How Do Agencies Make Money? - Marcel Petitpas
Like any other service business, marketing agencies make money by charging clients for their services. The digital agency model consists of three main components: strategy, creativity and technology. Agencies are paid through various hourly and project-based fee structures, or a value-based pricing model depending on the scope of work and complexity of the project. And once you set your pricing, you need to start measuring agency profitability, by looking at key performance indicators like customer lifetime value, utilization rate and others. Knowing your net profit margin will allow you to invest into your business more confidently and perhaps hire a dedicated sales team to fuel topline growth or get that piece of project management software you always wanted to raise efficiency.
What factors determine the profit margins of advertising agencies?
To make a profit, digital agencies must know how to balance their business costs with their fee structures. This includes operational costs such as employee salaries, rent and other overhead expenses. It also includes pass-through digital marketing services that might be outsourced, such as SEO, web design and paid ads.
Earning a healthy profit isn't just beneficial for the ownership team. It can have a major positive impact on both employees and customers alike. When your company is financially secure, you're no longer limited by finances. This can allow you to do business in accordance with your ethics, creating clear expectations and finding better-fitting opportunities for those who don't align with your own vision.
Pricing models
Every agency must provide a pricing system for the service that it provides. A pricing model is set forth by an agency based on the value of products offered, as well as industry standards and guidelines. Some models benefit agencies more than others, and they differ between firms. Your pricing model might be based on another agency's pricing model that does not meet your business goals.
Listen to Marcel Petitpas to learn details of an agency model. Here is an introduction from his article in the Agency Growth Book.
"You probably didn’t get into business to make less money than you could have working for someone else... Unfortunately, that’s the reality for many agency owners, especially in the formative years of their business. Even after things start to take off – be it increasing revenue year-on-year, or growing a bigger team – many owners struggle to see their bottom line grow at the same rate.
Being very profitable isn’t just something that benefits the ownership team. It’s also one of the best things you can do for your employees and customers. The more profitable your company is, the less constrained you are by finances. This means the freedom to act in a way that is in alignment with your values, which in turn can help you set clear expectations with your teams and optimum clients, while guiding those who aren’t a good fit toward other agencies that may better suit their needs.
If you’ve made less than a 20% EBITDA after paying yourself a market-rate salary, or felt confused and overwhelmed about how to measure and take control of your profitability – this chapter has been penned for you.
I’m Marcel Petitpas – founder of the expert firm Parakeeto. What’s our expertise? We help digital and creative agencies to measure and improve their profitability. I’m an international speaker and run the #1 podcast on the subject of Agency Profitability. Parakeeto has helped thousands of agencies measure the right metrics and optimize their profitability through our range of managed services and free resources.
In this chapter, I’m going to give you everything you need to manage your agency better than 90% of the industry...
Let’s dive in. "
