These are the top financial metrics you should be monitoring regularly in your marketing agency.
Running a creative agency in Ireland is highly competitive. The landscape is dynamic and there are low barriers to entry for new competitors. To run a successful digital marketing company you need to have a tight handle on your finances and be monitoring your KPIs and agency metrics regularly.
Around Finance is a leading online accounting firm in Ireland. We work closely with marketing agencies. From our experience we’ve put together this list of top agency metrics to help you run a profitable business.
Profit & Loss – The Big Picture
The table below is a ‘rule-of-thumb’ guideline to the cost structure in your marketing agency.
Net Profit before Tax
Different agencies will have different cost structures.
For example, some will choose to spend 10% of the annual budget on marketing, accepting a lower net profit as they try to grow aggressively.
In terms of labour cost, generally speaking, if an agency is spending significantly more than 60% on labour cost the reasons are usually a combination of:
- Wage costs
- Low productivity
- Over servicing existing clients
With this in mind, the following agency metrics should be tracked weekly/monthly.
List Of Agency Metrics
We suggest you create a simple dashboard to monitor these KPIs regularly in your marketing agency.
- Labour Cost % Of Revenue
- Marketing Spend (% of GP)
- Operating Expense (Ex labour ex marketing) % Of Revenue
- Net Profit %
- Utilisation Rate
- New Client Acquisition
- Churn Rate
- Customer Acquisition Cost (CAC)
- Lifetime Value (LTV)
- Average Ticket Value
- Accounts Receivable (AR) Ageing
This is an obvious one but still very important to track each month. You want to see your topline revenue increasing over time and in line with your budget and sales targets.
2. Labour Cost % Of Revenue
Staffing and freelancers are one of the biggest costs in a marketing agency so it’s important that you’re monitoring this KPI monthly to ensure there’s no unexpected creep.
This agency metric tells you what percentage of your revenue is going towards human resources.
Labour total expense / Revenue x 100 = %
3. Marketing Spend (% of GP)
Surprisingly, a lot of marketing agencies don’t spend enough (or at all) on their own marketing. You should be spending between 5% – 10% of gross profit if you want to grow.
Total marketing spend / Gross profit x 100 = %.
4. Operating Expenses (Ex labour ex marketing) % Of Revenue
Once you have spent money on labour (servicing clients) and marketing (finding new clients) other operation costs should be measured and managed.
Operating expenses (also known as overheads) include all the costs involved in running your agency, including things like rent, bank fees and software subscriptions. This KPI gives you an idea of what percentage of revenue is going towards running your business.
Overheads (Ex labour, ex marketing) / Revenue x 100 = %
Successful agencies are able to maintain this cost between 15% – 20% of revenue. As you scale you should aim to drive this cost down as you capitalise on efficiencies within the business.
5. Net Profit % Of Revenue
Net profit is the profit left in your digital marketing agency after deducting all of your operating expenses.
Net income / Revenue x 100 = %
There’s no clear agency metric benchmark here for marketing companies. The niche you’re in and the services you offer play a role here. Highly successful agencies are able to achieve Net Income percentages of well over 30% while those that are trying to establish themselves will be happy with 10%. Most agencies seem to sit between 12% – 20%.
6. Utilisation Rate
How efficiently are the people in your marketing agency working? Utilisation rate is one agency metric to determine that and can help optimise resource allocation.
This is the percentage of billable hours worked by the agency’s employees out of the total available working hours.
Total billable hours / Hours worked by employees or freelancers x 100 = %
You could take this to a further step and calculate this KPI per individual.
7. New Client Acquisition
A core focus for any successful agency is sales and adding new clients. If you’re not adding clients to your digital marketing agency you’re putting your business future at risk.
Make sure you’re tracking the number of new clients that you’re adding each month. Compare that to your sales targets.
8. Churn Rate
On the opposite end of that spectrum is churn – customer attrition. Churn rate is what percentage of your clients are leaving each month / quarter / year.
Client retention is a key part of running a successful digital agency. It’s frustrating putting all that time, money and effort into growing your agency and not seeing profitability increase because you have a leaky bucket.
Churn Rate = (Number of customers lost during a time period / Total number of customers at the beginning of the time period) x 100
Ideally you want this number to be zero but as you grow that’s not realistic. Make sure you keep it low and manage client retention well.
9. Customer Acquisition Cost (CAC)
Customer acquisition cost is a key metric for a digital marketing agency to track. It tells you how much you are spending to acquire new customers. This is the total amount spent on sales and marketing versus the number of new clients added over a period.
CAC = Total marketing and sales expenses / Number of new clients acquired
Total spend = €30,000
New clients = 12
CAC = €2,500
A digital marketing agency wants to have a relatively low CAC as it means you’re acquiring new clients cost-effectively. But if your CAC is too low it could also mean that you’re not investing enough in your own marketing. An important metric to look at alongside CAC is LTV.
10. Lifetime Value (LTV)
If you’re spending €2,500 to acquire a new client, is that good or not?
Part of the answer depends on how much that client is worth to you. Are they a once off client who only spends €3,000 with your agency? Then no.
Lifetime Value (LTV) or Customer Lifetime Value (CLV) is a valuable KPI for marketing agencies. It calculates the total revenue generated by a customer over the entire duration of their relationship with the agency.
If your agency is using a monthly recurring revenue (MRR) model and is charging a monthly retainer, and a client spends an average of 24 months with your agency, then that CAC is good.
LTV = Average invoice value x lifetime with your agency
Average invoice value = €2,000/m
Lifetime with your agency = 24 months
LTV = 48,000
At a CAC of €2,500 your agency should be making considerable profit to cover operating costs and ensure you’re able to deliver quality services, while still generating strong profits.
11. Average Ticket Value
Average Ticket Value (ATV) is a financial metric that measures the average amount of revenue generated by each client.
A lot of marketing agencies owners that struggle to pay themselves a decent return have an ATV that’s too low. They may not be charging enough for their services or have too many low ticket clients. They’re being stretched thin to service those clients.
By increasing ATV (or optimising other elements of your offer), an agency will have money to hire better people, provide better quality work, invest in growth and pay the founders a healthier return.
ATV = Total Revenue / Number of Clients
Under this point it’s also worth understanding the makeup of your ATV. Your ATV may be high but if you have one outlier client who is significantly pulling up your ATV, your agency could find itself in trouble, especially if that client leaves.
12. Accounts Receivable (AR) Ageing
Marketing agencies, especially new ones, are heavily dependent on cash flow. Accounts Receivable ageing is a metric to measure outstanding client payments. It helps you to identify potential bad debts and risks before they become a problem.
You should be able to pull this metric directly from your accounting software.
Your goal should be to have a healthy free cash flow and be building a cash reserve of three to six months to cover expenses in the event of a drop in revenue.
Average monthly operating costs / cash-on-hand = number of months cash on hand.
We Give You Numbers That Matter
Around Finance specialises in bookkeeping, accounting and advisory services for digital marketing agencies in Ireland.
Our goal is to help you grow a highly successful and profitable agency. And that starts by having a strong financial model, growth plan, clear agency metrics and on-going support.
Take a look at our services for your industry or book a discovery call with us now to see what we can do for your agency.