The State of Profitability in Digital Agencies in 2024 (75+ Expert Responses)

Author's avatar Improving Performance UPDATED Jul 15, 2024 PUBLISHED Jul 11, 2024 21 minutes read

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    Peter Caputa

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    How profitable are digital agencies in 2024? What strategies are they using to stay ahead of the competition?

    Running a digital agency is no easy feat – from managing client expectations to keeping up with technological advancements, there’s usually a lot on the plate. And while profitability is the primary focus, there are too many variables at play that make things that much more complex.

    So, what are the secrets to staying profitable?

    That’s what we set out to discover in collaboration with Arithmetic. Together, we surveyed 77 industry experts to get a better understanding of profitability in digital agencies.

    We gathered insights into the strategies that are working, the common pitfalls to avoid, and the key trends shaping the future of the industry.

    Read on to learn how top-performing agencies are achieving profitability and staying ahead in 2024.

    Who Did We Survey

    For this report, we partnered up with Arithmetic and surveyed 77 companies since July 2023.

    About 60% of the surveyed agencies that participated have up to 25 employees.

    agency profitability - number of employees

    Regarding the location, about 55% of the surveyed agencies are located in North America. 23.4% of them are in Europe.

    agency profitability - location

    One of the first things we asked these agencies was about their primary goals – what do they focus on?

    Most agencies selected “Agency profitability” (70.59%), “Project profit margin” (63.24%), and “Client profit margin” (50%) as metrics they set goals/targets for.

    agency profitability - goal metrics

    How profitable were these agencies in the previous fiscal year?

    For most of them, profitability in the last fiscal year was under 20%.

    agency profitability last year data

    At the same time, for 52.94% of surveyed agencies, the profit has grown by 5% – 25% in the past 12 months.

    agency profitability - profit growth

    Next up, we asked them about how they price their services. We found that the main pricing strategies agencies use vary, with value-based pricing being slightly more popular.

    agency profitability - pricing strategy

    Our next question was about resource allocation.

    When it comes to factors companies consider when allocating resources to projects, most of our selected multiple factors, with the top three being skill sets (82.35%), current work capacity (79.41%), and staff availability (75%).

    agency profitability - resource allocation

    If you’re a digital agency or a b2b company that tracks time with Harvest, we want to invite you to join our exclusive, invite-only Benchmark Group called Profitability Benchmarks for Digital Agencies which is hosted by Arithmetic.

    It’s completely free to join and you can use it to anonymously compare your agency’s time tracking data from Harvest with other companies like yours – all you need to do is connect your data to the Benchmark Group (this is 100% anonymous for everyone in the group).

    And even if you’re not a digital agency, but still want to try out our product for other types of benchmarks, don’t worry. You can join Benchmark Groups for free and find a cohort that’s most relevant to your business and what you want to compare.

    Time Tracking in Digital Agencies and Its Impact on Profitability

    One big factor that affects profitability is how well time is tracked on different projects. But even though it’s important, many agencies find it hard to track time properly.

    Time tracking helps you see the real costs of client projects. It shows you where resources are going and helps spot any inefficiencies. However, the practice is often met with resistance from team members, leading to incomplete or inaccurate data.

    Without reliable data, it’s hard to measure project profitability and make smart decisions about resource use and future planning.

    Sirvan Jackson, the CEO of Arithmetic, also shared some interesting insights on this topic:

    “Project profitability remains a challenging metric to quantify for digital agencies. This is mainly because team members have not fully embraced the practice of time tracking, leaving the data set incomplete and inadequate for resource allocation and forecasting.

    Even when project profitability is tracked, many agencies are unsure about where to begin with rectifying any identified issues.”

    Sirvan Jackson

    Sirvan Jackson

    CEO at Arithmetic

    Want to get highlighted in our next report? Become a contributor now

    Interestingly, our survey showed that a bit over 10% of the surveyed companies do not time track.

    agency profitability - time tracking impact on business

    As for companies that do time track, most of them report multiple benefits. What’s more, most companies agree that time tracking significantly has a major impact on profitability tracking.

    agency profitability - time tracking impact

    As for the specific tools agencies use for time tracking, the results vary. The two most popular ones from the survey are Harvest (17.65%) and Teamwork (14.71%).

    agency profitability - time tracking tool

    Profitability Benchmarks for Digital Agencies

    We covered some of the main stats we pulled up from our survey – but there’s also a wealth of insights inside our Benchmark Group.

    The Profitability Benchmarks for Digital Agencies group collects data on how agencies leverage time tracking data to improve profitability and resource allocation strategies.

    Now, according to the data provided by Arithmetic’s Benchmark Group Profitability Benchmarks for Digital Agencies, the total amount of money earned from billable hours or project tasks completed by team members on April 24 was $116.51K (median, 29 contributors).

    However, the results for the top performers are more than 2x better – with $271.99k (also median). 

    agency profitability - benchmark group billable amount

    According to the same group, there were 982.5 Hours Tracked (the total amount of time spent on a project by all team members) in the same period (median, 37 contributors). However, top performers had 2.2k hours tracked in April (also median).

    agency profitability - benchmark group hours tracked

    There were 614.91 billable hours (​​the amount of time a team member spends on client work that can be billed to the client) in April 24. Again, top performers had significantly more – 1.67K billable hours (also median).

    agency profitability - benchmark group billable hours

    Want more insights like this on this topic? Join the group for free and you can check out the rest of the metrics in literally just a few minutes.

    5 Key Initiatives for Boosting Digital Agency Profitability

    Boosting your digital agency’s profits means taking smart steps to streamline your work and add more value.

    Here are some key initiatives to help improve efficiency, keep clients happy, and increase your bottom line that our respondents recommended:

    1. Implement Utilization Targets and Tracking for Each Service Division
    2. Focus on the Areas in Which You Excel the Most   
    3. Optimize Your Pricing Model and Strategy
    4. Use Tailored Software to Optimize Your Project Management
    5. Allocate Your Profits to Develop an Internal Marketing Structure to Acquire New Clients

    Implement Utilization Targets and Tracking for Each Service Division

    With clear utilization targets, you can ensure that each team member’s time is used efficiently and productively. Tracking these targets helps spot underused resources and adjust workloads, maximizing the value delivered to clients.

    This approach also highlights any bottlenecks or inefficiencies, allowing you to make smart decisions to improve operations.

    Jake Shelton of Mint Design is one of our respondents who used this tactic:

    “We implemented utilization targets and tracking for each service division in the company. We were not being as profitable as we were aiming for and we lacked visibility as to where the profit was getting lost. We set goals for each team member in terms of what their expected utilization should be and then we got the team leads to report on utilization weekly. This has greatly improved the visibility and focus on profitability per team.”

    Focus on the Areas in Which You Excel the Most   

    To boost your agency’s profits, focus on what you do best. If you concentrate on your strongest areas, you can provide top-notch services that set you apart from others.

    This means your team spends time on projects where they can shine, making the most impact. Plus, when you specialize in what you’re best at, you’ll attract clients who need those exact skills, leading to more repeat business.

    Kalie Fry of Atlas says that her team “intentionally niched down our services so we’re spending time in the areas where we excel most.”

    “Not just in terms of skill sets, but where processes are the most streamlined and which projects yield the highest profit margin. For us, that was website development. That’s where our strengths lie – we know the processes like the back of our hand and we’re compensated well for that confidence. I’ve spoken with colleagues and specialization is the trend we’re seeing across the board. It’s a win-win, both for the agency and the client.”

    Andi Graham of Big Sea also says that their biggest move was to “niche down even farther than we had ever done in the past, refining our core offerings and our target market to a very narrow space.”

    “We have been getting better clients, more profitable and predictable work, and a more engaged team. Wish we’d done it sooner! We had a rough year in 2022, but 2023 has turned around completely. After 18 years in this business, we feel more optimistic than ever.”

    Optimize Your Pricing Model and Strategy

    Start by evaluating your current pricing structure to make it accurately reflect the value of your services. You can even think about using flexible options like tiered or value-based pricing to suit different clients.

    What’s more, keep an eye on what competitors are charging to stay competitive without cutting into your profits.

    Michael Maximoff of Belkins says that “in the past twelve months, we decided to optimize our agency’s pricing strategy as well as our client strategy, focusing more of our efforts on clients that bring in the most revenue. As a mature agency, optimizing our pricing strategy helped a lot, and the same goes for our decision to prioritize our best clients.”

    Ravi Sharma of Webomaze developed a “performance-based pricing model over the past year that completely transformed the profitability of our SEO agency.”

    “To design a win-win arrangement, we carefully analyzed client outcomes, competition, and industry benchmarks. Implementation required open communication with current clients and a persuasive marketing strategy to draw businesses interested in our cutting-edge methodology. By fostering trust, significantly improving client retention, and increasing revenue by 25%, this initiative has reaffirmed our agency’s dedication to results and helped us stand out in a crowded market.”

    Sometimes, the right move can also be to simply increase your prices.

    Nate Tower of Perrill says that his agency “increased prices for all clients that had been with us for more than a year.”

    “This was our first price increase in a decade, so it was certainly justified. We notified key clients ahead of time and updated invoices with a memo for smaller clients. The impact was high and we had almost zero churn as a result of the price increase. A few clients questioned the price increase, but after explaining the rationale and the fact that it was the first price increase most of them had experienced, they understood and stuck with us.”

    Use Tailored Software to Optimize Your Project Management

    Tailored tools can streamline your workflows, help your team collaborate better, and make sure projects are delivered on time.

    Automating routine tasks and getting real-time updates on project status can also cut down on delays and mistakes.

    Natasha Rei of Explainerd says that they were able to “significantly boost our agency’s profitability by optimizing project management through tailored software. We recognized inefficiencies, selected a solution, trained our team, and customized workflows. The impact has been substantial, with increased efficiency, client satisfaction, and improved profitability, allowing us to handle larger projects and grow sustainably.”

    PRO TIP: Are you having a hard time tracking time spent on projects by your team and similar project management metrics? Take a look at our free Project & Team Report Dashboard Template for a simpler way of doing things. Now, you can track all of your most important time metrics such as hours tracked, billable hours, time spent on tasks, and more, all in one place.

    agency profitability - project & team report dashboard template

    Allocate Your Profits to Develop an Internal Marketing Structure to Acquire New Clients

    Dedicating resources to building a robust internal marketing team helps you create targeted campaigns that effectively reach your ideal clients.

    An internal marketing structure allows for better control over your branding and messaging, ensuring consistency across all platforms. Not only that, but it also helps increase your client acquisition efforts and overall success with it.

    Alex Trueba of Trueba Media shared that “we allocated a larger portion of our agency’s profitability from last year towards enhancing our internal marketing structure in order to acquire new clients and handle a larger workload. Additionally, we have expanded our creative team by hiring new staff, which will have a significant impact on our growth over the next 12 months.”

    Changes Agencies Plan to Make to Improve Profitability

    To remain profitable, digital agencies need to be able to constantly adapt and evolve.

    Here are some changes that the agencies we spoke to are planning to make to improve their profitability and stay ahead in 2024:

    Leverage Big Data and Improve Data Literacy

    Big data helps you understand client behavior, market trends, and how your operations are running. This, in turn, helps you make smarter decisions and create targeted strategies that get better results.

    It’s also important to focus on improving data literacy across the entire organization, so your team can better interpret and use data insights.

    Abhi Bavishi of GrowthFox plans on “exploiting big data in the next year”.

    “We seek better decision-making and reliable predictions and trends to help us. The huge amount of data at disposal is a boon. We certainly view it as untapped potential. To do it, improving data literacy is our primary plan. Training our workforce to read, understand, and analyze data comes first. Investing in modern data analytics software comes second. Real-time insights can serve us better and data-driven decision-making is our ultimate goal.”

    John Reinesch of Asset Growth talked about how his agency improved his quarterly planning process by better analyzing at what the data shows:

    “We have improved our quarterly planning process and we are now tracking and more importantly, making adjustments as needed throughout the month and quarter based on what our profitability data tell us. We have been tracking the data for a while but the planning and measurement process should help us take more action and make adjustments in real-time.”

    Implement a Subscription-Based Service Model

    A subscription-based service model provides a steady, predictable revenue stream, reducing the financial uncertainty that usually comes with project-based work.

    With subscription services, you can build longer-term relationships with clients, making them more loyal and likely to stick around. It also helps with planning and managing resources better since you can predict and allocate work more efficiently.

    Luke Van Der Veer shared how he plans to implement this model in his own business:

    “I plan to implement a subscription-based service model to improve my agency’s profitability. This involves offering clients ongoing lead generation and digital marketing services on a monthly subscription basis. To execute this, I will create tiered subscription packages that cater to different business sizes and needs, ensuring a recurring revenue stream.

    This approach not only provides clients with consistent support but also stabilizes our agency’s income. Additionally, it fosters long-term client relationships, enhancing client retention and ultimately boosting profitability through sustained, predictable revenue.”

    Using AI and Machine Learning Technology

    These technologies bring multiple benefits to the table. For example, you can use them to automate repetitive tasks, save time, and cut labor costs.

    They also offer advanced data analysis, helping you create marketing strategies that fit each client’s needs. There’s predictive analytics as well, and you can use it to spot market trends and client behaviors ahead of time, helping you make smarter decisions.

    Keiran Griffiths of 1st on the List plans to “implement more AI software to help make our team more efficient. If we can implement AI to make a 5-hour project only take 2-3 hours we effectively doubled our potential output.”

    Lucas Vitale of SEO Assistance also talked about his plan for leveraging these new technologies:

    “We plan to integrate Artificial Intelligence (AI) and Machine Learning (ML) into our SEO strategies to further improve our agency’s profitability. AI and ML have the potential to analyze vast amounts of data faster and more accurately than traditional methods. By harnessing this power, we can better predict search engine algorithm changes, understand user behavior in real-time, and make quicker, data-backed decisions on content optimization and link-building strategies.

    Before a full-scale roll-out, we will test the newly integrated tools on select projects. This will allow us to measure the impact, refine our strategies, and make necessary adjustments.

    We anticipate that this can lead to a 30% increase in client retention and up to a 25% increase in new client acquisitions, owing to the advanced, state-of-the-art services we’ll be offering.”

    Refining the Project Management Process

    Streamlining project management workflows and setting clear guidelines makes everything run smoother and faster.

    You can also use advanced project management tools to help distribute resources better and cut down on delays. This not only improves teamwork and communication but also keeps clients happy with timely, top-notch work.

    Noel Cabral says that his goal is to boost agency profitability over the next year by refining the project management process.

    He plans to “introduce a robust project tracking system, optimizing resource allocation and timeline management. Regular performance checks will ensure timely adjustments, maximizing efficiency without compromising quality. This strategic enhancement will undoubtedly drive increased profitability.”

    Expand Service Offerings

    Adding more services helps you attract a wider range of clients and meet more of their needs, which means more revenue for your agency.

    Offering related services like SEO, content marketing, or social media management lets you provide complete solutions that build on what you already offer.

    Art Zabalov of Art Does Ads says that he plans to expand his service offering by “partnering up with web development and SEO experts”:

    “Many clients have asked us to provide these complementary services to our existing PPC, design, and landing page capabilities. Offering bundled services reduces client churn, increases lifetime value, and enables higher profitability per client with less account management time. With careful execution, we expect this service expansion to increase profitability by 20-30% in the next 12 months.”

    Art Zabalov

    Art Zabalov

    Founder & CEO at Art Does Ads

    Want to get highlighted in our next report? Become a contributor now

    Another way you can expand your offerings is to invest in training people who already have complementary skills to what you’re offering.

    Frank Olivo of Sagapixel plans to do just that:

    “We are going to invest in training more people from outside the SEO industry who possess complementary skills. Talent with even a little experience has become quite expensive and I’ve found that the value they bring doesn’t always equal their cost.

    Developers and people with strong writing backgrounds can be taught different aspects of SEO; smart people with strong interpersonal and organizational skills can be great at managing accounts. Training these individuals in very specialized aspects of the work we do is well worth the investment cost.”

    PRO TIP: Are you also planning to include SEO in your service offerings? If so, here’s a free Google Organic SEO Dashboard template that combines insights from both Google Analytics 4 and Google Search Console. With this dashboard, you can monitor all of your most important SEO metrics on one screen.

    agency profitability - google organic seo dashboard

    Implement EOS

    EOS gives you a solid framework for managing and growing your business. By focusing on things like vision, people, data, issues, process, and traction, EOS helps make your operations smoother and more efficient.

    This system ensures everyone in your agency is on the same page and working towards the same goals. Plus, it helps with better decision-making, problem-solving, and accountability, leading to consistent performance and growth.

    Susie Kelley of Spot On says that her team is implementing EOS and that it’s “something that has helped us in setting measurable goals for the company and each individual employee.”

    Stay On Top of Your Agency’s Profitability With the Help of Databox

    Achieving and maintaining profitability in digital agencies is far from easy, especially nowadays.

    But as our research has shown, there are certain strategic approaches and common practices that can help you improve your agency’s bottom line.

    Whether it’s optimizing your pricing models, diversifying your service offerings, or investing in the right talent and technology, there are paths to profitability that many successful agencies are already taking.

    There’s also another – how will you know if your strategies are effective and if your agency’s performance is competitive?

    And that’s where Databox steps in.

    With Databox’s Benchmark Groups, you no longer have to rely on guesswork or outdated reports. You can gain real-time insights into how other digital agencies are performing in key areas.

    You can use this information to compare your metrics, identify gaps, and discover opportunities for improvement.

    And that’s not all – you also get access to Databox Dashboards, which provide a comprehensive, real-time view of your most critical metrics, all in one place.

    Join a Benchmark Group today and start leveraging these tools to stay ahead of the competition. The path to greater profitability is clearer when you have the right data at your fingertips.

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    Article by
    Filip Stojanovic

    Filip Stojanovic is a content writer who studies Business and Political Sciences. Also, I am a huge tennis enthusiast. Although my dream is to win a Grand Slam, working as a content writer is also interesting.

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