I am always amazed by how many agency owners I speak with who have built a multiple six-figure or seven figure marketing agency, but they have no idea about their main metrics.
They don’t know what’s working, and because of this they don’t know how to grow the agency further. Most of them have been stalled for years, and are finally taking action to continue growing it.
In this article, I’ll show you the metrics you MUST be tracking if you want to grow your agency.
They are:
How many leads you’re getting
How many you close into new clients
Delivery margin (how profitable each project is)
Revenue and gross profit (what each client is worth to your business)
LTGP:CAC (aka Effectiveness of Marketing)
New Leads
To grow your business, you have to have enough leads. If you’re not tracking the number of leads you’re getting, then you’re flying blind and don’t know if you have enough leads or not to meet your revenue goals. Leads turn into clients, so you need consistent leads first to hit your goals.
What’s a lead? It’s someone who reaches out to you and is interested in discussing your services and what you can do for them.
But not all leads are a good fit for you. So we need to categorize leads into:
Marketing qualified leads (MQLs)
Sales qualified leads (SQLs)
MQLs are leads that look legitimate and are inquiring about something you offer.
SQLs are leads that sales has spoken to and verified that they need what you offer, have the budget to spend, and are motivated to make a decision. At this point, they become a prospect.
It’s good to track both MQLs and SQLs, but the only one that really matters is SQLs. MQLs matter insofar as your MQL to SQL ratio can help you understand how well you’re targeting the right people with your marketing. Other than that, though, they’re a vanity metric.
SQLs, aka qualified prospects, on the other hand are what feeds your business. Once you understand your close percentage, SQLs are the number you’ll need to influence to grow your sales. Why? Because adding a few more qualified leads is often a lot easier than dramatically increasing your close rates, unless you’re actually really terrible at sales.
On a spreadsheet, it looks like this:
If you want to get fancy, like I have with my spreadsheet, you can do it by channel:
Now you know how many leads you’re getting each month, and can track it over time ✅
Number of New Clients
It AMAZES me how many agencies have no idea how many new clients they’re getting each month. They don’t know how many are cancelling, either.
This is because most small agencies aren’t being run like a business. That ends now.
You have to know how many new clients you’re getting because growth in an agency looks like this:
(Number of clients * how much they pay you) - (number of churned clients * how much they were paying you) = GROWTH.
Of course, the number of clients you get is always going to be smaller than the number of leads you get. So by tracking the number of new clients you get, and dividing that by the number of leads you get, you get the conversion rate to sales. This then lets you know how many leads you need to get the clients you want who pay you enough to grow your business to where you want it to go.
Our spreadsheet now looks like this:
By the way, a close rate between 30-50% is where you should be. More than that, your pricing is probably too low and you’re leaving money on the table. Lower than that, and your sales process likely needs fixing.
Delivery Margin
Delivery margin is another term for Cost of Goods Sold (COGS). COGS is, quite simply, how much it costs you to deliver the work that you’ve sold.
Calculating it is, fortunately, pretty simple.
First, you need to calculate the following:
People costs
Tools (software) used to deliver work
If delivering work for a client costs you $500 in people and $100 in software, your COGS are $600.
If that client pays you $2,000, now you subtract that $600 from the $2,000 and you get $1,400.
That is your delivery margin.
Client Lifetime Value (LTV) and Lifetime Gross Profit (LTGP)
The next metric that you need to understand is actually two metrics. Let’s define them.
Lifetime Value - how much the client pays you lifetime
Lifetime Gross Grofit - how much the client pays you lifetime minus how much it costs you to deliver the work
Fortunately, this builds on the work we just did to figure out Delivery Margin.
How to Calculate Lifetime Value (LTV)
Don’t get sucked into thinking that you “can’t calculate lifetime value” of a client “because we’re still working with them.” While it’s true that you can’t yet calculate the LTV for a particular current client, you CAN calculate average lifetime value of a client for your business.
Finding it is pretty easy.
Take all of the clients you’ve ever had. Most billing platforms have a way to export total billings by client into a CSV. So export that and put it into Google Sheets.
You’re going to need this information:
Total revenue
Number of payments they make
That’s it, for this calculation.
Here’s an example for you:
From this you can see that:
A client, on average, pays you $7,321.43.
An average client makes 3.42 payments. Let’s call it 3 for simplicity.
Their average payment is $1,927.57
This is phenomenal insight to have! Now you can multiply the average client LTV times your close rate to understand what each lead is worth to your business.
In this example, if an average client is worth $7,321.43 to you, and your close rate is 34%, a lead is worth $2,489.29. Amazing!
How to Calculate Lifetime Gross Profit (LTGP)
Now, lifetime value is great. You should know how much an average client pays you.
But the number that really matters is Lifetime Gross Profit, aka how much money is left over after you pay for the people and tools required to deliver work.
To get this number, we take COGS and subtract them from Revenue. Here’s how it looks in our spreadsheet.
Remember that this table is actuals. It’s also useful to have average lifetime gross profit (LTGP), because this is the number that we’re going to use to calculate the final metric you need to know.
To get average LTGP, I’ve multiplied total revenue per client times .7, because that’s our Delivery Margin. Then I take the average of that across all clients to understand average LTGP.
Average LTGP per client in this scenario is $5,125. We also know that each lead is worth $2,489 in revenue and $1,742 in lifetime gross profit.
CAC:LTGP (effectiveness of your marketing)
Finally, we get to the one metric that too many agencies don’t know, and not knowing it is costing them business growth because they’re under-investing in marketing.
Too many agencies grow off of referrals. Referrals are great because they’re usually highly qualified and thus easy to close without much work. But they’re a terrible way to scale an agency, because they’re unreliable and you can never be sure when the next one will come.
But now, with all the work you’ve done above, you can calculate how effective your marketing is overall. You’ll get insight into how much you are currently paying to get a client, and how much you could be willing to pay to get a client.
If you want to get REALLY fancy, you can get effectiveness by marketing channel too, even if it’s just how much time you’re spending on that platform multiplied by your hourly rate.
Here’s how we do it.
Calculating LTPG:CAC
Continuing the example we’ve been building this whole time, we have these metrics:
LTGP = $5,125.00
CAC = $1,800
Cost per qualified lead = $600
So, LTGP:CAC is:
2.84:1
As I mentioned above, this is a bit lower than ideal for growing an agency. If you could get this to 4:1 or 5:1, or even 8:1, you’re going to be able to stack cash a lot faster and invest into growth.
On a $5,125.00 average LTGP, ideally you want to get clients for ~$1,000.
What’s Next
Now that you know your LTGP:CAC, you can make decisions like:
Where do I put my marketing dollars to generate the best leads that close at the highest rate?
How do I bill and set up contract terms so that I’m making my acquisition cost back as quickly as possible?
Do I need to increase leads or improve my close rate? Which is going to be easier for the highest return?
I’ll cover all of that in later posts. For now, let me know how this has helped you get clarity into your business.
PS: I work with agency owners to help them get this clarity and scale their agency from $100k to $500k a year in revenue. If that’s you, reach out on Instagram and let’s chat.
Excellent breakdown, thanks for the walkthrough!