There’s a scenario digital marketing owners and leaders face that’s not talked about openly. One moment, finances seem great and all is well, then suddenly, you’re living invoice to invoice and crossing your fingers as you ask what checks have come in. Even when work is brisk it can happen: your money seems to mysteriously leave your hands nearly as soon as it arrives, and your profitability is low.
In fact, in a HubSpot survey of more than 1,000 owners and leaders worldwide, 57% of agencies reported having less than three months of cash on hand to cover planned expenses.
If this sounds familiar, take heart. Not only is it common, many have learned how to overcome this recurring issue. They now understand where their money goes, what metrics are most important, and how to grow instead of feeling as if they’re constantly putting out financial fires or rebuilding.
The answer is in key performance indicators (KPIs) and how they truly can drive agency stability and success.
Follow The Money
A KPI analyzes performance as it relates to a goal. KPIs can be used to evaluate the overall success of an agency or a specific initiative, and a strong set of KPIs will monitor critical business criteria to provide insight into where progress stands. The most useful KPIs are developed with the SMART framework: Specific, Measurable, Achievable, Relevant and Timely.
With marketing agency KPIs, you can follow where your money is going so you’re able to manage it better. Because let’s face it, when you’re measuring something, you’re going to manage it.
According to HubSpot’s research, only 30% of agencies now work strictly on retainer. With the rise of project work and the typical peaks and valleys of activity, KPIs are more important than ever. Today, many leaders share these with their teams so they can ask the right questions, identify what’s working and what isn’t, and make better decisions.
Keep in mind that KPIs for professional services organizations (PSOs) — which is what digital agencies are — are tied to knowledge workers. Whether it’s profit, quality or customer satisfaction, growing in any significant way usually means investing in employees and contractors.
KPIs can ensure that this growth is done in ways that improve your business.
Profit By Example
There are many KPIs for digital agencies to consider. These can range from sales closing ratios to cost per acquisition, goal completion rates to customer lifetime value figures. One of the foremost KPIs for agencies is project profit margin (PPM), which can determine how much of each dollar charged to the client you will get to hold onto.
It can be a useful early indicator that your agency might be heading in the wrong direction, too, giving you time to take corrective action.
The following is a basic process for getting PPM, which you can duplicate to create other KPIs. Overall, this involves identifying the objective, determining a formula to create the metric, collecting the necessary data, setting a KPI target, then measuring and monitoring progress regularly.
The formula for calculating PPM can be done in five steps:
- Actual sales: Determine hours spent multiplied by your sales rate
- Actual cost: Look at hours spent multiplied by the cost rate of employees doing the work
- Expenses: Add up all project expenses.
- PPM in dollars: Subtract actual cost and expenses from actual sales
- PPM percentage: Divide the actual profit margin dollar figure by actual sales, and multiply it by 100.
Now it’s time to collect your data on a project. Let’s say you’re working on an e-book to support a lead gen campaign. Your team consists of a designer at $140 per hour, $130 for the content writer, $100 for the account manager. You also needed to buy a few things for the project.
With all this data, you’re now able to calculate PPM for the project. If it comes out too low, moving forward, you’ll be able to set a higher PPM as a target. When you measure in real-time from a project’s beginning, you can adjust to make sure you hit that desired margin.
PPM is a valuable KPI for leaders for project managers who are concerned with the “here and now” and ascertaining the current health of a particular initiative. Leaders will take matters a step further and apply this information to long-term planning, specifically matching it against the pipeline of impending activity in order to more accurately forecast and prepare for what’s ahead.
Naturally, whenever you can better evaluate income and costs, you can better understand cash flow and what percentage of revenue you need to keep on hand. As a rule of thumb, 10% typically covers about two months’ worth of agency expenses, 30% is closer to six months.
Driving Performance And Success
The thing about KPIs is they snowball. You start with one and end up with much more insight.
For instance, with PPM, you can drill down to understand what type of work produces the greatest profit, which approaches are more cost-efficient, and if you’re over or under-servicing clients. You can look at what worked best historically, and then when you tackle new work, better forecast time and allocate resources — this is an industry where time definitely is money.
Chasing information down can be a bit of a challenge. Different functions in an agency rely on different tools and employees do keep all sorts of spreadsheets. So, while the data you need is all there, it may be siloed across different tools and documents. Professional services automation and other sophisticated methods of data aggregation can help. Not only do they automate key agency functions, but all your data is in one place, can be viewed in real time, and — when shared with employees — they can put an entire agency on the same page.
Regardless, KPIs drive digital agency performance and success. Start small and see where it brings you. This blog by the Bureau of Digital can help – we also cover the topic in further detail here. Chances are, you’ll make a lot more progress in less time than you ever imagined was possible.