TL;DR

• We wrapped up the salary survey with 103 owner salaries and 1,315 employee salaries. Look for the full report later this month!
• I’m refining a standalone service to uncover gaps and provide guidance on repeatable revenue generation systems. Grab some time on my calendar if you'd like to learn more. I'll be discounting the first few I do in exchange for feedback on the service.
• Optimizing for pure growth or margins can cause a myriad of issues.
• Agencies need to deploy their limited resources in such a way that supports both growth AND margins appropriately.
• Using a range goal and explaining the importance of each to the team can help with this.

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Welcome to January!

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Hope everyone had some time to relax and recharge over the holidays. I took some time off and spent a good portion of it hiking around the Cuyahoga Valley National Park (see above). Something about getting out in a forest and disconnecting for a while really resets me.

I’m looking forward to 2024 with some cautious optimism.

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First, a few announcements:

The salary survey has ended.

We received 103 owner salaries and 1,315 employee salaries. This will be plenty to put together a really robust salary report. I’ll be working on the analysis over the next few weeks and send out the final report to everyone who participated by the end of the month. A huge thanks to everyone who participated!

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Wish it was easier to grow your agency?

Sales and marketing are always top of mind for agency leaders. It came up so often that I wrote a 92-page research report and guide on the topic. Since publishing that, I’ve received a ton of requests to review revgen strategies. Until now, I didn’t have a specific service to support them.

I’m refining a standalone service to uncover gaps and provide guidance on repeatable revenue generation systems. It'll have about a two-week turnaround from kickoff to delivering results.

I’m doing the first few at a discounted rate of $3,200 in exchange for feedback on the service.

Feel free to grab time on my calendar if you’d like to chat more.

Hopefully, this new service helps a lot more shops have a better 2024!

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Growth vs. Margins

This newsletter is all about the tradeoffs agency leaders make. No matter how big you get, every leadership team operates with limited resources. The ones that win use those resources efficiently. They figure out how and where to deploy them and how to adjust as the markets shift.

Much of my work revolves around helping leaders solidify their agency’s goals. During that work, I often run into leaders trying to choose between optimizing for growth or margins.

Today, I want to explore what each of those paths looks like and then make the case that optimizing both is the best course of action.

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Optimizing for growth

Most agency leaders want to grow their companies.

They want to grow for a variety of reasons. Some want to earn more, others want to take on new challenges, and a few think it’s just what they’re supposed to do.

Whatever your reasoning, keeping an eye on margins while you grow is essential. If you only optimize for pure growth, some significant challenges arise:

It’s incredibly easy to overstaff throughout your organization while revenue is growing rapidly. This bloat can compress margins and weigh on cash generation. It’s also difficult to right-size when the need arises. Expanding those margins later isn’t easy.

Agency growth requires talent. “Hire slow, fire fast” goes out the window, which dilutes culture, increases the chances of a bad hire, and increases employee turnover.

If you grow too quickly, onboarding and training AM, PM, and value delivery team members becomes even more difficult. This can lead to a dip in quality and increased client churn.

The real issue is that strong growth can mask many of these issues for a LONG time. When they come to light, it’s typically because growth slows and the company’s cash flow tanks. Suddenly, efficiency, culture, and client experiences are a big deal again.

These issues were especially apparent over the last year.

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Optimizing for margins

Some leaders are incredibly interested in expanding their margins.

There are three times I see this: Either they don’t believe in their agency’s growth prospects, they need cash personally, or they’re gearing up to sell.

Leaders in this margin-maximizing mindset want to extract the most they can from their current resources. This can lead to some interesting challenges.

The most common are understaffing or underpaying talent. Cutting here seems to make sense since talent is easily an agency’s biggest expense. Unfortunately, this can cause broader issues with culture, employee turnover, and efficiency issues that negate any gains.

Volatile utilization is another critical issue that comes from ignoring growth. Any unexpected slowness in a sales pipeline can cause serious utilization issues. Many leaders view their sales and marketing expenses as easily cuttable. They shouldn’t be. Even moderate levels of uncertainty can push projects out. A strong sales pipeline keeps utilization rates high.

Here are some guidelines for agency margins:

You can think of an average level of COGS in the 45-65% range. Anything too far outside of that, and it’s probably worth looking into your pay bands and staffing levels.

Similarly, you need a certain level of overhead to run a shop without the wheels falling off. That tends to be in the 20-40% range.

It’s fine to want to grow margins, but margin expansion without growth isn’t very valuable.

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Reliable growth with sustainable margins

Trying to optimize for growth while ignoring margins will introduce a ton of bloat into the organization. That bloat is incredibly difficult to sort out later. It’s shocking how quickly the truly valuable employees blend in with the not-so-valuable ones. Knowing where and how deep to cut later is a challenging task. Everyone likes to think they’re using a scalpel, but it’s often a chainsaw in disguise.

It’s equally difficult to optimize for margins without also thinking about growth. You can design a perfectly sized team for given revenue and overhead levels, but one pushed-out project or a randomly slow pipeline can spell disaster. Slow growth means your team has more opportunities to have poor utilization, which weighs on margins.

What this means is that agencies need to deploy their limited resources in such a way that supports both growth AND margins appropriately.

A range goal can help with this.

“Our goal is to grow 20-30% this year with gross margins in the 40-60% range.”

Understand what margin you’re willing to reinvest in growth or what growth you’re willing to forego to boost margins.

Let your team know that it’s not either-or. Help them understand that growth should be fueled by reinvestment. The more efficiently you turn revenue into net income, the more you have to reinvest in gaining additional revenue. Then, make sure you link your agency’s growth to their personal success.

Hopefully, this illustrates how growth and margins are linked. Understanding this should make it easier to grow more reliably.

I’d love to hear your thoughts on the topic!

-Nick