Agency Business Model: Are Clients Buying What Agencies are Selling?

Posted on October 8, 2013

Over the past five years I’ve been advising a number of small-to-midsize full-service agencies on growth strategies.  Having built a $20MM marketing firm, I have first-hand experience with evolving my business model to changing market conditions and recognizing the key to business survival is to “build what is sellable” not “sell what’s buildable.”   The former is customer-centric and the latter is self-centric.

Nearly all of the agencies I’ve worked with shared a few common themes that had troubled the partner executives:

  1. Founded by creative or digital (technical) specialists who lacked brand marketing experience
  2. Partners are making good personal income but had seen revenue and profits erode as their services have become commoditized
  3. Agencies struggled to differentiate themselves (each website offered the same list of “Services” as the next agency)
  4. Agencies were organized around functional areas (design, web/programming, media buying, PR,etc.) that reflected a task focus
  5. Agency partners personally stretched to meet the demands from top clients and lacked second tier level of senior thought leaders

When I questioned the partners they knew intellectually they needed to evolve their business, but they had grown comfortable in their six-figure incomes and couldn’t emotionally make the difficult decisions needed to make a change.  It was pretty clear that their focus was not client-centric (despite rhetoric about “the client comes first”) but rather, it was about protecting an archaic business model that provided financial security.  In one case, I asked an agency partner if he’d give up $300,000 in end-of-year income to hire staff and make investments in CRM/marketing automation needed to grow the agency and he refused.

Agency Growth Dilemma: Remaining Relevant to Clients

The book Who Moved My Cheese?  provides a wonderful illustration of the dilemma confronting many full-service agencies — can they remain relevant to clients while trying to hold onto a playbook that had worked for them five or even ten years earlier.

While these agency founders were languishing whether to evolve their agency business model, their clients had quite a different set of expectations.  As I talked with client top executives, they expected their agency to be making investments in senior marketing staff, technology tools, and insights capabilities to provide them with strategic guidance and best-practice tactical execution.  This disconnect between what these agencies wanted to sell and what their clients wanted to buy became crystal clear.

If you have read my other posts on the rate of technology adoption and complexity facing CMOs, you will note that the opportunity for agencies to invest in strategic functions to help CMOs has never been better. Some will get it right and will prosper while many won’t and will die.  Websites like 99Designs, and others have made it easy for a CMO to outsource commodity production services.  However, these CMOs are starving for thought leadership that can help grow their business.  The problem is that their agencies can’t give it to them because most are structured to be a production vendor — not a strategic advisor.

Here’s a brief compare/contrast tool across seven characteristics:

  • Billing (vendor: hourly;  advisor: ongoing)
  • Profit (vendor: 2X-3X markup; advisor: flat fee, % of results)
  • Org Chart (vendor: vertical functions; advisor: horizontal outcome)
  • Staffing (vendor: junior technicians; advisor: senior marketers)
  • Sales (vendor: projects; advisor: executive strategy + marketing campaigns)
  • Focus (vendor: completing tasks; advisor: generating results)
  • Validation (vendor: awards; advisor: client sales)

McKinsey & Company recently published a great Infographic that proposes the skills and capabilities CMOs (and indirectly their agencies) will need to succeed in the digital revolution.  It provides a convenient roadmap to guide the investment strategy for digital agencies.  I’m happy share to a copy upon request.

For full-service agencies to remain relevant to their clients, they must align their business model to reflect the needs of their clients.  This means more than being able to structure a Google PPC account (Google offers setup and management now for free), designing collateral, managing social media, building websites, and writing content.  All of this can be outsourced to freelancers, professional networks, and contract marketers in the job market.   There just isn’t enough value transformation happening at this level for agencies to justify their retainers and overhead fees.

If I were leading Business Development for an agency who had made the transition from vendor to adviser, I’d make this a cornerstone of my new business pitches to differentiate my agency.  When I ran my marketing firm I did exactly this — I asked clients to compare the LinkedIn profiles of my MBA staff who had brand marketing experience against the credentials of the inexperienced AE staff that an agency would put on their account.  I paid 50% more for my staff than agencies did and it showed in terms of the thought leadership we brought to our clients.

If you’re not in the intellectual capital business, you are on your way out of business.

Need help aligning with how CMOs think?  I can help.

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