When discussing agency margins, it is akin to pondering an individual’s ideal weight, assuming there is a universal standard. However, much like personal health, agency margins are deeply individualized, contingent on a myriad of factors such as lifecycle stage, service mix, and organizational goals. The notion of an “acceptable” margin is complex, personal, and perpetually evolving.
Each agency possesses its unique characteristics and ambitions, making it impossible to assign a one-size-fits-all margin. Despite this, the industry often seeks uniformity, which can stifle creativity and innovation. Imagine if the film industry attempted to standardize margins, erasing the diversity between blockbusters like Top Gun and critically acclaimed films like Parasite. Such a move would eliminate risk and variety, leading to a bland homogeneity.
The Purpose of Agency Margins
Agency margins should serve as a reflection of past decisions rather than a prescriptive guide for future actions. They are indicative of strategic choices rather than a rigid rulebook. Pricing decisions, too, are context-dependent, influenced by the client, the brief, and the intended impact. Not all projects are equal; some are priced to foster relationships, while others command a premium for their value.
Thus, when asked, “What’s an acceptable agency margin?” the answer is not a number but a strategy. It is about understanding the intent behind pricing decisions and aligning them with the agency’s broader objectives.
The Pitfalls of Chasing Uniformity
Ironically, the pursuit of a standardized “acceptable” margin may contribute to the declining profitability of agencies. By adhering to artificial benchmarks, agencies risk:
- Subordinating themselves to clients, mistaking compliance for partnership
- Pursuing work that fills time but lacks ambition
- Compromising on creativity or talent to meet unrealistic targets
- Turning creative discussions into cost debates
- Confusing stability with success, prioritizing predictability over progress
- Undercharging for high-quality work to satisfy financial spreadsheets
- Accepting subpar briefs out of desperation
- Investing in non-core work that dilutes their strengths
These missteps stem from asking the wrong questions, leading to misguided answers. As Clayton Christensen cautioned, the true issue lies in the pursuit of profit, not in principle, but in measurement. He noted,
“When profit becomes a percentage, it causes you to focus on smaller and smaller wins.”
This mindset rewards short-term gains and penalizes patience, pushing creativity towards safe, quick, and minor achievements.
Redefining Agency Margins
The real opportunity lies not in chasing industry averages but in defining what margins mean for each unique agency. Establishing one’s own margin is an act of leadership, allowing agencies to reclaim control over their narratives and strategies.
To achieve this, agencies must evaluate:
- Their lifecycle stage: growth, recovery, stability, or reinvention
- Their portfolio mix: commoditized versus premium, retained versus project-based work
- Their long-term ambitions: growth, stability, creative reputation, or preparing for sale
- Which clients or products warrant premium pricing
- Their capabilities and capacities: strengths and areas of strain
- Their market position: differentiation and competitive advantages
By adopting this comprehensive approach, margins become a reflection of strategic choices rather than arbitrary targets. They balance present needs with future foundations, enabling agencies to tell compelling stories to stakeholders, including distant investors who may only visit occasionally.
Embracing Authenticity
There is a fine line between conducting this exercise honestly and using it as a defense for underperformance. The difference lies in the intent to understand, reset, and grow, rather than to make excuses. This process is not about lowering standards but about recognizing where they stand and why.
Ultimately, margins are not benchmarks; they are unique fingerprints, reflecting the distinctiveness of each agency. Chasing a generic number is akin to engaging in “spreadsheet astrology” rather than strategic planning. To determine an acceptable margin, agencies must do the work, define their own parameters, and embrace their individuality.
