Agency Profitability: Journey or Destination?

agency profitability

Quick—name the most important determinant for your agency.

If you said profitability, you’re not alone, but you might be looking at your business in a way that holds it back.

Businesses of all types, especially creative agencies, focus on profitability. At first glance, it’s the thing that makes all of our problems go away. If our agency is profitable, we’re happy, our staff is happy, and even our clients are happy. We invest in our people and incentivize top talent to join our team. It’s all sunshine and lollipops if we have a highly profitable year, right?

Not quite—and here’s why.

Profitability as a Metric

The problem with focusing on profitability is that it’s not a metric that allows you to predict long-term success.

In the name of increasing profitability, many agencies focus on questions like:

• how can we can reduce costs?
• how can we bring in more new business quickly?
• how can we be more productive?

These are important questions, but they’re often asked prematurely.

Profitability is a health metric, not a goal.

Here’s where things get interesting: Margin can illustrate whether or not your agency is well positioned.

If it isn’t—because your value proposition is too broad, unclear, or non-existent—you’ll find that you can only do so much to improve profitability.

You can try to run leaner and leaner until you impact the quality of your work, but that’s not sustainable and will not lead to growth.

Similarly, companies can go ahead and open the floodgates to bring in more customers quickly, leading to an influx of top line revenue, but those customers will not be a good fit for the agency.

The wrong types of clients, projects that are outside the scope of your core expertise, and too much grunt work in the name of quantity will ultimately hurt your overall profit margin.

Profitability and the Health of Your Business

You can start to see how profitability is an indication of the health of your organization. There are many levers that must be pulled, adjusted and reimagined in order to move margins higher.

Think of profitability like your annual check-up with your doctor: Blood work reveals that your good cholesterol is too low, which means you’re not exercising enough. Checking the number every day or every week won’t change it; the number begins to rise over time as you make small adjustments by eating heart-healthy foods and sticking to a fitness program. Profitability should be looked at the same way.

To be clear, that’s not to say that you should forget about your margins or only look at them once per year. No business will succeed or grow without a sustainable, healthy margin. But profit should be part of your overall journey, rather than the sole destination.

Your company needs a strategic positioning, before anything else. What creative and technology agencies offer their clients needs to differ from the competition. Whatever it is that sets your company and its staff apart from the competition is how you should be positioning your agency.

Starting with positioning means posing different questions than starting with profitability. Instead of asking how to reduce costs or quickly bring in a high volume of new business, ask yourself what’s at the cross-section of your team’s expertise and passions, why your ideal clients choose you, and how your agency differs from competitors.

When you can pinpoint why your agency makes clients want to pay more or choose your agency over another, your positioning becomes clear.

The Benefits of Positioning for Long-Term Profitability

Good positioning can be used to protect your profits. In this way, you’ll make money and grow steadily by focusing on what you’re good at, what you’re known for, and what you can do better than anyone else.

If you don’t focus on core skills and heart, you run the risk of watering down your positioning to seek out greater profits. Ultimately, this can leave your agency vulnerable because there will be little if anything to differentiate it from competitors. And you don’t want your journey to include becoming a commodity.

It can be challenging to let go of the idea that profit is the most important thing. Yet, if you stick with ensuring your positioning is strong, specific, and accurate before anything else, your profit margin will be healthy and steady.

Profit, as a goal, is short-term. Positioning, on the other hand, will inform your strategy in the long-term, adding value to what you do and how you do it.

Positioning will impact your pricing, too. With accurate pricing based on your unique value, profits will rise.

How? Your agency will be working with clients willing to pay the premium fees you deserve.

Now, let’s try that again.

Quick—name the most important determinant for your agency.

Your new answer: Strong positioning.

Author: Kelly Campbell
Kelly Campbell is an Agency Growth Consultant based in New York. A former digital agency owner for 15 years, she helps creative and tech agencies transform—focusing on people, positioning, pipeline and profitability. Kelly is also an IA/SEO consultant to Facebook and NASA. She writes for Website Magazine, speaks at digital marketing and agency growth conferences across the U.S., and has been featured in The New York Times, Woman Entrepreneur and Forbes. She is the host of THRIVE: Your Agency Resource, a bi-weekly video podcast sponsored by Workamajig that helps agency owners navigate growth.

2 Comments

  • Love this article!!! It came at a good time too- I’ve been talking with a ton of big agencies with high volumes of work the past 3 weeks, but the rates many of them have with their current staffing agencies are crazy low. I’ve been debating whether I should rethink my margins and start lowering rates a bit because it could literally bring in millions of extra revenue. I hate the idea of doing it though for a lot of same reasons you mentioned here.

    • Thanks, Lauren. Lowering margins to bring in more business may have you working more for less profit. I understand the internal debate, but if your service quality is one of the highest in your industry, you should be targeting prospects willing to pay your current rates (or higher!). Remember that this isn’t a quantity game, it’s one of quality—and you deserve to partner with high-quality clients because of the expertise you provide.

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