TL;DR

• We're live with this year's State of Digital Services Report!
• Agency growth stabilized in 2024; Studio and Small shops grew modestly, Medium and Large agencies contracted slightly.
• Agencies expanding or shifting service mixes achieved significantly stronger growth.
• Specialists (84% of agencies) continued to outperform generalists in revenue and margins.
• Increasing rates drove higher revenue growth and profitability; reducing fees led to a 6% revenue decline.
• Agencies serving larger clients grew substantially faster than others.
• Headcount declined, leading to a 19% increase in contractor usage.
• 78% of agency leaders are bracing for a moderate-to-large impact this year from U.S. political instability that's freezing budgets.

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Tough Growth, Easy Margins

I think we all sensed that growth didn't come easy last year, but I didn't expect to see two of our agency size cohorts contracting.

At least it seems like the slowing is stabilizing.

Margins also looked good, which is tough to do when growth is so anemic. There are a lot of moving pieces here, but agency leaders are managing them well.

Part of this margin protection is due to how agencies utilize contractors.

There's been a structural shift in how agencies meet demand that's been brewing for a few years now that's finally showing itself in the data.

Contractor use jumped 19% last year, while average headcount fell.

We're seeing agencies maintain and use broader contractor benches to meet demand rather than adding headcount. We initially saw this at the larger agencies (150+FTEs), but that strategy has made its way down to even the smallest firms.

Here's the summary from the full report with some select charts to provide a bit more fidelity:

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SoDS 2025 Executive Summary

Digital agency growth stabilized in 2024 but varied by size. Studio shops returned to long-term growth levels, Small shops maintained slow but steady gains, and Medium and Large agencies experienced mild contractions for the first time on record.

Those that shifted or expanded their service mix saw far stronger growth than those that stood still or cut services. 84% identified as specialists this year and once again, the specialists outpaced their generalist counterparts when it came to revenue growth.

Pricing and revenue were closely linked. Agencies that raised rates grew more quickly and earned above-average margins, while fee reductions correlated with a 6% revenue decline. Value-based pricing again outperformed standard models, although it remained a minority approach. Agencies that transitioned into serving larger clients grew substantially faster than others.

Average agency headcount contracted in 2024, driven by a 10% decline at Small agencies. Agencies turned to contractors to offset this as we saw contractor use rise 19% on average. Total employee turnover rates sat at 23% overall, skewing higher for the smallest agencies.

Net margins stayed stable, with Studio shops earning a standout 19%. Industry-focused specialists outperformed generalists on margins, and expanding or shifting service mixes boosted profitability.

AI was the biggest disruptor. Most agencies implemented AI in copywriting and coding but moved more slowly in design, project management, and sales.

Economic and political instability were major concerns, shaping cautious client budgets and spurring nearly half the agencies to explore M&A.

Overall, adjusting services to meet market needs, specializing, and growing project and client sizes defined success in a challenging year.

State of Digital Services 2025 Report

This year's report is live!

We asked 151 agency leaders all about:

• Revenue growth rates
• Service mix shifts
• Service mix and vertical specialization
• Pricing levels and methods
• Clients and projects
• Profitability and margins
• Efficiency and utilization
• Team dynamics
• Political and economic impacts
• M&A activity
• Artificial intelligence implementation and maturity
• Offshoreing/nearshoring
• Remote/hybrid/in-office and return-to-office
• In-housing concerns

Everyone who participated got their copy last week (and an invite to the private highlight review call).

If you missed the deadline to participate, you can get your copy at our research shop.