Five Drivers of Agency Profitability

A whopping 78% of agencies fail within the first 10 years.

And there’s one distinct culprit: a lack of profitability.

A lack of profitability leads to inadequate cash flow, making it harder to pay people and expenses while continuing to operate. This is how some agencies fail. It’s also why most agencies are forced to let good people go, with the ebb and flow of their client roster.

The bottom line is this – not all growth is good growth.

In fact, I often say, “Growth is pointless if it’s not profitable.” Growing top-line revenue while maintaining or enhancing your profitability requires a high degree of intentionality.

So, let’s look at five key drivers of agency profitability—the things you need to be intentional about as you grow.

Things we all know to be true yet somehow fail to do ;)

1) Financial Clarity

Do you have the right metrics in place to track your profitability?

Most agencies fail miserably when it comes to tracking profitability, specifically in two crucial areas. You must be able to track your profitability per client and per service.

This enables you to make strategic decisions, over time, about (1) which low-margin clients or services you should get rid of and (2) the types of high-margin clients or services you should get more of.

Plain and simple.

You must be able to track your profitability (1) by client and (2) by service – so you can make the key decisions required to sustainably shift your long-term profitability.

2) Market Specificity

Do you cater to a specific market?

The more relevant you are to a specific market, the better. This enables you to have a higher perceived value in that specific market, where you can land clients more easily and charge more for your services – because of the specificity of what’s being provided. People will not only pay closer attention, but they’ll also pay more for things that are specific to them.

Over the years, you’ve likely debated whether to focus on a more specific market. Well aware of the benefits this would provide. However, you don’t want to alienate any of your current clients or turn away any potential future clients. So, you leave the door open nice and wide for whoever wants to come in.

Due to the width of this doorway, you’ve likely acquired a somewhat random collection of clients over time—from different industries with differing needs. As you go, it becomes harder and harder to dive deeper into any one specific industry or area of focus.

So, unable to find the courage to specialize further, you continue to collect whatever comes through the door. All the while, you are aware that your lack of specialization is making it harder to attract new clients—simply because you don’t have a sharp enough hook.

Your brand isn’t positioned to resonate deeply enough with any one specific type of client. And you can’t say, with a straight face, that you have a well-oiled sales and marketing machine.

Without market-specificity, you’re forever held back from your own potential.

Market-specificity is the most foundational layer upon which everything else is built.

3) Perceived Strategic Value

Do you lead with strategy or execution-based offerings?

Strategy-first agencies can charge more, whereas execution-first agencies cannot. It’s a simple fact of life.

What’s most important is what a client first comes to you for, how they first enter your domain, and whether they were looking for strategy or execution.

When you position your brand and offerings around strategic value, you attract clients who are looking for strategy work. This sets the foundation for a certain type of relationship—from the start—where you’re respected as a strategic thinker instead of treated as an order-taker. One where you come to the table with a higher perceived value and can, therefore, charge higher prices for your services.

For this reason, your external positioning must focus on your brand and offerings' providing strategic results and outcomes.

4) Productization of High-Value Offerings

Listing services on your website is fine—and you should continue to do so. A list of services provides a snapshot of your capabilities, which is useful when a client is researching your agency. 

But a list of services does nothing to land new clients. You can’t use a list of services to attract new clients to the table, nor does it help you land them in a pitch meeting. You can’t write a marketing email saying, “We do website development,” and expect it to do anything.

Rather, you need to engineer what you do into high-value, productized offerings – then use those offerings as hooks to get your dream clients to the table.

Services say, “We are capable of doing this.”

Whereas a productized offer says, “We have a proven system to produce x results.”

A productized offer has three components:

1. A specific audience.
2. An important result you can produce for that market.
3. A structured method you’ll use to produce that result.

Once you define those three things, you can put that productized offer on a landing page and use it to get your dream clients into that first meeting.

5) “Actual” Differentiation

Having worked with hundreds of agencies throughout my career, I can confidently say that every agency is unique. Yet, most agencies appear almost identical from the outside looking in.

It’s remarkable how the companies that are supposed to help their clients build great brands and stand out from the crowd also fail to do it for themselves so miserably.

And although there are many reasons for this, I’ll focus on three big ones: 

1. A lack of market-specificity.
2. A lack of differentiated high-value offerings.
3. A brand position that fails to reflect either of the above two items.

Most agencies have incredibly generic positioning. When you break down what is being said, it’s usually something about “big ideas that matter” or “provoking change” or “performance” or something to that effect. Different combinations of words that largely say the same things.

This is also because agencies are notoriously bad at properly caring for themselves. In a world where the client always takes priority, it’s rare that agencies find or take the time to think these things through in as much detail as they would for their biggest client.

And so, for any of this to be possible, you must be willing to invest in yourself.

“The only investment that never fails in investing in yourself.” - Warren Buffet

Therefore, it all starts when you take a good hard look in the mirror...

Take a moment to consider the above five drivers of agency profitability. Then ask yourself, how many of these am I doing properly today?

If you’re doing one or two, you’re better than most.

If you can do three or four, you’re flying.