In today’s fast-paced business environment, marketing agencies must have a clear understanding of their finances to remain competitive and profitable. But one key element to building a successful agency is accurately projecting your revenue streams.
Understanding the difference between gross and net revenue and how to segment revenue into existing and new clients can provide a solid foundation for accurate financial projections and a budget that sets your agency up for success.
We’ll show you how to maximize your revenue streams below.
Gross Revenue vs. Net Revenue
A budget is an essential tool to ensure the financial health and long-term success of any business. Knowing the difference between gross revenue and net revenue, as the owner of a marketing agency, is a critical first step to understanding your budget.
Gross revenue includes the sum of all fees charged to your clients, regardless of whether your agency keeps the money or passes it through to a third party. This can be things like media fees or other expenses that your agency may pass along to the client without marking them up.
Whereas net revenue only includes the fees that your agency collects from clients and retains as revenue. It doesn’t include any pass-through revenue or expenses that you may incur.
When you’re projecting your agency’s revenue, it’s important to focus on the net revenue because it represents the real revenue that you will be able to retain and use to fund your operations. It also helps your agency make more informed decisions about where to allocate resources and when to scale back or up.
For example, if your agency is projecting $100,000 in gross revenue, but $20,000 of that is pass-through revenue that will be paid to a third party, your net revenue will only be $80,000. Focusing on the net revenue allows your agency to better understand how much money you will actually be able to keep and use for your own operations and growth.
Understanding Existing vs. New Client Revenue
Once you’ve differentiated your gross and net revenue streams, it’s crucial to segment your income from existing clients, as well as any new clients, so you can make annual revenue predictions.
Existing clients are those who signed up before the beginning of the fiscal year, while new business refers to clients who signed up on or after the first day of the fiscal year.
By tracking revenue for these two categories separately, you can hold different teams accountable and have a better understanding of where your revenue is coming from and how it is performing.
Projecting Existing Client Revenue
To accurately predict existing client revenue, you must consider renewals, upsells, and attrition.
To accurately predict renewals, start by estimating the revenue of each service for every month. At each renewal period, you will want to determine if the client will renew for the same amount, less, or more.
Breaking down your predictions in this way will provide you with a wealth of essential data that is necessary for resource planning and decision-making. Aim to make binary decisions regarding renewal instead of assigning probabilities, as our experience has proven that this strategy yields more accurate forecasts!
When looking at your upsells—additional services you can offer customers beyond their initial purchase—consider existing opportunities in your current pipeline and also anticipate potential unknown ones that have not been explored yet.
These upsells require insight from past patterns of successful upselling as well as investments made to enhance future performance. Leverage historical data combined with intentional investment for the best possible outcome.
When customers leave and stop purchasing your products or services altogether, that’s known as attrition. It’s important that you account for attrition in your prediction so that your estimated revenue isn’t too inflated due to unexpected losses from clients who decide to leave your company during the course of the year.
Examining past customer churn rates as well as the causes of their departure, such as industry shifts and new competitors in the market, can be beneficial. Additionally, you should investigate if any investments made in your service offering could potentially reduce future churn.
Predicting existing revenue for your business can seem daunting, but it doesn’t have to be! Start by considering three key elements—renewals, upsells, and attrition—to gain insight into accurate predictions about existing client revenues for this fiscal year and beyond.
By taking these steps, agency owners can better understand their current financial situation and plan ahead for success in their businesses.
- Predicting Revenue by Month
Once you have finished projecting your revenue for your existing clients, you will know the number of customers expected as well as how many customers from this group you will have for each line of business.
Projecting New Business Revenue
Accurately predicting new business revenue is a critical task for any agency owner. To do so, it’s important to consider not only your existing leads in the pipeline but also prospective clients who may be arriving soon. In this section, we’ll show you how to make accurate projections of future revenues from these sources.
- Define Your New Client Revenue
At “The EngineBI Way,” new clients are defined as anyone who signs up after the beginning of our fiscal year. For instance, if your financial year starts on January 1 and you have a customer signing up any time that month or later, then it will be counted towards this current year’s revenue quota.
If there is an additional purchase from this same client during the period of said fiscal year, these sales will still fall under the “New Client Revenue” category.
- Reviewing Your Existing Pipeline
The first step in projecting “New Client Revenue” is to review your existing pipeline and make a binary decision as to whether you will win or lose each deal.
To get the clearest view of your desired results from each customer, project the revenue for every single service that you anticipate them to buy each month. This will give you an accurate representation of the reaction to expect from any potential clients!
- Predicting Revenue by Month
When you are done projecting your new business, you will have an understanding of how many new clients you expect to win each month.
Ideally, you will break this out by naming prospects that are currently in your pipeline as well as unknown prospects—we call these “Blue Sky Clients”—that you will win every month.
Projecting Unknown Prospective Revenue
The next step is more of a challenge. You’ll need to forecast revenue from potential customers that have not been identified yet but could be sources of future income throughout the year.
In order to project your revenue for unknown prospects, you’ll want to first look at your sales history. This will give you an idea of how many new clients you win each month, the average order value, and the amount of new business you win with each of your services historically.
Then you’ll want to analyze your sales and marketing efforts and determine how they differ from the past. If your sales and marketing strategy is similar to what you have done historically, then you should expect the same result. If you’re increasing your sales and marketing, you should expect more “blue-sky clients.”
Be careful not to be too optimistic about the results. Especially if you are trying brand new campaigns that are not yet proven. The combination of analyzing your historical results and the changes in your sales and marketing should give you a solid idea of what you can achieve in terms of blue-sky revenue.
Accurately projecting revenue from “New Client Revenue” is a crucial step for understanding your revenue projections for the year. You will want to continually improve at projecting both named prospects and your blue-sky revenue.
- Predicting Revenue by Month
In addition to existing and new customers, you should also take into account any potential lost customers due to attrition or other circumstances. Your client churn should already be built into your existing and new client projections.
Once you have completed all of the projections in terms of existing, new, and lost customers by month, you should lock these numbers in for each budget or forecast. This way, you will be able to compare how you are performing with what you thought you would achieve.
Why Accurately Predicting Revenue is Essential for Your Agency
Accurately predicting revenue is essential to the long-term success of your marketing agency. Without accurate projections, it’s challenging to make informed decisions about resource allocation, scaling operations, and investments in growth.
By understanding the difference between gross and net revenue and segmenting revenue into existing clients versus new businesses, you can create a solid foundation to begin projecting revenue.
Predicting existing client revenue requires careful consideration of renewals, upsells, and attrition, combined with an analysis of seasonality and market trends.
Adding Attributes to Your Client Revenue Analysis
Projecting your client’s revenue by month is essential for understanding the success of your company. However, to get a more complete picture of your sales performance, you need to add more attributes to each client.
Doing so will give you insight into trends over time and provide answers to important questions like what is the revenue or gross margin for each attribute. Let’s look at a few examples of attributes that you should consider adding to your client analysis.
- Lines of Business and Sub-Lines of Business
We always recommend, at a minimum, projecting your revenue by client and line of business by month. Oftentimes, you can break it down further into sub-lines of business, which provides even deeper insights into how different aspects of a product or service are performing.
For example, if your agency has search marketing as a line of business, you could have paid search and organic search as sub-lines of business.
Oftentimes, we come across agencies that bundle their services or do not have a clear understanding of their lines of business. We recommend that, even if you sell your services as a bundle, you break it down in your budget by each line of business so that you can truly understand how each of your services is performing.
If you do not know exactly how to allocate your revenue by line of business, it is important to do the work to determine how you assign your revenue.
- Other Key Attributes
You may also want to consider adding other attributes, such as revenue by location or team. By having these additional data points, you can identify any discrepancies between different locations or teams and make changes accordingly.
You can also look at trends over time, which will provide insights into areas that need improvement or areas where there have been successes that should be replicated in other areas.
Projecting your client’s revenue by month is a great first step in understanding the success of your company; however, it does not tell the full story. By adding more attributes, such as line of business with sub-lines of business, as well as other relevant factors such as location and team, you can gain deeper insights into how successful different aspects of your product or service are performing over time.
Doing this will allow you to answer key questions and identify potential opportunities that could lead to greater success for your agency in the future.
Start Projecting Your Revenue Streams Today
Projecting revenue is a crucial element in building a successful marketing agency. Understanding the difference between gross and net revenue and segmenting revenue into existing clients versus new businesses provides a solid foundation to begin projecting revenue.
Accurately predicting existing client revenue requires careful consideration of renewals, upsells, and attrition, combined with an analysis of seasonality and market trends.
By establishing a regular process to review and adjust your projections, you can make informed decisions and ensure the long-term success of your agency.
But if you’re unsure where to start or need help determining your gross or net revenue, consider downloading our Golden Key Checklist.
This checklist will help you determine your agency’s current income and how to properly predict your revenue streams. Download it here.