Businesses are rushing to their drawing boards to even out the impact of 2020 on their revenue. Going into 2021, COVID-19 is not the only driving factor that has affected businesses. Tensions between the US and China, the separation of the United Kingdom from the European Union, and elections in major countries around the world like the USA, Hong Kong, and South Korea could also impact the global economy. How do advertising and digital marketing agencies find themselves in this new world? What do their finances look like?
Many experts have observed that the shift in the world economy has also changed consumer behavior, customer needs, and targeting strategies, which is a great challenge for digital marketing agencies.
AdWorldMasters assessed the financial situation of digital marketing agencies in 2020 and 2021 to see how well they coped with these changes and challenges. We have invited agency top managers from all around the world to participate in our survey. The research was conducted from December 2020 to January 2021.
🎯 Most agencies (42%) reported a lower income in 2020 as compared to 2019.
🎯 86% of agencies agreed that the change in their income and revenue was attributed directly or indirectly to the pandemic.
🎯 Cutting costs was the most popular strategy chosen by agencies to combat the pandemic.
🎯 Most agencies are optimistic about their business in 2021.
The overall income of agencies suffered in 2020. 42% of the agencies who reported their income had an overall decrease compared to 2019. Within that figure, 26% of the agencies’ income was lower by 20-49%. This is a significant drop.
Also, 26% of respondents stated no overall change in their income. So for over a quarter of the interviewed agencies, 2020 was the year of stagnation.
However, not all agencies experienced downfalls. 32% of the respondents had a higher income than in 2019. One of the respondents shared their own agency’s strategy, stating, “Our agency made quick moves to control our expenses by cutting surplus spending. Monitoring any outgoing expenses, restricting leave, and reducing wages until we had certainty. This allowed for a head start on competitors (and) allowed our agency to survive and then thrive as we exploded out of the pandemic. Creative thinking, innovation, and out of the box tactics caught the attention of businesses who were drowning.”
A report “The impact of COVID-19 on digital agencies” from Uplers shines some light to explain these findings. According to it, nearly half of the agencies responded that they lost leads in 2020. The same report showed that 28% of agencies reduced their fees, either for client retention or to appease new clients. Another respondent in our own agency survey demonstrated this approach of flexibility to retain existing clients, saying that “As an agency, we are doing everything we can to support those of our clients who are struggling while also looking to grow our client base in those industries which are doing well.” (Cameron Prockiw, Founder of Vovia).
A HubSpot report “Marketing Agency Growth” on digital marketing agencies back in 2018 disagreed with reducing service charges. One expert insight from Daryn Smith advised: “Undercharging is going to put huge pressures on your cash flow — resulting in your agency making less strategic decisions. The single most important piece of advice I would tell other agency owners is it’s not worth selling to low-value new clients.”
Agencies who responded to Wix’s report “Top challenges for digital marketing agencies for 2020” identified two main opportunities to increase revenue in the face of economic hardships: a) expand their number of services and b) sell high-ticket, thorough services that provide more value and sell at a greater cost. This seems to agree that agencies shouldn’t devalue their services even during the pandemic to get new clients.
However, business results of pandemic together with market transformation factors are impacting the way agencies can grow. Business growing their in-house teams, setting smaller budgets for projects, and a large number of new agencies entering the market are changing the position of agencies in the supply chain and making it weaker. A respondent described it in her own words, “In a rush to “get something going” many new agencies are popping up without the requisite knowledge or capabilities to deliver at the level of agencies that have spent time building competencies (this is happening in many industries). What this does is undercut the market making it harder for everyone to survive.” – Minali de Silva, Managing Director of Three Sixty Marketing & Three Sixty Digital.
The idea of selling high-value services to increase the cash flow is risky and controversial. Another respondent of our survey echoed this opinion. “I believe that companies that focused on the numbers and not (the) clients are going to struggle (or) go out of business.” – Laura Farkas, CMO of LMNTs Marketing. Agencies who have built strong relationships with their clients are definitely more likely to keep generating business, even when cheaper options are available for the client.
Is it a better idea to expand services in order to boost revenue? We look into this in the next section.
Factors Contributing to Revenue
The majority of agencies who responded had one or more niches that their services center around. 44% stated they did not have any specific area of specialization. We looked into how much revenue came from the agency’s niche if they had one. 14% of agencies generate over 91% of their income from a single industry sector. 18% of the agencies attribute 50-90% of their income to their main sector niche.
Agencies were asked, “What percentage of your income came from your main technical specialization? (e.g. SEO, Social Media, Web-Dev, UX, etc.)”. 30.6% of them said that they provide a wide range of services. But 18.4% of agencies, who focused only on one specialization, generated over 91% or more business from it. Over 40% of agencies generated at least 51% of their income from a single technical specialization.
At first glance, focusing on a sector niche or one technical area can seem attractive. There are lower costs in managing and organizing agency competency, better performance, and often better results for clients. It can also mean less competition.
On the other hand, having more than one area of specialization generates more stable revenue than having just one. If an agency loses business in one area of specialization, it still can generate business in other areas. This second strategy seems less risky. Growing competition on the market is pushing agencies towards different specializations. Referring back to Wix’s agency report, this result supports their advice for agencies to enter into more than one area of specialization to generate growth.
Agencies in the hygiene, eCommerce, and telecom niche were winners. Influencer Marketing Hub’s report, “Coronavirus (COVID-19) Marketing & Ad Spend Impact” took a look at the changes in ad spend for different industries. It showed that the US Telecom industry will account for 10.6% of total digital ad spending in 2021, compared to a figure of 9.4% in 2019. Advertising agencies in these niches were lucky, unlike those in the travel industry niche, which is expected to lose at least $850 billion.
What conclusion do these findings lead to? A hyper specialized marketing agency could get lucky and happen to be in a fast-growing, in-demand industry that sets a high marketing budget. Pre-pandemic, the travel and tourism industry also fit that description perfectly. Insider Intelligence tracked ad spend in the US travel industry and described their findings in their article, “US Travel Digital Ad Spending 2020”. They had predicted a 19.4% growth in ad spend. However, the ad spend fell from 4.2% in 2019 to just 2.4% in 2020; a 41% decline.
This unpredictability of the market is the biggest motivator to specialize in marketing for more than just one industry. But if the marketing and ad agency diversify too much, they will suffer from low focus, less expertise, and high costs of operating so many different channels of marketing. The agency cannot cover a thorough and complete service if it spreads itself too thinly over many different sectors.
Predicting Future Revenue
Agencies are optimistic when it comes to calculating business growth in 2021. 84% of them expect more growth in income for 2021 than they had in 2020. Only 8% are expecting a further decrease in income in 2021. 8% are not expecting any change. 22% of agencies expect 20% of growth in 2021 compared to 2020 – it was the most popular choice.
This is an interesting find. In the survey report “Agencies’ views and expectations in a post-COVID world”, we conducted in spring 2020, nearly 30% of the agencies who responded were pessimistic and expected a decrease in income for 2020. They weren’t wrong – most agencies in this study did see a decrease in income as predicted.
What makes marketing and advertising agencies so optimistic about the future? CallRail’s report “2021 Digital Marketing Agency Outlook” replicated similar results: marketing agencies were overall optimistic about the future despite losing revenue and facing challenges. They were confident that they could generate new leads, gain new clients and continue to earn from existing clients.
🎯 96% of the client relationships of the agencies lasted more than one year.
🎯 Agencies made decisions like shrinking overheads and working remotely, which reduced costs without affecting service quality and unexpectedly increased profits.
🎯 Facing hardships forced agencies to be creative and come up with innovative strategies.
When asked, “What is the primary driver of your agency’s business growth or decrease in 2020?” 44% of the respondents said “mostly the economic results of the coronavirus pandemic”. 42% of them said that the reasons are more complex: “economic results of the coronavirus pandemic combined with the marketing industry transformation in the last few years”.
Agencies are under structural pressure to transform. This presents difficult challenges as well as innovation opportunities for digital marketing and ad agencies. These are the opportunities that make agencies hopeful for the future of their business. We go deeper into this subject in another article commenting on other results of our survey “Opportunities & challenges for agencies in 2020 & 2021”.
Digital marketing and advertising agencies lost revenue due to clients not being able to sustain partnerships after the pandemic struck. Agencies have to make decisions to recover these losses. They have to adapt to the pandemic. The different approaches agencies have taken to ensure this is supporting their client relationships, innovating strategies, growing a client base in more successful industries, and cutting down on expenses. There is a wide array of opinions about the best way to increase cash flow. Agencies need to make cautious financial decisions while also protecting their loyalty to clients. They also need to find a balance between specializing and diversifying their services to remain stable.
Overall, agencies have been successful in coping with these changes and moving forward; not by expecting things to go back to normal, but by changing themselves as the market changes. Their optimism in getting a higher revenue for 2021 shows this. Michael Nolin, the CEO and founder of Guru Advertising described the future outlook perfectly by commenting, “We’re now living in the new normal, brands and businesses as well as people will need to adapt, adopt and advance. If we choose to operate business as usual, we suffer the consequences of delayed development both socially and economically.”
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