7 Aug, 2019
Creative agencies are big business. Creative agencies include advertising agencies, marketing agencies, digital marketing agencies, and creative strategists. The creative agency space is growing increasingly competitive and new start-ups are leveraging technology to broaden their reach to prospective clients. In addition, large consultancy firms, such as Accenture Interactive and Deloitte Digital, are entering the market.
According to research conducted by Technavio, the global market for creative agencies is forecast to grow at a Compound Annual Growth Rate (CAGR) of 5.58% until 2021. This prediction opens up a wealth of new opportunities for progressive agencies.
In other research, the World Federation of Advertisers’ has found that clients give their current agency set-up 5.7 out of 10, where 1 is not fit for purpose and 10 is fit for purpose. Agencies rate themselves even lower at 5.2. Why is there such a performance gap? One suggestion is that agencies are not fulfilling their clients’ expectations in relation to strategy execution.
What Are Creative Agencies?
A creative agency is an organisation or firm that sells creative services. This may include marketing, design, advertising, market research, product development, branding, campaign building, public relations, and more.
Creative agencies, like any other business, need to track their Key Performance Indicators (KPIs) to ensure they are on the path to success.
The Three KPI Categories
KPIs for creative agencies can be grouped into three categories:
Let’s dive in and take a look at some of the KPIs that agencies may like to track (and why).
Customer Acquisition Cost (CAC)
CAC = marketing spend per month / number of new customers.
This is about measuring the marketing spend per customer acquired. This is a measure of how effective your marketing campaigns are. It’s important when it comes to budgeting how much your agency will need to spend to hit your overall revenue target for the year.
It can also shed some insight into which marketing channels produce more qualified leads and a better return on investment for your business. Lowering the CAC may also pave the way for reinvestment into your firm’s sales team.
Customer Churn Rate
Churn Rate = (number of customers at the start of the month - number of customers at end of month) / number of customers at start of month.
Measuring the average length a customer remains with your agency. Churn rate can be hard to measure, especially if your agency focuses on individual projects and does not work within an exclusive arrangement with clients, or is a blend of both. For a detailed insight into churn for creative agencies, take a look at this post by Synup.
Conversion rate = (number of new customers / number of leads) x 100.
What % of leads (pitches/tenders/quotes) are turning into customers? This will let you know whether any change in process is yielding a change in your conversion rate. It can also help determine whether the services you are offering are a good fit for your market, or if you need to change your messaging to certain industries or groups.
Upsell Rate = (Number of customers who purchase additional services / total number of customers) x 100.
How many of your clients increasing their spend with you each period? If their spending is contracting, then you will need to find ways to win additional clients to cover the loss. If spend is increasing, then you will see an uptick in revenue as a result. Having spent the cost to acquire these customers, you want to try to expand them where possible.
Operating Cash Flow
Operating cash flow = (net income + non cash expenses) - increase in working capital.
Every business needs to keep an eye on its cash flow to ensure it remains solvent. Agencies are no different. Using a business plan and subsequent budget is critical for measuring cash flow.
You need to ensure you know what your target is, so that you can measure against this at the end of every month and ensure you remain on track.
Operating cash flow measures the amount of cash generated by a company's normal business operations and indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations. For a detailed breakdown of operating cash flow, check out this detailed operating cash flow overview from CFI.
Accounts Receivable Days
Accounts Receivable Days = (Accounts Receivable / Annual Revenue) x number of days in the year.
This is related to cash flow, as you want to keep your Accounts Receivable Days (AR days) as low as possible. This means you will collect cash quicker and will be able to reinvest it into the business.
Decreasing your AR days is the easiest way to free up cash in your agency. Mark Probert, Managing Director of Cact.us and Co-author of Agencynomics, advises that 45 days or less is a competitive target for digital agencies. This is echoed by Netsuite’s Brainyard.
AR days can be reduced by employing a few simple processes. Ideas include — invoice on time, include payment terms in your documentation, use tech to make paying easy, switch to retainer-based billing where possible, and automate your invoice chasing.
Benchmark for Accounts Receivable Days:
Gross Profit Margin
Gross Profit Margin = ((revenue - cost of goods sold) / revenue) * 100.
Keeping an eye on your profit margins is crucial for any business to survive.
Bringing in top-line revenue is great, but if the costs outweigh the revenue and you are making a loss from that account, then it may mean troubled times ahead for your agency.
Gross profit margin is one of the most, if not the most, important metric to be tracked within a creative agency. The gross profit margin answers the question: “Are we providing our services to customers in a profitable way?”
Kingston Smith has identified that an income-to-expense ratio to monitor is fee income vs staff costs. They advise that 60% is a reasonable target; venture above this, and profitability will be affected.
Technavio, in their Creative Agencies Market Intelligence Report, segments the cost-saving opportunities available to creative agencies into the following:
- Adoption of technology.
- Supplier competition.
- Adoption of negotiation strategies.
- Optimisation of procurement practices and,
- Bundling of services.
The majority of the suggestions have the same principle at their heart - streamlining processes to ensure cost efficiency.
Mark Probert, author of Agencynomics, mentions the following as targets to ensure you are keeping on top of your profit margins:
- Gross Profit per head: $135,000 AUD / £75,000 / $95,000 USD / p.a.
- Gross Profit per month per fee earner: $20,000 AUD / £10,000 / $13,000 USD.
- Team costs to be no more than 60% of Gross Profit and,
- Marketing spend to be between 5-10% of Gross Profit.
Benchmark for Gross Profit:
Lead Time Per Project
Knowing what your current lead time is will be key to managing client expectations and knowing your workload for the upcoming quarter. Having a longer lead time is not necessarily a bad thing, as it gives you more time to plan and can create a heightened sense of demand.
Estimated vs Actual Project Time
Estimated vs actual project time = (forecasted hours / actual hours) * 100.
If you are not tracking the accuracy of your estimates in terms of time, you may not be pricing correctly. Measuring how long you have spent versus what you estimated will give you a greater insight into what you should estimate.
Estimated vs Actual Project Cost
Estimated vs actual project cost = (estimated cost / actual cost) * 100.
Similar to the above, if you are not tracking the variance of your actual project spend versus your estimated project spend, you may be losing more money. This will cover resource cost as well as any other spend on the project.
Resource allocation can get more refined when you begin to collect the data through KPI tracking.
Benchmark for Project Profitability:
Utilisation rate = Total number of invoiceable hours / Total number of hours the employee works during a standard week.
Utilisation rate refers to the percentage of time that your team spends billing clients.
The higher the percentage, the better - until it gets to a point where it negatively impacts employee morale. Intuit notes that it’s important to also take into consideration the time that employees need to spend on non-client related tasks.
These tasks could include responding to emails, work and industry related professional development and training as well as internal meetings just to name a few.
Netsuite’s Brainyard suggests that the utilisation rate should not exceed 80% as employee moral will begin to be negatively affected.
For more ideas on which project management KPIs to track, check out this post by ClearPoint Strategy.
Moving Forward With KPIs In Your Creative Agency
Set up a clear process to regularly monitor your creative agency KPIs. By measuring what matters, you are giving yourself the best chance of meeting your strategic goals, and setting your firm up for business growth.
Most agencies will choose to have a suite of software tools which help them to track their KPIs.
These tools could include cloud accounting software for financials (Xero, QuickBooks Online, MYOB), reporting and analysis software for KPIs (Fathom), and project software for project planning and resource allocation.
By regularly monitoring performance, and comparing these results to targets, agencies can implement strategies that will chart them on a course to success.
Written by Matt Lowry
Matt is a Business Development Manager for Fathom’s UK office. With a background in legal services, Matt also has tech experience, having consulted to clients ranging from sole traders to FTSE 100 companies before joining Fathom.