The different digital marketing agency profit margins are gross profit margin, operating profit margin, and net profit margin. All of which include 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? By 2026 the digital marketing industry will be worth $807 billion, but not all agencies make high-profit margins.
To increase your revenue, you need to take advantage of free traffic. Organic traffic is the best way to raise your margins; it results in 53% of all website traffic. But, most agencies invest 20%+ of a client's budget on paid ads. (Yet 86% of people ignore paid ads).
As a result, the typical profits for a digital marketing agency are 20% or less. However, there are a few strategies to grow your earnings. This article explains why free traffic is the best way to increase net sales. Plus, how the lead generation business model can drive more organic traffic and sweeten your margins in 2023.
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 doesn't cost you anything but your time. (49% of companies say that 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?
The different types of profit margins are as follows:
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 freelancer?
- 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?
"Only about 22% of businesses are satisfied with their conversion rates." (Sales Lion)
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).
"86% of marketers saw an increase in brand awareness by using digital marketing channels." (Market Splash)
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?
Pricing models used in digital marketing include three main categories:
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). 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. And 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 idea 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:
Starting a digital marketing agency 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.
Why The Lead Generation Model Is The Best Type Of Online Business To Start In 2023
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%. In contrast, the local lead gen business model achieves profits of 85%-90%.
In addition, natural barriers like population, location, and a learned skill set minimize competition. Once you understand how to find the right niche in the right place, you can rank generic websites in the local market in as little as 6 weeks to 6 months.
Start-up costs are minimal. Plus, you can build more than one site at a time to scale fast. Take this site above, for example. I created this site in around 10-15 hours, and the total costs were about $500.
But this site has been making me $2000/month since 2015. Even better, this site is only one of over 80 lead gen websites I own, and how I was able to create a passive income of $52K/month.
You can make money with a digital marketing agency in 2023, even with profit margins of 20%. You can generate cash flow every month if you have a solid inbound marketing strategy and are willing to do the hard work to get the best results for your clients. But you need a steady stream of new clients and predictable revenue channels. The issue is that you're always on the hunt for new clients.
Plus, even with automation software, you're still responsible for a lot of the heavy lifting if you want to achieve the results you promised your clients. On the other hand, the lead gen model is a way to make money on autopilot. Once your sites are at the top of Google, they don't need a ton of work and have minimal overhead expenses. And that's how you harness time freedom and create passive income.