Top 11 KPIs to Scale & Eventually Sell Your Digital Marketing Agency
Top 11 Digital Agency KPIs to Scale & Eventually Sell Your Agency
Whether you just want to grow your digital agency or are looking to potentially sell it down the line, there are a few numbers you need to know and understand. In fact, there are 11 digital agency KPIs every agency owner should gauge the health of their business.
I’ve been through the acquisition of my first 8-figure agency. And now, as a partner in an agency that’s acquired 8 agencies in 10 months; I know a lot about determining valuation. I also know you need to build an agency worth buying, even when you’re not thinking about selling. By focusing on your digital agency KPIs now, you’ll make sure your agency gets the valuation you deserve for all the hard work you’ve been putting into it, whenever a sale happens.
What are the KPIs for Digital Marketing Agencies?
Let’s break down the 11 digital agency KPIs you should be focusing on to scale your agency and set it up for growth and a successful sale down the line. Remember, the time to worry about valuation isn’t when you’re ready to sell — it’s NOW, while you’re growing it. My motto is: Build your business to sell but treat it like you never will.
1. EBITA: Earnings Before Interest, Taxes, and Amortization
Your EBITA, or earnings before interest, taxes, and amortization, is basically your net profit—and it’s a number you should know. We hear a lot of bragging around gross revenue in the agency world, but that figure doesn’t tell us whether you are actually making any money. EBITA, on the other hand, tells us how successful and efficient your agency is, which makes it the most useful KPI for a digital marketing agency.
Your EBITA may fluctuate year-to-year depending on whether you’re building and investing in the company or focusing on growth. When you are preparing to sell your agency, however, you need to focus on optimizing EBITA. How do you do that? Streamline your agency by tracking where your time and money go. Make sure you have the right people doing the right work on your team, and be sure you’re pricing your services based on the value you provide.
2. Monthly Recurring Revenue (MRR)
A healthy agency needs more than just a single month of good profit. It needs predictability, which is why monthly recurring revenue is next on our list of digital agency KPIs. Your monthly recurring revenue is the income you know you will be getting every month. It allows you to predict your agency’s future income, which is crucial for any potential buyer looking to project out how their investment might perform.
If your monthly recurring revenue is low, there are a few ways you can increase it. The simplest? Raising prices. I’ve talked with way too many agency owners whose prices don’t reflect the value they provide. If you haven’t raised your prices in a while or didn’t set them high enough when you started, consider upping them now. Your MRR will thank you.
3. Average Contract Term
Your average contract term refers to how long your typical client sticks with you. This is one of our major KPIs for marketing agencies because, like monthly recurring revenue, your average contract term is a good indicator of predictability. If clients only stay with you a few months, you have no predictability for your agency’s future work and revenue.
Many agencies use month-to-month contracts, which a client can cancel anytime. Afraid your clients won’t commit to a longer-term? Make their decision low-risk. Build trust over time by starting small and delivering at every step. Ideally, you want clients who are staying with you longer than 12 months. If that average term is less than a year, you can’t have predictability in your growth, and you will be valued less by potential buyers.
4. Churn Rate Percentage
Your agency’s churn rate percentage refers to the number of clients you lost in a given period divided by the number of clients that you have. A low churn rate indicates you are able to deliver for your clients and that they stick around. If you have a high churn rate, however, you’re likely among the agencies who may be good at sales but struggle when it comes to executing and delivering services. It doesn’t matter how many clients you are bringing in, if you can’t keep them.
So, what is an acceptable churn rate for your agency?
Under 10%. If you are losing more than 10% of your clients, there is something wrong. Work to lower that number by making sure you are bringing on clients that are a good fit for your agency, that you are effectively onboarding them, and that you are communicating to keep everyone on the same page.
5. Average Expansion Revenue
If you’re bringing in clients at $10k per month, how often are you upselling them to $20k, $50k, or even $100k? Your average expansion revenue builds on your recurring revenue to show your agency’s predictable growth.
As an agency owner, you should always be on the lookout for ways you can help your clients further with the additional services you provide. And, if you are already adding to your available offerings, make sure your existing clients know. Upsell based on their needs and what you are currently doing for them and leverage the successful outcomes you are already providing as a foundation for more work.
6. Net Promoter Score
It’s easy to focus on the financials, but those aren’t the only digital marketing KPIs to consider. Your clients’ satisfaction is ultimately what will allow your agency to continue operating and growing—or not. As a result, your Net Promoter Score is crucial when it comes to assessing the long-term health of your agency.
How many of your clients are happy with what you’re doing for them? How many are neutral, and how many are saying bad things about you? If a lot of your clients aren’t willing to recommend you, it’s time to rethink your strategy. Are you focused on the right audience? Do you communicate regularly and set realistic expectations? Assess what you’re doing well and where you need to improve and work to bring your Net Promoter Score back up.
7. Client Revenue Percentage
We may all love the big clients we can brag about, but what you don’t want as an owner is for your agency to be dependent on a single client. If that happens, all it takes is a bad quarter for them or their leadership deciding to go in a different direction, and you are out of luck. To keep your agency in a healthy, sustainable place, make sure no client is providing more than 20% of your revenue.
Does this mean you should turn down a big client? No, but it does mean you should work hard to bring in more revenue from other sources whenever one is over that 20% threshold.
8. Employee Churn Rate
Clients aren’t the only ones who matter when it comes to your agency’s growth and valuation, and a healthy agency shouldn’t rely solely on the owner for success. If you are losing employees every quarter, that indicates something is wrong at the management level in your agency.
How can you reduce your employee churn rate? It starts with hiring the right people. Make sure you are bringing on team members who are aligned with your values and your vision, rather than taking the first person who can simply do the work. Once you build the team you want, keep employees around by paying them what they are worth, providing flexibility and autonomy in their workday, and prioritizing their happiness so they’re excited and engaged about the work you are doing together.
9. Average Sales Pipeline
For too many agencies, their work is like a rollercoaster. After bringing in clients, they focus exclusively on delivery and neglect sales. Then their leads dry up until they turn back to sales, but their delivery starts to suffer as a result.
How can you get off the rollercoaster and grow your agency? Focus on building your sales pipeline so you have a steady stream of predictable leads. Combine efforts in outbound marketing, inbound marketing, and strategic partnerships to generate qualified leads, and keep those channels running in the background while you work on delivery for the clients you have.
10. Scope Creep
One of the biggest mistakes I see agencies making is providing more and more services for their clients, without charging them more. If you aren’t careful, scope creep can eat into your revenue, keeping profit down and hurting your cash flow.
Take an honest look at your agency and your clients. Are you overdelivering, or not charging enough? If a client asks you for a change on a project, how much money are you losing by saying yes without charging a change order? While those additions may seem small and unimportant, they can add up to tens of thousands in lost revenue over time, and that loss will keep your agency from growing to the next level.
11. Cash Flow
As you know, your cash flow is the lifeblood of your agency. You need to know how much you have in the bank and how long it will last because if you don’t have cash, your agency is done.
A lot of owners ask me, “How can I increase my agency’s cash flow?” A few things we’ve already mentioned—like raising prices and fighting scope creep—will directly impact your cash flow. There are other factors, though, including your payment terms with both your clients and your vendors. And one of my top tips for agency owners? Get a line of credit when you don’t need it, and it will be there when you do.
Know Your Digital Agency KPIs
These eleven metrics should form your dashboard for your digital agency KPIs. Treat these like gauges in your car: Know what they are and be proactive about improving any that start to dip. By staying on top of your agency’s numbers, you’ll be able to grow, scale, and eventually sell for the value you deserve.
Looking Forward For Your Agency
When you have your digital agency KPIs in sight, it’s a great time to ensure all your processes in place are strong and effective in order to provide the results you want. If you don’t think you do — this is where I can step in.
I have advice for agency obstacles such as recognising common agency mistakes, how to keep great agency employees in your team as well as fostering the connections made with clients. If it’s challenging growing your business, I have agency growth hacks, the best ways to improve management of your business as well as why building a remote team can be beneficial in the long run.
You can learn more from my experience from my Ask Swenk series and my videos on my Youtube channel. Check out advice and learn even more from other successful agency experts featured on Smart Agency podcast twice every week.