Some agency owners look for ways to outsource as much work as possible to entry-level or overseas workers. Others are caught in a never-ending cycle of hiring and firing as revenues rise but profitability fluctuates.
Not Grayson Lafrenz. He’s the CEO & Co-Founder of Power Digital Marketing, a roughly-70-person growth agency based in San Diego, CA, that routinely hits 2X the average agency profit margins every year, despite an only 2:1 ratio of clients to employees. His team members are some of the highest paid around; most employees would kill to have the work-life balance, professional development, and compensation packages they have.
So how is Power Digital so profitable? The answer, for Grayson, is simple:
Agency profitability doesn’t come from cutting corners and employing the lowest-wage workers. Instead, it comes from a willingness to invest all the way in the people and strategies that will result in high-value services to low-churn clients.
And fortunately for the rest of us, he’s more than happy to discuss the policies that helped Power Digital grow to be so successful.
Grayson believes that business owners should always focus on the metrics that matter most.
“For most companies, especially service businesses, revenue is just a vanity metric,” he said. Instead, his two KPIs are profitability and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) per employee.
Those are the numbers he’s focused on improving, without sacrificing his employees’ happiness and well-being in the process. To that end, he covered four topics that contribute to his success:
- How he compensates employees (including profit sharing)
- Why he doesn’t see his agency as a “service provider”
- How they plan ahead for client retention
- How they integrate cross-selling into their business model
Before we explore those topics, let’s take a minute to understand the structure that allows Power Digital to be what it is.
Bonus action list: Get our 2-page PDF summary of action items you can use to increase agency profit margins based on Grayson’s advice.
Power Digital Marketing’s Organizational Structure
Grayson doesn’t believe in hiring a generalist when a specialist can do it better. While he himself is a generalist, he relies on team members with deep expertise in their fields to execute campaigns.
Those specialists are broken out across a number of departments like SEO, PPC, Social Media, Content, and Web Development. Each client gets a custom team of experts who assemble to work on whichever campaigns the client needs. Here is a more detailed look at the marketing services Power Digital provides.
In many agencies, account managers are “like a salesperson dressed up as a marketer,” Grayson said, and they don’t actually execute campaigns for their clients. But at Power Digital, account managers for a client are talented, personable strategists who are actually running that client’s campaign.
“The account manager is usually one of the best strategists; they’re actually executing on deliverables, they’re in the analytics, and they have deep channel expertise,” Grayson said.
Whenever they bring on a new client, a team is assembled from whichever departments are relevant. By way of example, let’s say that a client needs SEO, PPC, and Content. Therefore, the team will have three experts: an SEO specialist, a PPC specialist, and a content creation specialist. One of those three people will act as an account manager.
“The way that we select which department is going to bring the account manager is to look at the bandwidth of those departments and who they have available, the personality of the client, and where the client will have the most questions and scrutiny. Usually what the client is an expert in is what they’re going to try to pick apart, and we’re going to try to align those things,” he added.
Each team has an “executive sponsor” who keeps an eye on things and makes sure that the teams’ actions align with the client’s KPI’s. And in turn, the executive sponsor is held to three metrics:
- Client churn rate (i.e., retention)
- Client growth rate
- Team development and satisfaction.
“That executive sponsor role is critical not only to retain our clients, but there’s also no better opportunity to develop our team members than to do it through live coaching on actual clients,” he explained.
That structure gives them the flexibility to put together well-mentored teams tailored to the needs of each client.
1. Put Your Employees First
Grayson’s approach to employees may seem counterintuitive, but it works: Despite having some of the most highly paid employees in the industry, he runs an agency with almost double the average profitability of his peers.
Compensation and Perks
Employee compensation is tied both to personal performance and company performance. Each team member who hits certain KPIs earns corresponding bonuses. In addition, every employee benefits from profit sharing. “They start to take a much larger ownership mentality,” Grayson explained, when their yearly pay is tied to company profit.
They also get bonuses for getting clients to add additional services and for recruiting new team members.
“We put employees number one before the client. The second biggest priority is always our clients. And if we do a great job at number one with the employees, then number two wins. It’s a leading and lagging indicator,” he said.
Grayson tends to employee satisfaction by attending to the “vital five goals”: compensation, career growth, professional development, balance, and support. “We work very hard as a company and as a management team to ensure every team member is checking all those boxes, so that when they reflect at the end of the year, it’s a major win. And when people are winning in life and they’re winning in their career, they do great work and they’re successful,” he said. (To read more about the Vital 5 Goals, see this feature in Forbes).
Sponsor Professional Development
Mentorship from the executive sponsors mentioned above is only one part of the continued education that team members receive. Grayson is always looking for ways to empower his team, and management actively listens to what their teams want to learn.
“For example, our team members wanted to be more business savvy. We realized we didn’t want to be viewed as a marketing company. We wanted to be viewed as business consultants who solve problems. So we created a ‘Power Digital MBA’ program and brought in around ten different guest speakers who were happy to come and who didn’t charge us anything. They talked about everything from accounting to business law to HR to sales. That was super empowering and really fun,” he said.
2. Don’t Be a Service Provider, Be a Partner
Just as Grayson’s employees do well when Power Digital Marketing is successful, the agency does well when their clients are successful. They promise growth to their clients and monitor metrics closely to ensure their clients hit promised goals.
He sees the relationship between agency and client as one of partnership. “We’re not a service provider. If a brand is looking for somebody to go do what they tell them to do, then Power Digital is not going to be the selection, because there are really low-cost, commoditized people who can do that,” he said.
At the heart of their strategy is the idea that clients aren’t paying them for a set of services. “They’re measuring us based on how much money we make them,” he explained. During sales talks, he’ll often ask a potential client, “If we triple revenue, how much is that worth to you?” And that gives them a way to make the conversation about what the client is gaining rather than how expensive the service is.
“So, we have clients that scale to a lot of different sizes,” he added. “Our average client is about $15,000 a month.”
That makes a huge difference in profitability, especially when you consider their 2:1 client to employee ratio.
3. Plan Ahead of Time for Retention
98% of Power Digital’s business comes from monthly recurring revenue. The longer those contracts last, the better it is for profitability. Therefore, retention is a huge concern (and it’s why employees are, in part, gauged by how often their clients churn).
Reducing Client Churn Starts Before the Sale
When should you start thinking about retention? Before the client has even signed, as it turns out. Making sure the client is a good fit for your company is the number one way to ensure good retention rates. If you know it’s going to be hard to hit the numbers you promised or that there will be a personality or value clash with the client, don’t take them on.
“The solution for any agency is to get more deal flow,” Grayson said. “If you have unlimited deal flow, then you can cherry pick the best clients that you’re going to be super successful with and who share the values that you have. This business is super fun when you do that.”
Grayson actively avoids companies that can’t move quickly enough to keep up with Power Digital’s strategies. If everything has to be run by the brand department and items need to be approved by their executives every time, it’s not a good fit.
Think About Retention When You’re Hiring
When hiring, Grayson looks for two characteristics (besides expertise, which is easy to test for): emotional intelligence and reliability.
While he admits he has no repeatable way of looking for emotional intelligence, it helps tremendously to have employees who can pick up on nonverbal cues. Employees who will invest the time to build a relationship with clients and monitor the health of that relationship are more likely to catch problems that could lead to churn.
As for reliability, it’s also difficult to gauge during the hiring process. But do what you can to assess it based on their manner and work history, because “you can’t win with an employee you can’t trust to follow through,” he said.
While you can’t expect everyone to hit every deadline, it’s important to have team members who will communicate ahead of time why they’re delayed and what they’re doing to resolve the situation. They’re the best people for managing expectations and ensuring an account runs smoothly.
Make Sure the Client’s Whole Team Is Winning
Whenever the Power Digital team takes on a client, they make sure to build relationships with multiple decision makers within that company. You want to know what the financial decision-makers, technical buyers, and user buyers all care about.
“Build a relationship with them and make that team win. If you make your marketing contact at the client win, then you’re probably going to stick around. If the CEO is winning because of your efforts, they’re going to keep you around. That’s what we try to do, although it’s easier said than done,” he said.
4. Make Multichannel Services the Obvious Choice
Grayson’s opinion on cross-selling is baked into Power Digital’s business model.
“When you’re providing one service or one channel, then you’re a service provider. When you’re a service provider, you’re commoditized. And when you’re commoditized, your pricing is compared apples to apples, and people are going to look for the lowest-cost provider a lot of times,” Grayson explained.
“When you integrate multiple channels, that’s a solution. When you’re providing a solution, it’s less about the price and more about the value. And when you’re selling on value versus price, that’s the winning formula,” he continued.
“That’s a big part of why we have strong profit margins,” he said.
Leading by Example
It’s obvious that Grayson practices what he preaches. He takes the time to get to know his employees (as well as he can, given the company size). He’s careful to make sure their “vital five goals” are being met. And he even acts as the executive sponsor on two of their largest accounts to “keep his sword sharp.”
He doesn’t want to become the manager who loses touch with what his team faces every day. And as long as he’s able to meet their needs, he’s confident that Power Digital Marketing will continue to have a profitable — and enjoyable — future.
Bonus action list: Get our 2-page PDF summary of action items you can use to increase agency profitability based on Grayson’s advice.