My marketing agency will hit $2,000,000 in annual recuring revenue this year.
If you want to start a business, I highly recommend starting with building a marketing agency.
In this article, I will explain to you why marketing agencies are great businesses and also debunk some of the myths that put a dark cloud over owning a marketing agency.
Avoiding the Agency Trap
If you start an agency, it’s probably because you have a certain skill and you think you can get paid to perform that skill for clients.
If you’re a great video editor, then it’s perfectly reasonable for you to think that you could start and build a successful video editing agency.
The problem is that you go into business with your skill of video editing and you haven’t yet built the skill of running a business. They’re two completely different skillsets.
Imagine you’re a copywriter and you’ve been working at a company for a decade. You’re a real expert in the craft of copywriting. You want to be your own boss and so you quit your job and start a copywriting agency.
It won’t take long until you realize that being a good copywriter won’t directly translate to building a copywriting agency. Suddenly, there’s an entire list of additional responsibilities you have to manage.
Your business requires your presence 24/7. Every job is now your job. You cant step away from your business or even take a break, because as soon as you do you fall behind.
But it’s your business! So you feel obligated to put in the extra hours and do whatever it takes to succeed.
Michael Gerber calls this “working for a lunatic.” This is a quote I remind myself of often.
To start a successful agency, you must plan for this dilemma ahead of time. If you avoid the agency trap, then you can build an agency that allows you to MAKE MORE WHILE WORKING LESS!
That’s what you want. You want freedom of your time and utility over your decisions. You want to make money, travel, and spend time with your family.
The truth about marketing agencies
If you prepare for these pitfalls ahead of time, you can build your agency in a way that allows it to run itself. In order to do that, you must create …
- systems and processes
- workflows that makes it easy for departments to communicate with each other
- sales systems so you can close top dollar clients that don’t annoy you or demand your attention
- a mechanism that allows you to replace yourself so you are never stuck working at a certain position
Now that we have highlighted the agency trap and shined light on the potential potholes to avoid, we can talk about why agencies make such remarkable businesses and why you should seriously consider starting one for yourself.
Agencies are Very Profitable
When Bryan and I first started Stodzy, we agreed early on that we wouldn’t take any client that didn’t have a 50% gross margin.
In the early years, I admit it was challenging to learn how to properly manage the books and make decisions based on projected cash flow, but we kept practicing and eventually got the hang of it. It didn’t take long before we were organized enough to predictably produce a 35 – 40% net margin.
If our agency hits $2,000,000 a year in annual recurring revenue that means the company itself is generating ~ $700,000 in profits.
But how do you actually create the margins needed?
Understanding the Pareto Principle
The Pareto principle is a fundamental law of nature that states that 20% of the outcomes come from 80% of the causes.
20% of the stars in the universe account for 80% of the mass. 20% of the trees in the rainforests get 80% of the sun.
This means that 20% of your clients will take up 80% of your time. It also means that 20% of your clients will make up 80% of your revenue.
If left unchecked, the Pareto principle can be a profit killer. The smaller dollar clients are usually the ones who demand the most from you. Smaller companies generally are squeezed tighter for resources and so they are much more paranoid about the money they spend.
As such, the smaller clients will take time away from your clients who are generating most of your revenue. But that’s dangerous because if your top dollar clients cancel their contract with you, you can lose a huge chunk of your revenue all at once.
Remember, 20% of your clients (we call them whales) will account for 80% of your revenues. So those clients are paramount. But conversely, 20% of your clients (usually the small dollar ones) will take up 80% of your time.
So how do you solve for this conundrum?
The first step to big profits is to create a system that helps you avoid this death trap.
This means systematizing your services so that you can accurately predict what the client load will be and what the margins on those clients are. This way, you’re never in danger of going bankrupt by losing your biggest client and you’re never in danger of being spread too thin by clients that don’t generate a lot of revenue.
Let me pull back the curtain for you a bit. Here’s the exact blueprint.
1. Don’t take any clients for less than a certain dollar amount. Find your number and stick to it!
This means having the courage to turn down small dollar accounts even if you know they will sign with you. At Stodzy, we don’t take on any deals for less than $5000 a month. (unless I cut them a deal, which is rare)
2. Completely systematize and automate your workflow to focus ONLY on doing work that generates results for our clients.
This helps you avoid random requests from your clients. Avoiding requests is hard because you want to please your clients, but you must set a boundary because requests take away from the important work that generates the results.
3. Pitch your services to a specific kind of client who fits the exact demographic you specialize in.
It might take time to learn your perfect client, but constantly be on the lookout for patterns. When you discover these patterns, adjust your marketing so that you pitch your services to your perfect client. This is ideal because once you find your perfect client, you can also create the perfect system.
4. Spend time at the end of each month to analyze the results you’ve generated to make adjustments.
It’s much easier to make frequent small adjustments than it is to make a massive adjustment.
With this system, it is very rare that you will encounter a nightmare client because your entire client base fits the same basic demographic and psychographic profile.
It’s predictable and scalable.
We don’t work with clients that are too big or too small. We have found our sweet spot and have doubled down on serving that particular set of clients better than anyone else in the world.
The best part is that with this system, you will be able to rachet up your profits while also generating the best results. Great results will generate a great reputation, which means you will get more referrals.
This system will position you to be THE VERY BEST marketing agency that does the very specific thing you do in a way that only you can do it.
You won’t have any whale clients and you also want have any time suck clients. You will have a client list that all generates about the same amount of revenue and has the same profit margins. Since the results you drive are so predictable, that means your clients will stay with you for years.
The length of stay for your client base is the most important internal metric you have because the length of stay generates compounding which is how your profits shoot to the moon.
A few years ago, I had an amazing conversation with Brian Casel and we spoke a lot about this topic.
As someone who advocates for this type of structured business growth, I also realize there is a place for custom work with artistry and true craftsmanship.
Agencies Don’t Require Any Upfront Capital
What do you need if you want to start a marketing agency?
All you need is a laptop and a client.
You don’t need to develop a product or build a fancy website and you don’t even need to create a social media following.
All you need is a computer and a client. As soon as you land your first client, then you’re in business.
Almost every other business model demands that you invest money and time into creating the foundation of the business which means you are taking on risk.
Let’s imagine you are building a SaaS product. It’s totally reasonable to think that you will have to spend $100,000 investment to get your product into beta.
Most likely, you’ll need to get investors, take out a loan, and probably have a board that you need to report to.
Up front capital comes at a price. The price you will pay is having other people in your ear telling you what to do, how to do it, and what they need from you.
This is a prison. This is exactly what you wanted to avoid by starting your own business in the first place.
If you build a marketing agency, you truly are your own boss. You don’t have to answer to anyone.
There’s nothing wrong with taking on debt or accepting venture capital. Many businesses require up front capital to get started and if that’s your dream, then I encourage you to take that route.
However, if you’re like me and you don’t want to have that worry and responsibility hanging over your head, then starting a marketing agency gives you the perfect opportunity to generate millions. You won’t be putting yourself at risk to debt, you won’t have the anxiety that comes with the responsibility of managing other people’s money or the fear of financial ruin if your business fails and you declare bankruptcy.
Agencies Free You Up and Give You More Free Time
It’s true that in any client services business, you will have to sacrifice your time in one capacity or another. For instance, when you are first building your business, you will undoubtedly have to spend time talking to clients or doing work.
But how is that any different from any other business?
When tech entrepreneurs make claims about leverage and about working smart but not hard, I often wonder what business model they are talking about. In what world do you think you can build a successful business and not have to put in the work?
There is no such thing as creating a successful business without working. Sure, there are rare exceptions to the rule and usually those exceptions lead to failure and bankruptcy anyway.
Agencies don’t require you to work any harder than a SaaS business or a digital product business. Running an agency shouldn’t be any more stressful than any other business.
So then why do agency owners work so much and get so stressed out?
This question brings us back to the original point, which is that most people start a business around the skill they are providing, and fail to learn the actual skill of running a business.
Let’s imagine you’re a web designer, and you start a web design agency, it’s not difficult to see a scenerio where you are wearing all the hats.
In addition to a full schedule of design work, you also have to manage …
- customer service
- everything else
You started a business so you could be a web designer and work on your own schedule, but before you know it, you’re working harder than ever and you may even be resenting your work, which you used to love so much.
So what’s the solution?
Agencies thrive when they are built around systems
If you create the proper system, you can create leverage in your processes. This is the most important aspect of success in the agency business, because without systems built into your processes, you will constantly be playing catch up because all of your time will be spent on managerial type roles.
Systems are everywhere. You can build systems around your hiring process, your invoicing, you customer relations, your reporting and even how you perform your services.
What’s most important in building your processes is that you replace yourself at every possible opportunity.
To say again, when you first start your business you will likely be a one person show. This means you will be wearing all the hats and managing all the departments. But your goal should be to continuously hire people to replace you in the positions that are most easily systematized.
The end result is that you no longer work in your business. Your full focus should be to work ON your business. This means you have more time than ever.
Agencies are Production Companies
This is the final piece of your agency masterpiece and is the biggest missed opportunity for agency owners.
When you start your agency, you obviously want to make your business as successful as possible. But I would argue that most of you miss the true opportunity because you’re too focused on the day to day of your business and don’t take the time to look elsewhere for opportunity.
The reality is that an effective marketing is a tool that every business needs. If you spend the time to build a marketing agency that is effective and results driven, then you can apply your team and your skills to other places.
Suddenly, you have a bargaining chip in every business conversation you have.
Treat your agency like it’s a business asset
Once your business starts to generate real success, it’s only a matter of time until you will start to be approached by other entrepreneurs who want to partner with you.
People are more than willing to give up equity in their companies in exchange for your marketing skills. The best part is that since your agency has all the leverage, you can even demand to be paid for the work IN ADDITION to getting equity in the business.
I’ve used this approach many times. It’s a big reason why I have been able to build a portfolio of equity positions in other companies.
If you want to get rich, you need equity. It’s not to say that you can’t get rich by your agency alone (my agency accounts for about 30% of my income), but the true path to wealth and financial freedom is to build a network of assets that generate cashflow for you without you having to work for it.
The best way I have discovered to do this is to use your marketing agency as a bargaining chip to negotiate equity positions in businesses in exchange for your serivces.
I’ve done this so many times I don’t even know the number of companies I own. I can tell you this, it’s many more than I list on my portfolio section.
If you don’t want busines partners, than you can start new companies
I could see why some of you wouldn’t want equity in companies. Sometimes, having new business partners in your life can make things complicated.
If that’s the case, you can use your agency to form new companies. This means that you can use the revenues and profits that are generated by the client services side of your business and reinvest that money back into your agency to build new companies.
Treat yourself like you’re a client. Put your team to work and use the same systems you’ve created for your clients and apply them to build new businesses.
This is exactly how Recovery Local has become so successful.
We never had to start a new company. Rather, our team got together and started building new media and business assets that we own internally.
This is how you get rich in the agency business. When you own an agency, you own much more than a service business. You own a highly valuable process and set of workflows that can be applied in different ways.