13 critical performance metrics that will let you know for sure.
Agency owners and managers are often so busy helping their clients succeed, they don’t have much time left to monitor their own success.
That’s why we’ve created this easy-to-use checklist of all the Key Performance Indicators (KPIs) agencies need to track to understand how they’re doing. We also explain what they mean and what to look out for when you review them.
Regularly monitoring them will make it possible for your agency to make the most of what’s going right and limit the harm when things go wrong.
1. Gross margin.
This is a term that many agency people find scary, but it’s not as complicated as it may seem. Gross margin is the difference between what it costs to serve your clients and the revenue you bring in from them. This should include everything it takes to run your agency, including talent costs, equipment expenses, rent, insurance, marketing and more. If you subtract these costs from your sales revenue, you will have calculated your agency’s gross margin.
Gross margin helps you understand how efficient your agency is. If your gross margin is too low, it’s a sign of an unhealthy business. You may want to look into hiring less expensive talent, finding cheaper suppliers, improving your marketing, lowering your rent or rethinking your client base. Doing these things could help improve your gross margin, making it more likely your business will survive and thrive in the future.
2. Bottom line agency profitability.
Is your agency performance heading in the right direction? Monitoring your bottom line profitability over time will help you find out.
It’s similar to gross margin, but profitability is able to be expressed in relative terms, which makes it easier to track in a meaningful way. It only takes two figures to calculate it: your agency net income and revenue. Simply divide your net income (profits after all business expenses are subtracted from total income) by your revenue (total value of sales) and multiply by one hundred.
If your profitability percentage increases over time, it’s a sign that you’re working with better, more profitable clients and you’re improving the efficiency of your operation. If it’s going down, the quality of your clients may not be as good, because you’re earning less revenue from them. It’s a sign that they could be too demanding, or your agency isn’t serving them as efficiently as it could be.
3. Client churn
Are you bringing in a lot of clients while losing many at the same time? This is a sign of high client churn, which is a bad thing for agencies.
Agencies typically spend a lot in marketing to bring in and onboard new clients. Because of this, they earn less profit on the initial projects they do for them. Agencies don’t have to spend a lot marketing to existing clients, so any new projects from them are typically more profitable.
If most of your work is from new clients and not established ones, your agency is not earning as much as it could from its client base. Plus, the unhappy clients who leave your agency are probably saying things that harm its reputation. Taken together, these factors point to an agency that’s heading toward failure.
An easy way to identify a potential client churn issue is to track how much of your revenue comes from current clients. If it falls too low (80 percent is a common benchmark), it could be a sign that you’re not doing enough business with them, and it’s time to remedy the issue. Once you do, your agency profitability will improve, positioning it for long-term future success.
4. Lead quality.
Does your agency track and keep a record of where your leads come from, along with the amount of business they do when they convert into clients?
It’s likely that some lead sources, whether it’s referrals, marketing campaigns or social programs, earn more money for your agency over time than other ones do. Determining the relative success of your different lead sources will take time — you may not have a clear picture for months or even a year — but it will make a big difference to the efficiency and success of your agency marketing over time.
5. Time and money versus return.
Do you calculate how much time and money you spend on marketing your agency? If you don’t regularly do this in a thorough and complete way, you could be putting it at risk.
Most agencies know how much they spend on tangible things like media costs. But when it comes to staff time, they’re less clear about the costs. People on your team may be pitching in during their down time and not recording the hours they put in. That means your marketing is actually costing far more than you think.
It’s important to get this situation under control as soon as possible. Ensure that everyone tracks the amount of time they spend on agency marketing. Track all costs including things like media spend, website licensing and photo purchases.
Once you understand what you actually spend on marketing, compare it to any change in revenue you are able to attribute to the efforts. Is it really worth the time and money?
6. Cost to acquire a client.
This KPI is related to time and money versus return, except it brings it down to the individual client level. It’s not enough to know whether your overall marketing efforts are paying off. It’s also necessary to figure out how much it costs to bring in each client.
When you onboard a new client, figure out how much you spent on all forms of marketing and sales activity — including everything it takes to attract the lead all the way to closing the deal. Don’t forget to include expenses like travel, mileage and meals. Compare the total to what you can realistically expect to earn from each client over time. Many agencies are surprised to find out how much they actually spent to attract a piece of new business and that it will probably not pay off. The truth is often missed in the excitement over landing a new client.
It’s important to check your client acquisition costs regularly to ensure you’re bringing on the right clients in the most efficient ways possible.
7. Cost per lead.
It’s important to know whether your overall marketing efforts are paying off and if you’re bringing in new clients in efficient ways. On top of this, you should also determine how much you spend on leads.
An increasing per-lead cost indicates your marketing efforts, especially those related to awareness and prospect education, are becoming less efficient. If they’re falling, it’s a sign that you’re learning from the marketing results you’re reviewing and using the information to optimize your activities. It’s almost impossible to bring in clients in a cost effective way if your lead cost is too high.
8. Conversion rate.
This is an easy metric for most agency people to understand. It’s basically your batting average.
How many prospects are you pitching? Divide it by the number who become clients. This is your conversion rate.
If your conversion rate is too low, you could be dealing with two different issues:
- A marketing process that’s bringing in too many leads that won’t convert.
- A sales process that’s not resonating with prospective clients.
You can figure out where your problem is by examining the prospect path through your marketing and sales funnels. Look for places where people are abandoning. Once you do, you’ll be able to take steps to plug the leaks. You’ll be able to figure out if you need to adjust the targeting of your marketing, refine your messaging or update your sales process to improve your conversion rate. A smaller supply of leads — or a better process for converting them — could make your sales and marketing efforts more efficient.
9. Social media engagement.
Is your social media program working? Or is your agency posting and not getting anything from all the effort?
There are many ways to determine the effectiveness of an organic social media program. It can include doing things like monitoring likes, clicks, comments and shares and comparing your results against benchmarks.
Here is a formula for determining social media effectiveness over time:
- Start by deciding on the period or periods you want to analyze. One week or month is common.
- Add up how many likes, clicks, shares and comments your posts earned during that period.
- Divide the total by your number of followers.
- Multiply by 100.
- This will give you a relative value that indicates the level of engagement with your content. The higher the value, the greater the level of engagement.
If the value is too low, or falls over time, you should adjust your social media strategies. You may even want to consider cutting some unengaged followers.
10. Lifetime customer value (LTV).
A client shouldn’t do just one project with your agency then go away. For most agencies, it’s too expensive to bring in a client for a short-term relationship.
Instead, the expectation should be for an extended period of work with a certain value. This is known as the lifetime client value KPI.
Figure out how much you need to earn from each client for it to make sense for you to do business with them. Develop a plan for cross- and up-selling services to reach that goal with each client. Then track progress toward achieving the goals. If you’re missing the mark, you may not be attracting the right clients, are providing an inadequate level of service or not understanding their long-term creative marketing needs. Whatever it turns out to be, it’s time to course correct and set things in a better direction.
11. Cash flow.
Cash flow is the net total of the cash and cash equivalents that are transferred into and out of your agency. The dollars you receive are inflows, while the ones you spend are outflows.
Your cash flow is central to all the financial metrics related to your business. Positive cash flow indicates an agency that is likely succeeding, although bad accounting or bookkeeping could be creating an artificially positive flow of cash. Negative cash flow is almost always a sign of a troubled enterprise, and it’s critical to immediately check other financial metrics to uncover and fix the problem.
12. Accounts payable (AP).
Accounts payable is how much your business owes, which is typically the total of your outstanding bills at any given time. This can include money due to suppliers, employees, utilities, insurance companies, rent, government entities (taxes) and more.
If your accounts payable increases over time, it’s a sign that your agency isn’t paying its bills. At very least, this could be costing you a lot in late fees. At its worst, it could be a sign of cash flow issues that could force you to close down your business.
13. Accounts receivable (AR).
Accounts receivable is how much that’s owed to your agency at any given time, usually represented by your total outstanding invoices.
If your accounts receivable total goes up, it could mean your clients aren’t paying you on time. If this is the case, it could make it impossible for you to pay your bills. It could also lead to other financial issues like overdrafts that could impact your business credit rating.
Always make it a point to stay on top of your accounts receivable. Clients who don’t pay their bills could do serious harm to your agency.
14. Burn rate and cash runway.
Your burn rate is how much money your agency spends above what it’s making, which is reflected in negative cash flow. Startup agencies typically have high burn rates. It’s critical to get this under control as soon as possible. A long-term high burn rate is a signal that an agency could fail.
Your cash runway is how long you can sustain your current burn rate before your business burns out. You can figure out your cash runway by calculating how long your business can continue running, based on current expenses, with the amount of cash you have on hand. If your cash runway is shorter than you think it should be, it’s time to cut expenses, bring in clients or seek new sources of financing.
15. Client concentration
Have you thought about where your agency’s revenue comes from? Is it from one client, a few or many? If it’s from too few, it could leave your agency vulnerable. What if your cash cow client suddenly leaves? If you’re depending on too few clients to ensure your agency’s survival, it’s time to find more and diversify your client base.
Monitoring agency metrics isn’t once and done. It has to be an ongoing part of how you do business. An agency management system like the one offered by agencyMAX provides a clear and easy-to-use dashboard that makes it simple to keep track of how your agency is doing in real time. Schedule an appointment today for a demonstration.