How To Grow Any Agency

A lot of the strategies in this newsletter are going to work for any type of online business, not just an agency.

..but since we’re currently raising money to go out and buy agencies, it makes sense to make them the focus of this email.

Agency Growth - Is It All About Marketing?

If you spend time on Linkedin or Twitter, you’ll come across dozens of different strategies for growing a business.

90% of them focus on marketing tactics.

Getting more revenue in the door with some improved marketing is definitely worth considering, but after years of running online businesses we’ve found a lot of the ways to grow a business start with improving the basic numbers.

In other words, you don’t need a new marketing campaign, you just need more cashflow to double down on what works.

If an agency is hitting these numbers, it’s probably a rocketship.

It’s throwing off enough gross profits to have cashflow available for marketing spend.

Less than 66% gross margins and there might not be enough to re-invest. All that gross profit is likely being eaten up by other operating expenses and salaries.

In reality, most businesses we see don’t have margins that good.

We’ve seen a range anywhere from 30% GPM to 55%.

Often the higher ones are not really that high either, the founder has neglected to include some of their time in the cost of services.

If we never see businesses for sale with 66% margins, how do we know they’re achievable?

Well, because we speak to a lot of agency owners and coaches who have seen plenty of PnLs of businesses that are NOT for sale. The reason you don’t often see a business for sale with margins north of 66%? They’re growing too fast, owners don’t want to sell yet.

That gives us an opportunity.

Buy a business, improve its margins, and either enjoy that new cashflow, or reinvest it to grow the revenues further.

Growing Gross Margins

So the first thing we do with any agency now is ask ourselves why the margins are what they are, and how we can improve them.

Typically this involves:

• Raising prices

• Reducing expenses

• Removing items from the service

• Stopping lower margin services

Raising prices is self explanatory, but implementing it is often neglected by founders. There’s a kind of fear they often have about charging more.

The easiest way to validate whether they can charge more?

1.) Figure out when they last put prices up, if ever

2.) Look at what competitors are charging for a similar service

3.) Figure out how much demand or capacity is available from existing clientele or leads.

Raising prices is really the first move here, but in addition, you could want to consider reducing expenses.

Most of the expenses with an agency service are people, so reducing those costs isn’t always easy. You don’t want to come in and fire a bunch of people to replace them with overseas labor for half the price. That’s the fastest way to gut an agency and kill the momentum.

You CAN slowly replace more expensive people with cheaper overseas talent as the more expensive ones churn out though, and you can also make recruitment focus on cheaper labor moving forward too.

Many US based agencies simply don’t know that there are people overseas who charge 1/10th of what their US employees are being paid, and the quality is just as good.

You can also reduce expenses if you’re working with subcontractors or vendors. Shop around, ask for discounts, see what you can manage. This is far less reliable than raising prices, but a worthwhile endeavour.

In a similar vein, many agencies offer too many things in their packages. How many times have you seen an agency offer low quality extras like social media management, which is ineffective, not particularly cheap to offer, and clients don’t really care about anyway?

Offer less, keep prices the same, improve quality in the process.

Finally, segment those services. Many businesses might look at their overall gross margins and ignore the fact one service is 85% and another is 40%. Can you stop offering the 40% service?

You will probably suffer lower revenues in the short term, but you’ll build capacity and focus to grow the higher margin services, reach your previous revenues, and scale beyond them at a much higher level in the medium to long term.

Many founders are unaware of this, or nervous to try it. They’re often unwilling to accept less profitability in the short term, especially if they don’t know that it’ll work. Once you’ve seen it happen a few times though, it becomes a fairly standard operation.

The final part I haven’t covered is simply getting clarity. Many founders are a C- when it comes to bookkeeping. They might think they have high margins, but are putting certain expenses in the wrong category, or paying themselves a decent salary and not allocating part of it as sales and marketing.

Later when they need to hire sales people, they wonder why their business can’t support it.

You’d be surprised, or perhaps you wouldn’t be surprised by the state of some PnLs we receive during a DD phase. Half of the battle is simply finding out what the real numbers are.

5-15% Sales & Marketing

Why do we like to see sales and marketing adding up to 5-15% of revenue?

It’s just a good benchmark to indicate a healthy growth budget. Less than 5% means either:

• <5% = There’s a lot of growth potential to be had by just spending more, OR

• <5% = The founder hasn’t categorised everything correctly (they’re doing marketing themselves)

• >15% = Something in their marketing is inefficient (this could be either an opportunity or a negative, but we’d rather not have to figure that out ourselves).

In an ideal world, they’re spending a good proportion of their revenue on marketing, that marketing is effective, and by improving the gross margins above, we can spend more on marketing and grow baby grow.

Rarely the case that it is that simple though.

Side-note: You’d be surprised how many founders don’t actually know exactly what drives their revenue growth. They’re doing 5 different things, posting on social media, going on podcasts, running some ads, creating blog posts, speaking at conferences, and revenue is growing..or not.

Which if any of these are driving most of the growth? The more certainty you have, the better.

10-20% Net Margins

Similar to revenue spend, this is just a sign of a healthy business. Lower margins might mean the founder is paying themselves too much, has over hired, or has something else not quite figured out.

Higher net margins means they are probably not spending on growth, or they can be spending more. As always, our goal is to figure out which is the case and what to do about it.

What Other Levers Are There?

If you focus on the above three areas and get them as close to possible as the ideal range, you’ve probably built yourself a nice business which is growing well.

Is that all there is?

Well no.

You also need to make sure customers like your service or product.

And you need to make sure the marketing spend we’ve talked about is effective.

If you’ve got crappy ads or you’re selling something nobody wants, you’ll have other problems.

But a lot of the time the answers to those things show up in the above numbers anyway.

A business spending 25% on marketing and not growing well might need to improve its marketing.

A business with high churn and low customer retention might need to improve its service offering and delivery.

But unless you fix your other margins first, you’re struggling anyway.

So work on those, and then go back to social media and conferences to learn about the latest marketing hacks.

Dom