When running a marketing agency, it’s common to see growth in revenue, but not in profit. This often happens because as revenue increases, so do the costs associated with delivering your services—your Cost of Goods Sold (COGS). The key to maximizing profit is to widen the gap between your revenue and COGS, ensuring that you’re not just bringing in more money, but keeping more of it as profit.
1. Understanding the Revenue vs. COGS Relationship
Imagine two lines on a graph—one for revenue and the other for COGS. Ideally, these lines should diverge over time, with revenue growing faster than COGS. Unfortunately, many agencies see these lines move in tandem, meaning that every dollar of revenue is quickly eaten up by costs. In some cases, COGS might even grow faster than revenue, leading to declining profitability.
To counter this, you need a strategy that targets both sides of the equation: increasing revenue while gradually reducing the percentage of your revenue that goes toward COGS. This isn’t something you can achieve overnight, but small, consistent improvements will have a significant impact over time.
2. Increasing Revenue
To widen the gap between revenue and COGS, focus on revenue growth first. Here are some strategies:
Raise Your Prices: Incrementally increasing your prices is one of the most effective ways to grow revenue without adding to your COGS. This is especially important if you’ve been underpricing your services compared to the value you provide.
Upsell and Cross-Sell: Offer existing clients additional services that complement what you’re already providing. For instance, if you’re managing their social media, could you also offer content creation or paid ad management?
New Client Acquisition: Invest in business development to bring in new clients. Refine your sales process and improve your lead generation strategies to increase the number of new clients you onboard each month.
3. Reducing COGS Incrementally
Reducing COGS can be tricky, but doing so incrementally can yield substantial benefits over time. Here’s how to approach it:
Track and Measure COGS Regularly: You can’t reduce what you don’t measure. Monitor your COGS on a monthly basis and set small, achievable targets to reduce it by even 0.25% per month. This may seem negligible, but over two years, this results in a reduction of 8%, which can significantly boost your profitability.
Optimize Team Efficiency: Review how your team is allocated across projects. Are there inefficiencies in how time is spent? Can you streamline processes to reduce the time spent on repetitive tasks? Investing in project management tools and automation can help here.
Negotiate Better Terms with Vendors: If your agency outsources parts of its work—like design, development, or copywriting—regularly review these costs. Often, a simple renegotiation can lead to better rates without sacrificing quality.
4. Balancing Growth and Cost Management
It’s tempting to try and slash expenses dramatically when aiming to reduce COGS, but this approach often backfires. Drastic cuts can hurt team morale, reduce the quality of your service, and damage client relationships. Instead, take a measured, disciplined approach:
Focus on Efficiency, Not Just Cost-Cutting: Look for ways to deliver the same level of service more efficiently. This could involve process improvements, better use of technology, or more effective team training.
Invest in Scalable Solutions: Consider tools or platforms that help you deliver services more efficiently. For example, adopting marketing automation software might be an upfront cost but can significantly reduce the time required to manage client campaigns.
Test and Learn: Experiment with small changes and measure the impact before making larger adjustments. This allows you to fine-tune your approach without risking major disruptions.
5. Tracking Progress and Celebrating Wins
It’s important to track your progress and celebrate small wins along the way. The path to reducing COGS and increasing profitability is a long one, but by breaking it down into smaller milestones, you can maintain momentum and keep your team motivated.
Set Monthly Goals: Set realistic monthly goals for both revenue growth and COGS reduction. Even a small percentage change in COGS can have a big impact over time, especially when combined with revenue growth.
Celebrate Small Wins: Recognize and reward your team when they hit their goals. Whether it’s reducing COGS or hitting a new revenue milestone, these wins contribute to the overall growth and profitability of your agency.
6. Final Thoughts
Maximizing your agency’s profitability isn’t about making sweeping changes overnight. It’s about making small, consistent improvements over time. By focusing on both increasing revenue and reducing COGS, you can significantly widen the gap between these two critical metrics, ensuring greater profitability for your business. Be patient, be disciplined, and remember that every small improvement compounds over time to create a more successful and profitable agency.