7 KPIs To Keep Your Agency Profitable
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Want to know how to use your data to your own benefit? First things first: you need to decide which metrics you should track.
Because you know it: each part of your agency’s workflow needs attention.
For instance, if you focus on profit too often, you can lose sight of other areas where you should be improving your agency’s performance—like bringing in new business.
Keep reading to unfold the top seven KPIs we suggest you watch to keep your agency profitable.
How To Define Agency KPIs
You can’t track every agency KPI that exists, primarily because no two agencies are the same. There’s no complete list that every agency should track. What you will track as an agency will depend on the industries you serve, the size and type of agency you are, and the goals your agency has.
Consider answering these three questions when choosing which KPI to monitor to keep your agency profitable:
1. What are your business goals?
What’s important to your agency? Good KPIs will help you measure what matters to your business. You may have goals specific to your employees, your marketing activities or customer service.
2. What stage is your business in?
Maybe your agency doesn’t want to grow in number of employees. Maybe you’re a new company and your main goal is to focus on retaining talent that will help you grow more stably in the coming years. Businesses that are in different stages will want to focus on different KPIs, so try to answer which KPIs are most relevant to the stage that your business is in.
3. What’s going to be your mix of lagging and leading KPIs?
The ideal mix of indicators to monitor for your agency will be a combination of both lagging and leading KPIs. Leading KPIs are forward-looking, e.g. client satisfaction. If your clients are happy with your services, that can be a leading indicator that new business from them will keep coming.
An example of a lagging indicator is profit. Monitoring your profitability will show you how well you have been financially performing, but profitability won’t reveal how well your business will be doing in the future.
After you’ve answered those questions, it’s time to look at the top seven KPIs that are most often monitored by agencies. We’ve divided them into three big categories:
Sales and acquisition agency KPIs
Agency profitability KPIs
Now let’s dive in.
1. Number of Pre-qualified Leads
If you have a sales funnel that you use to bring in new leads and convert them into clients, that’s great. But how do you measure your number of pre-qualified leads in it? Let’s take a look at an example.
Let’s say you’re looking at the month of March. How many new qualified leads landed in your sales funnel in March? Why not expand further and look at the entire first quarter of the year? Now you’ve got an idea of what your sales could look like next quarter.
2. Sent Proposals
Even though you shouldn’t jump to send a proposal to every lead you get, you should aim to get all of your qualified leads to the proposal stage as quickly as you can. A typical challenge that many agencies face is when proposals sit in their funnel for over a month—sometimes even 90 days—without closing.
Maybe you have a large number of leads coming in but they’re not making it through your pipeline. Why? Either your sales team is sitting on them too long or there aren’t enough qualified leads.
3. Value of Your Sales Funnel
Similar to your number of qualified leads and proposals sent, the value of your sales funnel will help you predict your coming months. But it doesn’t matter how valuable your funnel is if you’re not closing deals. That’s where close rates are important.
Ideally, you’ll want to have both a high close rate and a high value of your sales funnel. But of the two, having a higher close rate is more important.
Example 1: Imagine your funnel contains 20 deals that total $100,000 each. The value of your sales funnel is $2,000,000, and your close rate is 40%. According to that information, you can forecast that your agency will close $400K within the next month or two.
Example 2: Now imagine that you have a sales funnel that totals at smaller value, like $1,000,000. You might have less deals at a smaller price in your pipeline, but with a higher close rate, you can actually end up closing the same amount of revenue with less effort.
Having an end-to-end agency management tool will help you visualize your sales funnel and make more informed decisions. Here’s what your sales pipeline could look like in Productive:
Make sure that your sales team judges well: which leads are more and less worthy of your time?
Production at 4Site
Now, with Productive, we’re able to now see out into the future—far more than we were ever able to see before.
4. Client Acquisition Cost
Your client acquisition cost or CAC is a key metric to keep track of. If your agency is young, you may not be worrying about it as much, but as your company grows this expense will be more and more critical for you to watch. Your CAC will answer the question: how much do you have to spend to get a new client?
To calculate your CAC, you will need to add up all your marketing and sales expenses and divide that sum by the number of new clients that came in during a given time period.
Example: Let’s say you spent $10,000 on sales and marketing throughout the last quarter and you got 20 new clients. That means that your client acquisition cost is $500 per client.
5. Lifetime Value of Clients
Now let’s have a look at your number one retention KPI: lifetime value of clients (LTV).
The reason why you’ll want to track your LTV per client is that it will help you decide how much you can spend on acquiring new clients. If you know that your average client spends $1,000 per month with you, you need to make sure that your expenses (sales and marketing costs) to acquire the same customer are below $1,000.
That said, LTV isn’t the easiest KPI out there to track. Some agencies will have a harder time figuring it out, but the more retainer work you have, the easier it is to measure.
To calculate your LTV per client, multiply your average transaction value and your average number of transactions per year with your average client lifespan.
6. Agency Utilization Rates
As an agency or service provider, you always want to know the bottom line: are your employees working effectively? That’s what your utilization rates tell you.
Your agency utilization rate is a percentage that indicates the amount of time that a teammate is spending on billable work.
Your agency’s average utilization rate is calculated as the sum of all your employee’s utilization rates divided by your number of billable staff.
Monitoring utilization in Productive is just as easy as going into the tool to check out your team’s schedule. Assuming that everybody is regularly tracking their time, all you need to check your teammates’ utilization rates is to go into your utilization insights.
We’ve always known, on a monthly basis, how we’re doing as a company. But knowing on a per project level, in real time—we never really had that visibility. You guys do a good job of providing that. If you look at it on a yearly basis, it does give us the ability to look, per client and per project, where we really stand.
7. Agency Profit Margins
At the end of each month, quarter or year, one of your main questions is: as an agency, are you profitable?
To calculate your agency’s profitability in Productive, first, you need:
Time tracked by all your employees (top management included)
Your employee cost rates
Once you’ve got your expenses and budgets in Productive and time tracking going, you can analyze profitability without ever having to enter a spreadsheet again.
To get your ready-made profitability reports, just go into the reports library and choose how you want to view profitability, e.g. Profitability by month:
See? That was easy.
Learn more about how to increase your agency profit margins.
4Site Interactive Studios
Now, we can see a lot of that information built right into the UI of Productive. We’ve entered in all our cost and overhead information, so we look forward to seeing the numbers for each of our employees.
Bonus: Agency Gross Income
Agency gross income is all the income you’ve billed to clients without the cost of external services or goods you (still) have to pay for. In other words, your AGI is calculated by subtracting your expenses related to clients from your gross billings.
In a marketing agency, an example of external expenses related to clients will be buying media space or renting out equipment for a project that you’ll invoice to your clients with a markup. Another typical client-related expense would be when you hire contractors to join you in a project.
When you charge your clients for extra freelancers you hired to get a job done quicker, the total revenue you get from the client clearly isn’t all your own. In an agency, it’s important to be able to forecast how much your contractors are costing you because depending on the nature of the work, certain things are better delivered in-house. Being able to visualize different scenarios will help you increase your profitability in the long run.
Track the Top Agency KPIs That Will Keep Your Business Profitable
There’s no doubt you need to keep track of the agency KPIs that will keep your business afloat. But, remember: profit margins aren’t the only indicator to watch to keep your agency profitable. With an end-to-end agency management tool, you can keep track of all your KPIs and streamline your agency’s processes.
Schedule a demo call with our Sales team to learn how Productive can shape your agency’s future.