Thread by @ecomchasedimond

THREAD:

The levels of agency profitability:

One of the most interesting things I’ve learned about running an agency for the last 3 years.

Stage 1: The Early Days

The most profitable you’ll ever be is when you’re starting out.

Typically you’ll have to do most everything by yourself.

So with very low overhead, most of what you earn, you keep (outside taxes of course).

Let’s say at this stage you’re doing $10k per

month in revenue and you have $2k in overhead.

You end up with $8k per month in profit (outside taxes).

So what does stage 2 look like?

Stage 2: First full-time hire(s)

This is where your profitability begins to drop because you now have fixed labor overhead.

Let’s say you’re now at $20k per month in revenue but now you have $8k in employee overhead.

You end up with $12k per month in profit (outside taxes).

In stage 1, our profit margin was 80%.

In stage 2, our profit margin was 60%.

What happens in stage 3?

Stage 3: Scale

Normally at this stage you’ll have a full team and while your revenue should hopefully be increasing, so too will your expenses.

Your margins will probably be somewhere in the ballpark of 30%-40%.

So why is this important to understand?

It’s important because

you need to figure out what path you want to take.

You either need to be okay staying small or need to commit to going big.

I think stage 2 is no mans land.

The couple thousand extra you make per month in stage 2 probably isn’t worth the extra aggravation.

Getting to stage 3

is really rewarding but it requires a lot of patience.

At stage 3, the difference in revenue makes up for the halving of profit margin.

My best advice is:

If you want to focus on profit margin, fewer clients with higher client billables.

If you want to get an exit or build

something larger than yourself, more clients, more team members, so on and so forth that comes with Stage 3.

I got stuck in stage 2 for too long.

Other ways to be profitable regardless of the stage:
- Charge more
- Leverage overseas talent

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Due to the great feedback on this agency thread, I wanted to share some other thoughts about personal branding and agency life.

Would love for you to take a look 👇

https://twitter.com/ecomchasedimond/status/1365523534101893123