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Most digital agencies have relatively low-profit margins, and this is true for even some of the world’s top agencies. A survey conducted by Hubspot found that a majority of agencies were not sure of their margins, or reported margins between 11-20%. Anything in the single digits is unsustainable, and anything above 20% is superb. Considering this data, the question for many agencies becomes how do you increase your agency’s margins?
Luckily, there are proven best-practices that are effective strategies when it comes to increasing margins. While every agency is unique and focused on different primary services or goals, the following 4 tips will go a long way towards your goal of increased margins.
Operating an agency requires a lot of overhead. Whether this comes in the form of new hires, rent, office supplies, taxes, or team events, there is a myriad of costs associated with successful operations. An immediate alternative exists in the form of outsourced production. Your agency should be considering the outsourcing of deliverables, which can be done for a fixed price.
If you offer your clients elements of production that are not the core of your business, an argument can be made that this in-house work is not worth your time. If these elements are outsourced and properly managed by your existing staff, you can significantly improve margins. We recommend that you find a trusted vendor and outsource to them in order to reduce your overhead costs.
The conversion of a prospect to a client is an extremely challenging process. However, as soon as this transformation occurs, there is a massive opportunity to upsell and cross-sell. This client is already convinced of the value that you will provide, so offering additional value at a fair cost becomes much easier.
There are so many businesses that have tapped into the power of upselling, as upsells are 68% more affordable than acquiring a new customer. This is because of the very little work required. One approach is to upsell a customer on more of the same thing that they are already purchasing. Upsells can be the development of additional pages on a site or layering in related marketing initiatives. There are also opportunities to offer services that you actually outsource. This makes it possible to test offerings without the need to hire more employees or set up new processes.
Ultimately you want to provide an add-on that is simple for you to deliver but increases the value add for your customer.
Agencies that focus on strengthening their relationship with existing clients see higher profit than those that primarily focus on one-off projects. Pitching new clients is resource-intensive and time-consuming. When you build trust with current clients and develop long-term client relationships are able to close deals twice as often when compared to pitching new potential clients.
Agencies that generate 70% of their annual revenue from existing clients are increasing margins by cutting costs of pitching and onboarding new clients. This ability to reduce churn and maintain successful relationships with clients also increases opportunities for referrals, which are often easier sells than cold pitches.
Many agencies fall into the habit of customizing each product, which limits the ability to scale. By productizing your services, your agency makes its offerings highly defined and thus scalable.
This approach is a challenging one, as every agency’s individual client is unique, however, it is possible to establish a system that helps you reduce costs and sell more. As an example, if you are a web design agency, you can package your offerings by the number of pages or if you manage social media marketing you can sell packages based on the number of posts.
Too many agencies this might sound obvious, however far too many creatives fall into the trap of just saying yes in order to close deals. This strategy might work early on, but as workload increases and your client base builds, it becomes severely limiting. By packaging and productizing your offerings you eradicate wasted margins that originate from over customization.
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With the right approach and the adoption of these four strategies, your agency can begin to carve a path towards higher margins. Avion Technology helps digital agencies with white label programming. Our solutions can help your agency increase margins through a hybrid approach to programming and development that utilizes both Chicago-based and offshore talent.