Running a successful marketing agency isn’t just about delivering great results for clients; it’s also about ensuring that your business is financially robust. Without a solid financial strategy, even the most talented teams can find themselves struggling to keep the doors open. To help your agency not only survive but thrive, here are five essential financial strategies that every marketing agency should implement.
1. Price Your Packages at Least 3.5x Your Costs of Fulfillment
One of the most critical financial strategies for any marketing agency is ensuring that your pricing is right. It’s tempting to price competitively to win clients, but if you’re not charging enough to cover your costs and then some, you’re setting yourself up for financial strain.
Why 3.5x?
- Covering Costs:
The 3.5x markup on your costs of fulfillment ensures that you’re not just breaking even but actually turning a profit on each project. This multiplier covers your direct costs—like labor, software, and materials—and leaves enough margin for overhead, unexpected expenses, and profit. - Sustaining Growth:
Proper pricing also allows your agency to reinvest in growth, whether that’s through hiring, expanding your service offerings, or marketing your own brand. Without sufficient pricing, these opportunities become much harder to seize. - Avoiding the Discount Trap:
By setting your prices at this level, you also protect your agency from the temptation to discount too heavily, which can erode your profitability and devalue your services in the eyes of clients.
2. Allocate 20% of Total Revenue to Owner(s) Compensation
Another key financial strategy is ensuring that the agency’s owners are adequately compensated. It’s easy to get caught up in reinvesting every dollar back into the business, but the hard work and risk taken by the owners need to be rewarded.
Why 20%?
- Reflecting the Value of Ownership:
Paying 20% of total revenue to owner(s) compensation reflects the value of the leadership and decision-making that goes into running the agency. This compensation is not just for the day-to-day tasks but also for the strategic direction and long-term vision that the owners bring. - Ensuring Personal Financial Stability:
By consistently paying the owners, you ensure that their personal finances are stable, reducing the risk that they’ll need to draw unscheduled funds from the business in times of personal financial strain. - Incentivizing Performance:
Linking owner compensation to revenue can also serve as a strong incentive to drive growth. The more the agency earns, the more the owners benefit, aligning personal success with the success of the business.
3. Keep Your Churn Below 3% Per Month
Client retention is critical to the financial health of your agency. High churn rates can be devastating, leading to a constant scramble to replace lost revenue with new clients. A churn rate of 3% or less is a benchmark that can significantly enhance your agency’s financial stability.
Why 3%?
- Client Longevity:
With a churn rate of 3%, clients stay with your agency for an average of 33 months. This long-term relationship allows you to deliver more value over time, deepening client trust and making your services indispensable. - Predictable Revenue:
Low churn leads to more predictable revenue streams, making it easier to plan for the future, manage cash flow, and invest in growth. It also reduces the pressure to constantly acquire new clients to replace those who leave. - Focusing on Results:
To maintain a low churn rate, your agency must focus on delivering consistent, measurable results. Happy clients are loyal clients, and loyalty is a key driver of sustainable revenue.
4. Use the Profit First Method and Allocate 30% of Revenue to Profit
The Profit First method is a game-changer for agencies that want to ensure long-term financial health. This strategy involves allocating a portion of your revenue to profit before anything else, rather than treating profit as what’s left over after expenses.
Why 30%?
- Building Financial Resilience:
Allocating 30% of your revenue to profit helps build a financial cushion that can sustain your agency through tough times, whether it’s a slow season or an economic downturn. This reserve ensures that you’re not living paycheck to paycheck as a business. - Planning for the Future:
A healthy profit margin also provides the funds needed for future investments, whether it’s in new technology, staff development, or marketing. It’s about ensuring your agency has the resources to grow and adapt over time. - Rewarding the Owners:
Profit is not just for the business; it’s also a reward for the risk and hard work of the owners. This allocation ensures that the owners benefit from the agency’s success in a meaningful way.
5. Have an Exit Number in Mind
Every successful business should have a clear exit strategy, and that starts with knowing your exit number—the price you’d want to sell your agency for one day. Having this clarity helps guide your decision-making and keeps you focused on building a valuable, sellable business.
Why an Exit Number?
- Direction and Focus:
Knowing your exit number gives you a target to aim for. It helps you prioritize activities that increase the value of your agency, such as improving profitability, reducing risk, and building a strong client base. - Guiding Strategic Decisions:
With an exit number in mind, you can make strategic decisions that align with your long-term goals. Whether it’s scaling your operations, diversifying your services, or grooming leadership, every decision can be made with your exit strategy in mind. - Motivating Growth:
An exit number is a powerful motivator for growth. It keeps you focused on the big picture and ensures that you’re always working towards a tangible, financial goal.
Conclusion
Thriving as a marketing agency requires more than just creative talent and excellent client service; it demands strong financial strategies. By pricing your services appropriately, compensating owners fairly, keeping churn low, using the Profit First method, and having a clear exit number, you can ensure that your agency is not only profitable but also sustainable for the long haul. Implement these strategies today to set your agency on the path to long-term success.