The Four Benchmarks of an Agency's Lifecycle
Before I begin, I hope everyone is enjoying their summer. I just got back from a 3-week vacation in the Philippines that allowed me to rest, recharge, and refocus my business. I trust that everyone will be able to enjoy some vacation time this summer. I am grateful to the readers of this newsletter as your questions, challenges, and feedback motivate me to keep writing.
A previous version of this article was published in MarketingProfs.
There are 4 significant eras in the life span of a marketing agency, and different strategic priorities define them. Not all agencies will be able (or inclined) to progress through all these phases, but using them as benchmarks can help you plan for today and tomorrow.
1. Startup
You’re at the outset of your entrepreneurial journey, and you’re beginning to sell the idea of your agency to others. At this point, your strategic priority should be to find customers and start offering your services to them, thus proving the value of your idea.
Benchmark metric:Â Gross revenue.
To prove that your agency business is viable and that customers are receptive, you need to keep your eye on gross revenue. Gross revenue measures how willing people are to pay for your service.
2. Survival
You might not encounter any significant hurdles at the startup stage because there are very few barriers to entry when launching a marketing agency. Many firms don’t make it to the survival stage, however, because it requires increasing your earnings to build a thriving business.
Benchmark metric:Â Gross margin dollars.
Revenue can be a good sign, but it doesn’t tell you the whole story about the health of your business. Conversely, if you are consistently bringing more money in than you’re spending on the cost of goods sold / cost of services, your business is likely making an impact on your audience.
3. Growth
You need to increase your profitability to grow, which is hard to do if you’ve already spent a lot of time, effort, and investment starting up your agency business. Luckily — if you’re brave enough to take a calculated risk — there are many ways an agency can grow, including increasing revenue or headcount, acquiring new customers, and adding new services.
Benchmark metric:Â Profitability.
Keep track of which avenues are the most profitable to double down on those strategies and keep growing. Look at overall profitability, but also client- and project-specific profitability.
4. Exit
This phase is all about transitioning the business to a place where you are no longer at the helm. It could mean selling to a key employee, selling to an ESOP or some other transition option. Many agency owners don't spend enough time planning how to exit their business. Because of the lack of planning, simply closing up shop is often the only option remaining when an owner thinks about transitioning from their business. Run your business as if you were going to sell it one day to increase your agency valuation.
Benchmark metric:Â EBITDAÂ (in other words, earnings before interest, taxes, depreciation, and amortization).
You want to increase your EBITDA before an exit occurs because this metric will inform the valuation of your agency.
How Might You Use Benchmark Metrics to Grow Wisely?
Remember that benchmarking is not just beneficial for your financial success. It can also make your sales, marketing, and service delivery more effective. Regular benchmark-setting in these different arenas will clarify what your business goals need to be in each phase of your agency’s life cycle.
Focusing on the above benchmarks provides meaningful feedback. And when you’re figuring out how to grow your agency, you need all the feedback you can get. Using benchmark-related metrics, you can consider growing your business as a series of experiments, iterating after you receive results to create a more successful version of your business.
Here are some additional things you should consider when moving through your benchmark journey:
1. Focus on where your leads originate.
To calculate and grow your gross revenue (especially at the initial stage of starting an agency), start benchmarking the origin of those leads. This insight will help you focus your marketing efforts on lead generation tactics that work. Leads usually come from client referrals, strategic partners, thought leadership, or SEO. You want to invest more of your resources in the new business efforts that are working for your agency.
2. Help your team members bill their way to success.
Your team will ensure your success, so set measurable goals for employees to track their progress. Focus on gross margin dollars to determine whether your employee count fits with your billings. For instance, you should be billing out $150,000 annually for an employee getting paid $50,000 in annual salary.
3. Don’t let profitability be accidental.
To grow your profitability reliably and measurably, you need to turn your business into a bit of a profit lab. Conduct experiments, track their performance, and iterate until you’re doing more of what works. Focus on payroll costs relative to gross profit; you want to keep your payroll costs below 50% of your gross margin dollars (Agency Gross Income) as a benchmark. This tight focus will allow you to keep profitability growing and ensure that your investment is working for you.
When growing a marketing agency, befriending benchmarks could be the wisest move you make. Whether you’re in the startup phase, just trying to survive, or you’re trying to grow your agency’s worth, metrics can become milestones.