Typical profits for a digital marketing agency are 20% or less. Your profit margins depend on the type of marketing firm you operate. The local lead generation business model generates profit margins as high as 85%-90%, while an SEO digital marketing agency earns an average of 11%-20%. Other kinds of digital marketing agency profit margins include:
- A PPC Ad Digital Marketing Agency earns around 10%-30% of a client's budget.
- Social Media Marketing Agency can make margins of 11%-20%. Data suggests "that an SMMA agency can earn $1,500-$25,000 per client each month".
The profit margins for a digital marketing agency include gross profit margin, operating profit margin, and net profit margin. All of which have critical factors that can affect your total earnings. Like what services you plan to offer. How much will you charge? How will you produce results for your clients?
Research suggests that in 2023, "the average digital marketing agency in the USA generates $250,000-$300,000 per person". Of course, the size of your agency and the services you offer will directly influence your agency's revenue. Promethean Research reveals that "approximately 70% of agencies earn less than $1.5 million per year". The key is to be an agency that can get actual results for clients. Know what strategies to leverage to increase your revenue, like ranking higher in the SERPs, and how to get free traffic.
In 2023, organic traffic is the best way to raise your margins; it results in 53% of all website traffic. In this article, we share the different types of profit margins and how much each style of marketing agency can earn, including what popular pricing options deliver the highest returns and why free traffic is the best way to increase net sales.
4 Types Of Digital Marketing Agency’s And Their Profit Margins Explained
1. Local Lead Generation Agency
The local lead generation agency model earns profit margins between 85%-90%. Based on the rank and rent concept, with lead gen, you create websites in the local market. Next, leverage SEO strategies like on and off-site optimization, backlinks, and citations to get your websites to the top of Google. Once your sites produce leads, you can sell them to earn semi-passive income. Each site takes 10-15 hours to build and about $500 to rank. But now you own valuable digital real estate, and each site earns an average monthly income of $500-$2,000+.
There's no ceiling on how many websites you build or what location you target. Data reports that "there are 41,690 postal codes in the USA," and each one represents a target market of untapped potential. The key is to niche down. Offer one service per site. But, once you understand the process, you can scale fast. Then, build an empire of online property. Because the focus is on organic, you get some of the best traffic on the Internet for little to no out-of-pocket expense. As a result, you can earn some of the highest profit margins in the digital marketing industry.
2. PPC Digital Marketing Agency
A PPC ads firm earns between $500-$5,000+ or 10%-30% of a business owner's monthly ad spend. Data from Clutch reveals that their PPC ads services cost "$100-$149 an hour". Agencies can choose their pricing model based on a flat fee, a performance-based system, or a percentage of ad spend. As a PPC ads digital marketing agency, you provide services for your clients like:
- Keyword research & ad copy
- Ad creation & audience targeting
- Bid setting & tracking data
Several types of PPC ads include display ads, search ads, and Google Shopping ads. The secret is to know as much as you can about your target audience. What platforms are they on? What type of copy do they respond to? In 2023, PPC ads are popular because they get an offer in front of a ton of eyeballs fast. Research suggests that "the top 3 paid ads in the SERPs get as much as 41% of clicks".
Paid ads also reach a broader audience and can get in front of people who might not find a business somewhere else. Data indicates that "Google search ads can elevate brand awareness by 80%". But paid ads only get to the top of the SERPs when you pay to put them there. So, make sure you're monitoring each ad campaign to get the best ROIs for your clients. Scale what works and tweak what doesn't, and you can generate decent profit margins for your marketing firm.
3. SEO Digital Marketing Agency
The average profit margin for an SEO digital marketing agency is between 11%-20%. Margins are primarily based on how much you charge clients for your services. A typical agency will charge 2Xs-5Xs what it costs to achieve a business owner's goals and KPIs. Of course, other expenses impact your profit margins, like staff salaries, agency overhead, and how much money you have to spend to deliver results. HubSpot reveals that "leads generated by SEO strategies have a 14.6% close rate". An SEO agency focuses on search engine optimization methods that include:
Each approach has its own price point, and the more extensive the service, the higher the value. For example, EZ Rankings reports that "the going rate for a website audit in 2023 is between $650-$14,000. While data shared by Ahrefs suggests that "the average cost to purchase one backlink is about $314". But if your agency can improve a business owner's organic performance in the search engines and drive more Internet traffic, you can secure high-profit margins and make money in 2023.
4. Social Media Marketing Agency
Social Media Marketing Agencies make a profit margin of 11%-20%. Data suggests that "an SMMA agency charges $15-$200+ per day per day per client or a monthly fee of $750-$25,000+ for each client". While further research from WebFX states that "the average pay scale for a freelancer is about $15-$80+/hour".
In 2023, a business owner needs a social media presence to stay relevant, connect with a broader audience, and be a top-of-mind company. The role of an SMMA agency is to grow brand awareness and drive traffic to a business's website or landing page. As an SMMA agency, your job is to handle things like:
The goal is to gain more attention on the Internet. So, share content that engages your ideal target audience and get your clients more leads and more sales. Then, your SMMA agency will make a steady income.
Why Free Traffic Is The Best Way To Increase Profit Margins
Free traffic is the best way to increase profit margins for your digital marketing agency. The lead generation business model grabs 85%-90% profit margins because the focus is on organic traffic. Organic traffic is sustainable, and it doesn't cost you anything but your time. Research suggests that "49% of companies say the best marketing ROI was through organic growth". In contrast, paid ads can take 20% or more of your budget. Plus, you don't always get the best leads. The goal is to employ traffic-generation marketing to drive online traffic to your agency site actively searching for your services.
But to get free traffic, you need to get to the top of Google search engines. Then you're front and center for your ideal target audience. Of course, you can employ SEO tactics like content marketing, social media marketing, or email marketing. But by starting a lead generation business, you build and rank simple websites. Get them to the top of the SERPs, and they capture the best leads on the internet.
(Not to mention significantly higher margins than other forms of digital marketing). The key is to niche down and offer a specific service that people are looking for online. Plus, once your site is at the top of Google, you own prime real estate. As a result, you produce leads you can sell to a local business owner for a profit and create a steady cash flow. Then you will increase your profit margins.
What Are The Different Types Of Profit Margins?
Gross Profit Margin:
Your gross profit is the money you have left after subtracting your total expenses, and the gross margin for your digital agency should sit at around 7% or higher.
Operating Profit Margin:
Your operating margin is what's left after you factor in associate costs like wages, paid advertising campaign costs, cost of goods sold, and other operating expenses. (Operating costs do not include tax or interest).
Net Profit Margin:
Net profit is your measure of profitability and the percentage your make as revenue.
The average profit margin for a digital marketing agency depends on a few factors, including:
- Are you doing the work in-house or outsourcing to a freelance digital marketer?
- Are you charging enough money for your digital marketing service to scale?
- What is the perceived value of your online business? Can you improve it and charge more?
Of course, you need to allow prospective clients to pay what they're comfortable spending. But if you can show how your agency will increase a customer's revenue and grow their business, you can justify your rates in 2023.
What Is A Good Profit Margin For A Marketing Agency?
A good profit margin for a marketing agency is 20%. Of course, there are circumstances when costs go higher. But your benchmark should be 20% at a minimum. Note that most digital marketing agencies aren't profitable in the first 90 days).
You need to factor this into your overall pricing. The goal is to earn a client for life. But you need to be transparent with your pricing and your profitability. You also need to show your potential customers how much work goes into getting them the results they want. Being honest also puts you and your client in a position of accountability. But to be successful, you need to know how much you make. For example,
Factor in your time and make sure you're generating a profit for your work. For example,
- How much money do you invest in ad spend to drive traffic to your agency site?
- Are you leveraging the right marketing strategy to reach your ideal client base?
Of course, your goal should be to overdeliver and provide the services you want to provide for your customer. But you need to charge what you're worth. Then, the clients that value your skills will find you.
What Are Some Of The Best Ways To Increase Profit Margin In A Digital Marketing Agency?
Some of the best ways to increase profit margins in a digital marketing agency are to limit your expenses and automate your processes. For example, monitor the out-of-scope work you're doing or not getting paid for and make it less frequent. Instead, get paid for the work you complete for your clients. Of course, you don't need to eliminate all of the extras. Just be mindful of how much time you spend on tasks that aren't generating revenue. (You can also create a matrix of impact and effort.
But if it's high effort and low impact needs to be eliminated). If you have a 200-point audit, consider how many points are necessary. Instead, could you charge the same for a 75-point audit? One that gets the same results but focuses on the quality of the issue?
The idea is to remove redundancy and streamline the systems when you start a local marketing agency. Then you can take advantage of automation software like:
- Google Sheets
- Screaming Frog
- Google Drive
You'll do more for less time. Then you can scale faster and increase your total revenue. Another option is to raise the prices in your proposals. Or even consider switching to value based pricing. (You get paid a percentage based on the worth you bring a customer's business every month).
Focus on predictable revenue channels (like recurring billing and sales or marketing techniques). And have a cash flow management system. (To track your money and ensure you hit the margins you want). Adopt these strategies, and you can increase profit margins for your digital marketing agency in 2023.
What Are Pricing Models Used In Digital Marketing?
Clients pay on a per-hour basis for the work you or your team completes.
The project based pricing model allows you to charge a potential customer per-project basis. The downside is that you need to estimate how long the project will take. But if it takes longer than anticipated, it could have a negative effect on your gross margin.
Value Based Pricing:
Value based pricing is the best way to make a high net income, as both you and your client are accountable for the value of your work.
The digital marketing agency pricing and billing strategies you adopt can differ from client to client. Therefore, you need to consider the client's needs. And what digital marketing strategy will get the best results for the lowest price point. For example, do they want you to post videos with virality potential on TikTok? Or do they want to leverage Facebook ads? Or is a Google ads campaign the best option? If so, what are the CPCs?
You need to know your expenses and how much it will cost you to get results. Agencies should charge fees that generate a profit margin of 20% or higher. Of course, you should be flexible and deliver on deadlines. But if you get outcomes and focus on building relationships. Take the time to foster solid connections and deliver quality work. You'll increase your agency's perceived value. Then you can charge more and improve your net margin.
How To Drive More Organic Traffic To Your Digital Marketing Agency
You can drive more organic traffic to your digital marketing agency by employing digital marketing strategies that drive online traffic. (Then you don't need to pay for ads).Date reports that "70% of online marketers say that SEO is better than PPC for generating sales". For example, you can create rank and rent websites that get to the top of the SERPs for small business owners.
Once they're at the top, they produce organic leads you can use as an upsell. Once you're at the top of Google, you own prime real estate. As a result, you'll always get traffic unlike, PPC or CPC campaigns that rely entirely on your budget and ad spend to be seen. Another option to drive more organic traffic is to develop a social media agency branch of your business. The secret is to increase brand awareness and provoke conversation with your ideal client base.
You can publish videos with virality potential on platforms like TikTok and YouTube. Or connect with local groups on Facebook. The more high-quality content you offer. And the more value you provide your potential client base. The more organic traffic you'll get.
How Much Does It Cost To Start A Digital Marketing Agency?
The cost to start a digital marketing agency will depend on the size, whether you plan to offer in-house or outsource your services, and how many people choose to hire for your team. You can start a digital marketing agency as a solo show with a laptop and a fast internet connection for $2000 or less. However, the average startup costs typically sit between $20,000-$40,000+.
A few things to consider before you launch your company include:
It's worth starting a digital marketing agency, but it takes drive and talent. You need the skills to achieve results for your clients and build a reputation as an authority. First, find clients who see the value in your services. Then get them the best ROIs. If you can do that, you will be successful with the business model in 2023.
Related Articles on Digital Marketing
- Is It Worth It To Start A Digital Marketing Agency In 2023?: Read an in-depth guide on the types of digital marketing, what skills you need, how much it costs, and how to be successful as a digital marketer in 2023.
- How To Start A Digital Marketing Agency In 2023: This article shares a step-by-step outline on how to start an agency, including the pros and cons, how to get high-paying clients, and how much money you can make with the business model in 2023.
- How To Become a Freelance Digital Marketer From Home in 10 Steps - In this article, you'll learn how to start using your digital marketing skills as a freelancer in just 10 steps. You'll also learn some actionable tactics to increase your income potential.
Why The Lead Generation Model Is The Best Type Of Online Business To Start In 2023
The average profit margins for a digital marketing agency sit at around 20%. But as a digital marketer, you don't own any virtual assets. Instead, you're retained to rank other business owners' websites, landing pages, or social media pages. Once you get your clients to the top of the search engines, they can cancel your services and stop paying you. As a result, you've lost revenue.
Now, you need to either find another customer or make less money. The other issue is that if your agency can't deliver on KPIs or runs ad campaigns that don't get results, you have an unsatisfied customer. So, your firm could lose possible referrals and the profit margins you made with that account every month. You can make money with a digital marketing agency in 2023, even with profit margins of 20%. But to generate cash flow every month, your agency needs to have a solid inbound marketing strategy and know how to get the best results for its clients.
A digital marketing firm needs a steady stream of new clients and predictable revenue channels, so you're always searching for new customers. With the lead generation business model, you own valuable digital real estate. The process is easy. Build and rank simple websites that target one location and offer one location. Then, use local SEO tactics to get those sites to the top of the SERPs in as little as 6 weeks - 6 months.
At the top, your online property is in front of people looking for your service. Those sites produce leads you can sell to a local contractor for profit margins between 85%-90%. You own the website, the tracking number, and the leads. So, if a client decides not to pay, you just take your leads to the competition and still generate a recurring monthly income. Start-up costs are minimal, and you can build more than one site at a time to scale fast. If you want to learn how I make over $52K a month with local lead gen, check out this lead generation coaching program with over 7,000 students.