The advertising industry has undergone significant changes in the past 10 years.
The most obvious is that digital advertising has largely taken over traditional media like TV, radio, and print.
Working for large companies, it’s been interesting to see how the advertising budgets have shifted. Ten years ago, dinosaur executives were reluctant to allocate funds to digital advertising. Now, it’s a given.
Large companies are still adjusting to social media advertising, and as a result, the quick-to-evolve agencies who were able to embrace social media have outshined their competitors.
About a decade ago, I worked as a consultant to build a financial model for an ad tech company. At the time, programmatic advertising was somewhat revolutionary in how ads were bought and sold. Now, the advertising marketplace is more efficient although it does raise concerns about data privacy.
Advertising agencies are made up of both people costs, media and tech costs. An example breakdown of the revenue and costs that make up an Advertising agency’s P&L are:
| P&L Item | Description |
| Revenue | Total income from services such as media buying (placing ads on platforms like Google or TV), creative campaign development, digital strategy, and public relations. |
| Cost of Goods Sold (COGS) | Includes pass-through media costs paid to publishers (e.g., Google, Meta, YouTube) and production expenses for ad creation, like video shoots or graphic design. |
| Gross Profit | Revenue minus COGS, reflecting income earned from core advertising services such as creative ideation and campaign execution. |
| Salaries & Wages | Compensation for creative teams, account managers, marketing strategists, and executive leadership, forming a major expense for the agency. |
| Technology Expenses | Costs for using analytics platforms, ad-serving technology, data management tools, and proprietary AI systems to optimize campaigns. |
| Office & Administrative Expenses | Includes rent, utilities, office maintenance, and administrative support for regional and global locations. |
| Operating Income | Earnings after subtracting operating expenses from gross profit, representing the agency’s core profitability. |
| Net Income | Final profit after taxes, interest, and non-operating expenses, reflecting the company’s overall profitability. |
See example annual reports:
- Ogilvy 2023 Annual Report
- Publicis Groupe 2023 Annual Report
- Dentsu Group 2023 Annual Report
Advertising Agencies Profitability Margins
The midpoint of the average and median gross margin of 129 advertising agencies in the dataset is ~45%. EBITDA margin is ~11% and net profit margin is ~6%.
That’s a lot of operating expenses. The shift from traditional advertising which was mainly people costs to now integrating tech to stay competitive has eroded the net income for many advertising agencies.
The advertising industry will always be competitive no matter with or without technology, especially with the customer acquisition and customer retention costs.
The advertising companies that are able to successfully integrate tech to improve their operating efficiency to reduce OpEx/increase profitability and use proprietary technology to create recurring revenue for their advertising platform services will needless to say come out on top.
Advertising Agency Valuation Multiples
Out of 127 companies, the average/median revenue multiple is ~1.4x, EBITDA multiple is ~9x and PE is ~17x.
The dataset includes advertising companies in geographies with the top 20 largest advertising agencies: North America, France, United Kingdom, Japan, Korea.
Relative to EBITDA and net profit margins, the calculated EV/EBITDA and PE multiples from P/S are higher than what they are trading at.
The inference made from this observation is that investors don’t expect advertising companies to have huge leaps in profitability in the near future. Investors are valuing advertising companies on the hinges of revenue growth more so than profitability.
2025 Forecasts for Advertising Companies
The rise of short-form video and interactive ad experiences is reshaping consumer engagement. Agencies that are able to leverage influencers and help companies create short-form content are likely to see enhanced valuations.
As economic conditions and the regulatory environment changes, how will companies allocate advertising budgets and strategies? As for annual planning, it’s already a bit late for 2025 for any significant changes, so we won’t see any immediate shifts. But as the year rolls on, we’ll see what the impacts are towards the end of 2025.
Download 2024 Data
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