Agency Metrics and KPIs: The Right Way to Track Efficiency
Agency management is no easy feat. There is seldom a calm period, and it may feel like you’re running in a vicious circle. However, just doing a lot does not mean you are working efficiently. To help gauge that, you will need to track the key agency metrics and set KPIs.
This will help you evaluate how the process is evolving, where the weak points are, and, most importantly, understand which parts of the agency are the most profitable.
Ready to learn? Let’s discuss the agency metrics and KPIs you should be tracking.
What are agency metrics?
Agency metrics are measurements used to understand the current status of your business. They help get a sense of things such as client satisfaction and evaluate which of the efforts brought the most to the table.
Each agency will choose which metrics make the most sense and then define KPIs to track performance. Since there are quite a few metrics to follow, you may not need to apply everything discussed in this article. Having said that, I will cover the most widely used agency metrics to give you a good overview.
Looking for a tool to track agency metrics within your company? Check out this comparison.
High-level metrics will be covered first, with the list going down to the functional team-level metrics at the end.
I. Growth metrics
One of the most important metrics to any company is growth. You want to expand the business to ensure the company is moving forward and improving. Here are the agency growth metrics commonly used for this purpose.
1. Revenue Growth
Revenue growth is the first and possibly the most instinctual metric to track. It measures how the revenue has increased or decreased compared to the previous period.
In most cases, this agency metric is tracked month over month. However, there may be different approaches, such as quarter over quarter.
Revenue Growth (%) = ((Current Period Revenue – Prior Period Revenue) / Prior Period Revenue) * 100
A continuously growing revenue is an ideal sought by most businesses. But if your revenue diminishes, evaluate the accompanying factors to understand why that has happened.
2. Net Profit Margin
You will want to focus on the net profit margin to measure the business’s profitability. This metric measures your net profit against the total sales. This way gives you a better understanding of profitability.
Net Profit Margin (%) = (Net Profit / Total Revenue) * 100
The higher this margin, the more profitable your business is. Alternatively, if your net profit margin is diminishing, it means you may be selling at prices that are less profitable than before.
This could be improved cost of materials, labor, or client requirements. Either way, tracking and understanding the causes to keep your business profitable is important.
3. Lifetime Value (LTV)
Lifetime value is an important business metric commonly tracked in agencies with monthly or yearly subscription-based models.
By combining information for the average customer lifecycle and their current recurring payment, the business can calculate the projected lifetime value for all existing or new customers.
The goal is to increase the lifetime value, and if it is decreasing, that may be a sign to take action and evaluate the offers being made to clients a bit more closely.
Lifetime Value = Customer Value * Average Customer Lifespan
Alternatively, for SaaS businesses, the formula could be as follows.
Lifetime Value = Customer recurring payment * Average Customer Lifespan
A decreasing lifetime value can also be a signal of a shortening customer lifespan. Which is another problem you would have to solve.
4. Break-Even Point
The break-even point is another one of the commonly known agency metrics. It is also widely used in the startup scene to mark the occasion when your revenue and cost become even.
In terms of an existing agency, this metric can help asses if new initiatives and actions are bringing in the expected reward. As a result, it can help you evaluate and improve pricing and cost structure within the company.
Break-Even Point = Fixed Costs / (Selling Price – Variable Costs)
In most agencies, the break-even point is calculated for each project. Since your company is working on different initiatives, it helps track the progress and success of each individual.
II. Financial metrics
Financial agency metrics help you keep the business afloat and profitable. This is achieved by highlighting expenditures and revenue and comparing them in several ways to reach valuable insights.
5. Agency Gross Income
Agency gross income is a metric that allows you to understand how much money is coming into the agency. To calculate this metric, you want to subtract the pass-through expenses from the gross revenue.
This includes various expenses that are passed on to your clients or contractors. In other words, your agency is not the one paying for these expenses.
AGI = Gross Revenue – Pass-Through Expenses
6. Delivery Margin
This next agency metric helps us understand how effectively the business earns revenue. Delivery margin is calculated from the delivery costs and AGI. We have just discussed the calculation for AGI, and delivery costs will include anything needed to deliver the result.
Then, you must divide the delivery costs by AGI to get the percentage metric.
Delivery Margin (%) = Delivery Costs / AGI * 100
The golden standard for delivery margins lands around 60-70% for individual projects. You should aim for this to ensure the agency remains profitable.
When talking about the whole company, the percentage should be around 50%. It is natural for the number to be lower when everything has to be considered.
7. Operating Profit
Another one of the financial agency metrics is the operating profit, also commonly known as EBIT. This metric talks about the amount of money left over from operations.
Operating profit is calculated before interest and taxes and refers to the free cash flow within the company.
Operating Profit ($) = Delivery Profit – Overhead Expenses
This agency metric showcases how much money your company generates after the expenditures. So, a positive number would indicate that the company makes more money than it spends.
III. Customer Support Metrics
Another key part of any agency is its clients. Here are some agency metrics that can help you keep them happy.
8. Net Promoter or Customer Satisfaction (CSAT) Score
The net promoter or customer satisfaction score is a metric that allows the team to evaluate their current standing with the clients. The score is collected by submitting a survey to your clients and asking them to rank you from 1 to 10 on various points. In the end, the scores are added up, and you get an overall average.
The closer your score is to 10, the better. Keep in mind, though:
- With such surveys, gathering intel as often as possible may be tempting. But keep in mind that asking too often will only irritate your clients.
- Adding an optional comment section for the questions is another important addition that could help your survey. It will not be filled by everyone, but you will get some important insights for improvement.
NPS = % of Promoters – % of Detractors
IV. Operational metrics
To ensure the processes within the agency are running smoothly, you may want to look into these operational agency metrics.
9. Realization Rate
First, the realization rate lets you understand the amount of billable work charged to clients. This helps motivate the team to track their billable hours for each client and further optimizes your financial situation.
Ideally, the realization rate should be over 85%. Anything lower than 50% can start costing you money and should be reviewed.
Realization Rate = (Actual Billable Amount / Potential Billable Revenue) * 100
With modern time-tracking software, it is easy to monitor the billable work right where the job is done. Simply start the tasks and start tracking the time. Everything will be kept in one place and added up for billing.
10. Agency Utilization Rate
Agency utilization rate is another metric closely related to time tracking and management. Instead of focusing on billable work, it talks about how much time the team spends on revenue-generating tasks or, more simply, on client tasks. This does not include items being done for internal processes, administrative work, etc.
This metric aims to ensure that most of the work done by the agency employees is for the client and focused on bringing in new revenue. Since some additional work will always be there, the rate will never be at 100%, but aiming for 80-90% is ideal.
Utilization Rate = (Billable Time / Gross Capacity) * 100
Similarly to the realization rate, this calculation can be achieved using your task management system with a timesheet report. Here, you can filter client tasks by tags and get the total number for billable time.
V. Project management metrics
Another important aspect of your firm is looking at the agency metrics focused on projects. These are great for evaluating each effort separately and identifying where improvements can be made.
11. Estimated vs. Actual Project Time
When starting any new project in an agency, you will likely have to give a time estimate on how soon it can be completed. Based on this, you will determine the project cost, resources, and other details. Thus, evaluating estimated vs actual time is very important for projects.
It allows to forecast with more accuracy and bill clients with more certainty for future projects.
Estimated vs. Actual Project Time = Estimated Time – Spent Time
Agencies can quickly gather such data by using project management tools with time tracking and timesheets. In most cases, you will be able to evaluate the duration of the project and then compare those numbers to the actual tracked time.
12. Estimated vs. Actual Project Cost
Similarly to the previous metric, estimated vs actual cost allows us to determine if the budget for the project was set accordingly. Reviewing completed projects and identifying points in which the additional costs occurred can help avoid such situations in the future.
Estimated vs. Actual Project Cost = Estimated Cost – Actual Cost
13. Profit per Project
Lastly, review the total profit for each of your projects to better understand what type of work your agency should be doing in the future. You may see that small projects are far more profitable and easily done versus their bigger counterparts.
Profit per Project = Project Revenue – Total Project Cost
For those handling several initiatives at a time, a tool like Portfolio Overview may become very useful. Here, you can quickly see the key metrics for all your projects and evaluate the profitability with a glance.
VI. Marketing and sales metrics
Lastly, looking at the agency metrics most closely related to daily team activities, we come to marketing and sales metrics. Here are the main ones agencies consider tracking and reviewing.
14. MQLs and SQLs
MQLs and SQLs are the bread and butter of most marketing and sales teams. The abbreviations stand for Marketing Qualified Lead and Sales Qualified Lead and mark how many of the acquired leads meet the set criteria.
Usually, once a new client comes in, they are marked as a lead. If they meet the ICP criteria, they are marked as an MQL. If their business case meets the agency’s requirements, they are marked as an SQL.
The monitoring of lead numbers is usually done with the help of CRM and then compared month over month or week over week. A growing agency should maintain or grow the number of MQLs and SQLs in the pipeline.
15. CAC
CAC, otherwise known as Customer Acquisition Cost, is another important agency metric. While acquiring new clients, it is also important to track how much was spent on getting their business vs how much was earned.
Tracking this metric ensures your efforts are profitable and can help keep the team in check on what is put forth.
Customer Acquisition Cost = Sales & Marketing Expenses / New Customers
Most agencies will have a general idea of the average profit that can be attained by a single customer. Knowing CAC will let them evaluate the profitability and pricing.
16. LTV to CAC Ratio
Most agencies will check out the LTV and CAC ratios to better understand profitability. (The lifetime value metric is discussed above.)
An ideal to aim for in this ratio is 3:1. The LTV should be 3 times higher than your CAC. Naturally, there will be slight variations in these metrics that shouldn’t concern you. What you should pay attention to is seeing this metric dipping to 2:1 which indicates there are issues in your process.
LTV to CAC Ratio = LTV / CAC
17. Close Rate
This next agency KPI is often seen within the sales teams and describes how many sent proposals were closed. Understanding the average close rate helps with forecasts. Seeing an improving close rate would indicate the changes made in the sales process are working effectively.
Close Rate (%) = (Closed Deals / Proposals) * 100
18. Retention and Churn Rates
Just as it is important to understand how many clients your team can close, you should track how many are kept. For this, sales teams use the retention and churn rate metrics.
Using the total number of acquired clients at the beginning and end of the selected period, we can calculate the rate at which the agency is losing clients. Here are the calculations you can use>
Retention Rate = ((Clients at the End of Period – New Clients) / Clients at Start of Period) x 100
Churn Rate = (Lost Customers/Clients at the Start of the Period) x 100
Which agency metrics to choose?
We discussed several agency metrics in the post, but that does not mean you must rush to track them all. You will likely use most of the metrics discussed above in time. However, choosing a few of the most important ones will add great benefits if you are in the beginning stages of your agency.
See which of the aspects are the most important to you at the time and add in tracking for them. Once you feel the need for additional data, expand with corresponding agency metrics.
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