Does your marketing agency have a clear goal for gross profit margins? Learn from successful agencies and accountants what your goal should be and how to track and attain it.
Setting a healthy gross profit goal is the first step towards the success of your marketing agency. It can help you price your marketing services more strategically, track how well you’re using your company’s resources to deliver your services, and assess your sales and marketing spending.
However, setting a goal isn’t enough. You have to track it on a monthly basis as well. That way, you can spot problems and notice trends in your business. A change in gross margin can indicate several things, such as a problem with a particular client or cost overruns for the company as a whole. It can also show profitability trends and how your business measures against industry standards.
Essentially, setting a gross profit goal will give you an understanding of how successfully you’re running your marketing agency. But how high should you set your gross profit goal?
The Average Gross Profit for Marketing Agencies
Gross profit margins for marketing and advertising agencies have been fairly stable in the last couple of years. In 2019, the average gross profit margin was 23%, only a little bit higher from the margin of 21% in 2018.
Mike Rowan, CEO of KPI Target, says their ideal gross profit is close to the industry standard, landing between 20%-25%. This margin encompasses all the costs that go into running a marketing agency.
“When you’re working with an agency versus an independent contractor, we have the cost of office space, the cost of employee salaries, equipment, software — quite a few factors that go into what we are providing. While an agency is in its purest form is essentially outsourced marketing, behind the scenes there are a lot of real costs that go into that. So we factor all of those things into our blended hourly rate.”
Mike also points out that many agencies forget some important expenses that drive the burn rate up and eat away at the gross profit. Technology is one of those expenses.
One of the big benefits you offer your clients is that they don’t need to invest in things like data providers, marketing automation systems, CRM systems, and other marketing solutions. However, for you as a marketing agency, these software solutions can result in thousands of dollars in expenses every month, which can increase your burn rate significantly. To ensure profitability in your business, make sure to factor technology expenses into the rate you charge your clients.
The Importance of a Healthy Gross Profit
A healthy gross profit will put you on the path to a good net income, and enable you to cover all other costs of running a business, such as salaries, office rent, insurance, and other overhead costs. It will also leave room for investing in sales and marketing.
Sales and marketing activities are crucial for the profitability and growth of your business. Yet, some marketing agencies neglect to invest properly in these activities, despite recommending it to their clients. KPI Target does the opposite.
“Because we drink our own Kool-Aid,” says Mike, “we run our own sales and marketing programs, and we recommend that clients do the same because we recognize the ROI from it, and it helps us grow.”
Once you’ve set your gross profit goal, you can calculate the level of sales you need to aim for. After that, you and your team can put together a list of actionable tasks that can boost sales. It might be helpful to ask yourself the following questions:
- Am I charging customers enough?
- Have I included all expenses into the rate?
- Am I allocating enough funds to sales and marketing?
- Are there any services that are underperforming?
It can be very useful to reach out to past and existing customers to ask about their purchasing intention and future marketing needs. The responses might provide you with good indications of where to focus on future sales.
How FINSYNC Can Help You Achieve Your Gross Profit Goal
One of the key aspects of achieving your desired gross profit is good cash flow management. With FINSYNC, you can analyze and forecast your cash flow for the months ahead so that you can make insightful business decisions based on real data.
“The beauty of FINSYNC is that it’s obviously not just bookkeeping software,” says Mike. “Their ability to provide things like cash flow analysis and cash flow projections provides you with the visibility you need to make intelligent business decisions so that you avoid either overspending or not spending enough. It allows you to make better business calls on where you need to allocate funds moving forward into the future.”
FINSYNC’s project tracking is especially helpful for marketing agencies, as it allows you to track the profitability of specific projects in real time. This can help you make adjustments as needed, and keep you on track to reach your overall gross profit goal.