for these types of agencies to consistently predict ROI and other campaign results. 

As such, if they fall short of projections for their clients, revenue that’s dependent  on success can suddenly disappear, affecting profits in turn. 

By consistently reviewing their forecasted campaign spend versus actual spend, these agencies can best address these issues, and protect their profits, effectively. That way, they can quickly pause low ROI efforts and pivot to initiatives with better revenue-generating potential.

On top of this, Rob suggests that marketing and digital marketing agencies pay particular attention to expenses, and cut back where possible when they see ROI or campaign result trends shifting down. 

For example, they could also evaluate their internal tech stack, and pause or cancel subscriptions to unnecessary tools. 

Ad agencies

Ad agency profitability can take a hit when production costs and media purchasing costs rise, in Rob’s experience. Depending on the creative they’re producing, the cost of talent, specialists, and third parties mean budgets can get exceeded in a snap. 

When it comes to protecting profit, advertising agency leadership should prepare as far in advance as possible. Rob’s seen successful ad agencies prep for Q4 campaigns as early as Q1. 

With this long run-in time, advertising agencies can potentially negotiate lower rates since they’ll be guaranteeing their business ahead of time.

This tactic safeguards profits because agencies can then budget for a definite amount they’ll spend on production. Therefore, their profit won’t be unnecessarily eaten up by an unexpected media or production cost spike. 

What’s the bottom line on agency profits and profitability? 

Effective project management, value-based pricing, and strategic client relationships are all valuable tactics for boosting agency profits and profitability. 

But, the cornerstone of all of these approaches is good agency resource management. Centralizing all of the information about your people, resources and projects helps you handle all the moving parts that can increase costs unnecessarily, and eat into profits. 

For a better way to handle that, Resource Guru can help. 

Features like real-time availability tracking and project scheduling, guarantee the right people are assigned to the right tasks, at the right time. This minimizes underutilization and overbooking, reducing wasted hours and avoiding burnout.

In short, the software empowers agencies to boost productivity, meet deadlines, and, ultimately, maintain healthy profits.

To try Resource Guru yourself, just click here: