Agency KPIs That Can Help You Grow Fast
Building a successful agency is a continuous process. You need to make sure that your acquisition and retention efforts are working. And there’s always some system or process that could be improved with a little adjusting.
How do you know if profitability is achievable, and your marketing efforts are paying off? One way to measure progress is by looking at key performance indicators (KPIs). These can help you track progress, identify areas of improvement, and make data-driven decisions about where to focus your efforts. But what do KPIs mean, and how do you define agency KPIs?
In this article, I’ll be introducing you to seven essential KPIs for agencies. I’ll also offer some tips on how you can use them to build a more successful and profitable agency.
Tips for tracking agency KPIs
Before we get to the specific KPIs, here are two quick tips for tracking KPIs that will make your life as an agency owner much easier down the road.
Use KPI tracking software or tools
There are a lot of software options available to track and analyze your agency’s KPIs.
Some options include:
Google Analytics for measuring your acquisition efforts and client reporting
Stripe for getting payments and tracking revenue numbers
Google Tag Manager for tracking conversions
SPP’s client portal integrates with all three of the tools mentioned. Simply activate the integrations and send all data you collect in your customer portal. Then, build reports in Google Data Studio to help you visualize your agency’s performance.
Start tracking productivity
If you’re not tracking your team’s productivity, now is the time to start. Productivity tracking can help you see how your team is spending their time, identify areas of inefficiency, and make better use of your team’s time. Plus, there are a ton of valuable KPIs that require accurate productivity data—but more on those later!
SPP can help thanks to built-in project management features that allow you to keep taps on assigned orders and response times.
Key agency KPIs to track
1) Customer acquisition cost (CAC)
Customer acquisition cost (CAC) is the amount of money that your agency spends to acquire new customers.
To calculate CAC, simply divide your total sales and marketing spend (incl. salaries, marketing campaigns, etc.) by the number of customers newly acquired in a given period.
CAC is an important metric because it tells you how efficiently your agency is acquiring new customers. If your CAC is too high, it means that you’re spending too much money to acquire new customers, and you need to find a way to lower your costs.
How do you know if your CAC is too high? A great question that brings us to client lifetime value (LTV).
2) Client lifetime value (LTV)
Customer lifetime value (LTV) is the total value that a customer will bring to your agency over the course of their relationship with you.
To calculate LTV, simply multiply the average revenue per project by the average number of projects that a customer will work with your agency.
LTV is an important metric, as it tells you how much revenue you can expect to generate from a single customer. It’s also helpful for determining whether your CAC is too high, because it gives you an anchor for comparing the two numbers.
If your CAC is higher than your LTV, it means that you’re losing money on each new customer that you acquire. That’s not a sustainable business model, and you need to find a way to lower your CAC.
3) LTV/CAC ratio
The LTV/CAC ratio is a simple but powerful metric that tells you how much revenue your agency can generate for every dollar spent on acquiring new customers. In other words, it’s a dedicated metric for comparing your LTV and CAC.
To calculate the LTV/CAC ratio, simply divide your customer’s lifetime value by your customer acquisition cost.
As a general rule of thumb, an LTV/CAC ratio greater than 3 is considered good. This means that for every $1 spent on acquisition, your agency eventually makes at least $3 in revenue. If your LTV/CAC ratio is less than 3, it’s a sign that some area of your operations isn’t optimized:
Marketing: Are you spending too much on low-value channels?
Pricing: Are your fees too low?
Sales: Are you not closing enough deals?
4) Revenue earning efficiency
Revenue earning efficiency isn’t a KPI in and of itself. It’s a concept that describes how efficiently your agency is converting its time and resources into revenue.
As an agency, all of your revenue is a liability until you’ve actually earned it. It costs you to pay staff, buy tool and software credits, keep the lights on, and so forth.
In other words, how efficiently you earn revenue is just as important as the actual revenue your agency is earning. Hitting revenue targets is great, but if you’re only hitting those targets by working overtime, your agency won’t scale.
There are two KPIs you can use to keep tabs on your agency’s revenue earning efficiency.
Average Billable Rate (ABR)
ABR is a top-line metric that tells you what your agency’s average hourly rate is. This number can be deceiving, as it doesn’t take into account the time spent on things like admin, sales, and business development. But it’s still useful for seeing whether your agency earns your revenue efficiently enough.
To calculate ABR, simply take your agency’s total revenue and divide it by the number of billable hours your team worked or the number of hours you spent on client work.
Gross Margin (GM)
Gross margin (GM) is a metric that tells you what percentage of your revenue is profit on a per-project or per-client basis.
Start by subtracting pass-through expenses (expenses that you incur on behalf of your client but don’t mark up) from your gross revenue to get your adjusted gross income (AGI).
Then, calculate your GM by subtracting the cost of goods sold (COGS)—things like staff salaries, tool and software costs, and so on—from your AGI.
For your GM as a percentage, divide your GM by your agency’s AGI and multiply by 100%. The GM percentage benchmark for a highly-profitable, highly-scalable agency is roughly 50-70%.
Example: Your agency has an annual gross revenue of $95,000 for your biggest client. After subtracting $5,000 in pass-through expenses, you’re left with an AGI of $90,000. Your COGS for this period and client is $30,000. Based on these numbers, your GM is $90,000 – $30,000 = $60,000. Your GM percentage is ($60,000 ÷ $90,000) x 100% = 67%.
5) Utilization rate
Your agency’s utilization rate is a KPI that tells you how much of your team’s capacity is being used to generate revenue (i.e., work on client projects). To calculate your utilization rate, simply take the number of billable hours worked and divide it by the total number of hours available.
For most agencies, the utilization rate will fall somewhere between 80–90%. If your utilization rate is below 70%, it means you have capacity that isn’t being used—and that’s wasted money.
Grow your industry knowledge
If your utilization rate is above 90%, it means you may not be your team enough time for valuable, non-billable work, such as:
learning and professional development
Example: If you have a team of 10 full-time employees in client-facing roles, the total amount of time available they could be spending on billable work weekly is 10 × 40 hours = 400 hours. Let’s say that, in a given week, your team works a total of 350 billable hours. In this case, your utilization rate would be 350 hours ÷ 400 hours = 87.5%.
6) Client retention rate
Your agency’s client retention rate (CRR) is a KPI that tells you what percentage of your clients stick with you from one year to the next.
To calculate your client retention rate, simply take the number of clients you have at the end of a given period and divide it by the number of clients you had at the beginning of that same period.
A high client retention rate is important for two reasons:
It’s much cheaper to keep a current client than it is to acquire a new one.
The more loyal your clients are, the more likely they are to give you referrals.
You should do everything you can do keep the customer churn rate as low as possible. Once your sales team has successfully converted qualified leads, your success team should take over and ensure that the new clients are happy, and get the best bang for their buck.
7) Revenue per employee (RPE)
Revenue per employee (RPE) is a KPI that tells you how much revenue each member of your team is bringing in. This metric is an important one for larger agencies and digital marketing agencies in the process of scaling because it can help you identify inefficiencies and areas for improvement.
A high RPE is indicative of a well-oiled machine. A low RPE could mean you’re overstaffed or that your team isn’t as productive as it could be.
And what constitutes a low RPE? The benchmark depends on your agency’s gross revenue:
$0 to $1M: $43,000/employee
$1M to $2.5M: $54,000/employee
$2.5M to $10M: $107,000/employee
$10M to $20M: $120,000/employee
If your RPE is low, compare it to your utilization rate.
If your utilization rate is also low, over staffing is probably the issue.
If your utilization rate is high, it’s likely that your team’s productivity could be improved.
To calculate your RPE, simply take your agency’s gross revenue for a given period and divide it by the number of full-time equivalent (FTE) employees you had during that same period.
Example: If your agency has 40 FTE employees and generates $3 million in revenue in a given year, your RPE would be $3 million ÷ 40 employees = $75,000/employee.
Make your agency’s success measurable
Success is an admirable goal for your agency—but it isn’t a very useful one. If you really want to build a more successful agency, you need to get specific about what you mean. You need to define what success looks like for your business, for instance improving the conversion rate of trial users, or increasing the number of new customers. Aand you need to use data-driven KPIs to measure your goals.
The seven KPIs for marketing agencies we’ve discussed in this post are a great place to start. By tracking these metrics, you’ll gain invaluable insights into what’s working well at your agency and what needs improvement. And that information will help you make better decisions, build a more profitable business, and achieve the level of success you’re looking for.