Any good creative agency’s reputation is built on its creative output. After all, that’s what your clients are paying you for! As a result, many agency owners focus on creative output alone as a means to stand out from the crowd and build a successful agency. However, your business will never grow if you’re not making any money. This is where a fair few agency owners fall a little bit short. They’re so focused on building an agency that’s renowned for its amazing creative work that they don’t pay too much attention to profitability. This can come back to bite them! Ultimately, if you want your agency to last in the long run, you need to be thinking about profitability.
So, how can you grow a sustainable creative agency? Of course, it can be a complicated process and every agency is different so there’s no one-size-fits-all approach. Despite this, I believe that one of the most straightforward ways to achieve sustainable growth and ensure that your agency is profitable is by monitoring a select handful of KPIs. This blog will outline the 6 KPIs you need to monitor for a profitable creative agency, as well as show you how you can figure out how your agency compares with your peers and which KPIs you may need to work on. Building an agency that is both profitable and renowned for its work is possible. You may just need to rethink how you monitor and measure your business.
What are the 6 KPIs you need to monitor for a profitable creative agency?
When it comes to KPIs, almost anything you measure could come under this umbrella. However, this soon becomes overwhelming. You could measure KPIs all day long, but it’s about finding the ones that are genuinely useful to you and your agency. By this, I mean those KPIs that are a true reflection of your current performance and profitability. Don’t waste your time measuring KPIs that don’t help you reach your goals! The 6 I’ve outlined below are those that I believe are key if you want to build a successful and profitable agency. From there, if there are any others that you think would be valuable for you, of course you can measure those as well.
Gross Profit Margin
Essentially, your Gross Profit Margin (GPM) is your total cost of sales dedicated from your total revenue. The healthier this figure is, the more likely your agency will achieve a good net income. But what counts as your cost of sales? For most creative agencies, this will be your staff and freelance costs (but not staff that aren’t chargeable for client work such as finance and HR resources- these count as overheads instead).
For a sustainable creative agency, you should aim for around a 41%-50% GPM percentage. Anything above 50% is a great figure! If it’s below this, you may need to review how productive your fee-earning staff are being. Are they delivering quality projects on time? How many missed deadlines are passing you by? And, are you even charging enough for your services in the first place? These are all things that you need to consider for a good GPM and, in turn, a profitable creative agency.
Operating Profit Margin
The next of the KPIs you need to monitor for a profitable creative agency is your Operating Profit Margin (OPM). This is the proportion of revenue left after deducting all running costs before interest and taxes. By measuring this KPI, you will gain insight into how efficient your agency really is. To calculate the figure, divide your operating profit by your total revenue and multiply this answer by 100 to get a percentage figure.
A good OPM for a creative agency is 20% or over. If it’s lower than this, you may need to review your Gross Profit Margin and how much it’s costing you to run your agency. Where can you cut costs? Could you move to cheaper office spaces? Cut down on your freelance costs? Or, do you simply need to take on more clients so you have more revenue coming in? Finding this balance is key to a healthy OPM.
Cash in the bank
Of course, every business needs a positive cash position to be sustainable. So, it goes without saying, the more cash you have, the better position you’re in. A good reserve of cash gives you peace of mind that your overheads are covered, and allows you to plan for the future of your agency. It’s recommended to have at least 3 months of cash reserves available to you, but 6-plus months is ideal. Of course, it takes time to build your agency up to this point, but thinking about its long term position, this is the figure you should aim for. Every agency is different, so there’s no one-size-fits-all approach to getting more cash in the bank. But, by improving some of the other KPIs on this list such as your hourly rates and utilisation rates, you should start to see this figure rise.
When it comes to the KPIs you need to monitor for a profitable creative agency, hourly rates is another one that it’s important to consider. It’s recommended to review these rates a least once every year to make sure they’re in line with your costs and what your competition is charging. Doing this ensures that you are charging what your work is worth and you aren’t being undervalued. But, it also protects you against charging so much above the average going rate that potential clients will just look for a cheaper option elsewhere. Here, research is key- you need to know your competitors and what they’re up to, so that you can adapt your strategy and charges accordingly!
Of course it’s important to research your specific competitors, but what’s about average for the industry? This will vary depending on factors such as location, but a basic idea is as follows:
- Junior level hourly rates: ideally, you’d want the hourly rate for your junior team members to be somewhere between £76-£85. If it’s lower than this, you should definitely consider raising it. If it’s higher than this, then that’s great news! Are there any rising stars in your junior team who are punching above their weight? Could you increase their hourly rate, somewhere in the region of £86-105 per hour?
- Mid level hourly rates: Ideally, you’d want this to be around £96-105. Anything above this is good, and anything above £125 for this level is great!
- Senior level hourly rates: Anything below £105 per hour is low for this level of seniority. It should be at least £106-£125. Are there any rising starts who could have their rate increased to £125-£145?
- Director level hourly rates: At the highest level of your agency, directors cannot commit to paid client work 100% of the time due to the other activities they must carry out. So, you want to maximise every hour that is chargeable. A good rate is between £151-£170 per hour. Anything above this is a great rate!
Your utilisation rate means the percentage of your fee-earning staff’s time that you can bill out to clients. This will certainly vary between staff members, with junior roles tending to have higher rates than more senior roles who spend more of their time on non-chargeable tasks such as business development. However, the higher your utilisation rates are across the board, the more profitable your creative agency should be. Improving your utilisation rates can be a hard balance to find. But, start by looking at what your fee-charging staff are spending their time on. Can any of these tasks, such as business development, finance tasks, training, and so on be reassigned to staff that are not fee-charging? Where could efficiency be improved? Are your team members spending too much time working on the business itself rather than chargeable projects? All of these considerations can help you to improve your utilisation rates for all team members. But what should utilisation rates look like? Here are some guidelines:
- Junior level utilisation rates should be the highest in the organisation, as these are the team members with the least amount of time taken up with other tasks. Your junior level utilisation rate should be above 75%. If it’s not, could any non-chargeable tasks be given to someone else? Or, do they need extra support to complete their projects within budget?
- Mid level utilisation rates will be slightly lower, but should still ideally be around 75% or higher.
- Senior level utilisation rates should be above 65%, as it’s expected that these team members will spend more time on non-chargeable tasks such as overseeing junior and mid level staff.
- Director level utilisation rates should be the lowest out of all team members as these are the people with the most non-chargeable tasks on their plate! Anything above 25% is OK, and anything around 36%-45% is good.
You can find out more about utilisation rates in this blog post: Recovery rates: is your design agency working for free on Fridays?
Gross Income Per Head
The final point on this list of the KPIs you need to monitor for a profitable creative agency is Gross Income Per Head. To calculate this, you simply need to divide your total income by the number of all of your full-time staff. For a sustainable creative agency, you should aim for this figure to be at least £80,000, but the higher it is, the better. If it’s lower than this, especially if it’s lower than £60,000 per head, you should review your utilisation rates and staffing levels. For example, if you can improve your utilisation rates, more of your staff’s time will be chargeable and so you should see your income rise without having to take on more staff. But, if you cannot improve your utilisation rates any further but your gross income per head is still low, you may have to consider restructuring your staffing strategy and possibly making your team smaller.
How can I measure my profitability against my peers?
So, now we’ve covered the KPIs you need to monitor for a profitable creative agency, how can you measure your own current performance against where it should be, and others’ in the industry? Often, this is easier said than done, especially if you don’t know what’s poor, average, or good for the industry. So, I have put together a simple set of questions that you can use as a scorecard to benchmark your agency in terms of its current profitability in comparison with the rest of the agency, and what KPIs you may need to work on in order to improve profitability in the future.
This benchmark tool is completely free to use. Just click here to discover how your agency is doing today.
How can I improve my creative agency’s profitability based on these KPIs?
Once you’ve got a better idea of where your creative agency is at compared to the competition, where do you go from here? Building an agency that is not only renowned for its work but profitable too doesn’t happen overnight. But, there is support available to help get you there. I specialise in helping creative agencies grow and reach their goals in a sustainable way. Our initial 30-minute call is completely FREE, and I will offer you as much advice as I can about how to improve the KPIs set out above and, as a result, your agency’s profitability. Click here to get in touch about this today.