How does our agency make money?
Most people don’t know how agencies make money, or where it all goes. How is it the client pays $128 an hour and the person actually doing the work gets $40?
Agency Economics
Once you play around with the economic model of an agency, you’ll realize no matter what assumptions you make, it can be hard to beat fixed costs and build a profitable agency...More
Hey mate
Don’t let on, but we’re going to be going through a round of restructuring
What I’d love is for you to take a look at our model and see what we can do to trim the fat
What areas of the business cost us the most, and where can we do more with less?
Once you’ve got something send it my way
Again, keep this between us
Cheers
This course is a work of fiction. Unless otherwise indicated, all the names, characters, businesses, data, places, events and incidents in this course are either the product of the author's imagination or used in a fictitious manner. Any resemblance to actual persons, living or dead, or actual events is purely coincidental.
Running an agency or freelancing can be a complicated endeavor, and there are a few things that can surprise even the most prepared business owners. Agency economics can be confusing and hard to understand. Knowing how to manage the finances and deal with clients is essential for success.
One of the most important things to understand in agency economics is utilization. Utilization is the difference between the number of clients your team is working on and the number of clients you should be working on. It’s important to be aware of this because even if your agency is technically profitable, you may still be losing money if clients are paying late or if there are unexpected costs.
Another important factor is the agency’s margin. A healthy margin for an agency is 16%, but many agencies lose money. This is because agencies are not a highly differentiated business, and they are not particularly scalable. As an agency grows, they need more infrastructure, such as managers and marketing staff, and these fixed costs can erode away the variable costs.
When someone hires an agency, they are typically trading responsibility for money. It may seem like an agency is always a better financial deal, but this isn’t true. It’s possible to hire a freelancer for cheaper, and if you are willing to take full responsibility for delivering a result, then you can do the hiring yourself.
One of the ways to increase margin is to lower the salary of the executive team. This can have a big impact on the margin, as the executive team is usually the most expensive staff. You can also cut marketing and sales, but that will eventually lead to a decline in revenue. Another way to improve margin is to go remote, which can give you a 4% boost.
Utilization is also a major factor in agency economics. If you have too many people ahead of time, your margin will suffer. If your utilization is too low, then you could be losing money on every client. The ideal ratio is to have one client per one full-time employee, but it’s also important to keep in mind that there is a cost to having a client, such as having to do reports and invoicing.
Understanding agency economics can be a challenge, but it’s essential for success. Knowing how to manage the finances and deal with clients is key. It’s important to be aware of utilization, margin, and the fixed costs of running an agency.
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