Unlock 40% Agency Profits w/ Marcel Petitpas | AI, Pricing & Scaling Secrets EXPOSED

What's going on? What's going on, everybody who's actually tuning into this podcast? Once again, welcome back to another episode of the Nikhil Sai Show, which is hosted by me, the Nikhil Sai, and guests. What's going on today? We are back with another amazing guest. I know we have a lot of agency owners listening to this podcast. I'm an agency myself. We consult and work with agencies. So today's guest is probably the go-to authority for agencies to increase and optimize their business profitability. I mean, this is the toughest problem that nobody wants to admit. In agency space, it's easy to sell, but once you start fulfilling, you get into scope creep, churning clients, high expensive infrastructure, teammates, and operation costs. And then you're like, holy moly, I made a lot of money, but guess what? I paid a lot of money and I'm left with nothing. And that's the exact problem we are going to solve on this podcast episode. So if you are a coach, consultant, especially agency owner, tune in and this podcast will be a goldmine for you because the guest we are having on today's show is the agency profits god. He runs a podcast called the Agency Profit Podcast and he's achieved very interesting accomplishments in his own business and consulted with thousands of agencies at this point. He does international speaking engagements at conferences, does workshops, talk shows, publications, and many more. Let's not waste any time, any more time, and actually let's welcome the co-founder and CEO of Paraquito, and let's welcome Marcel Pedapaz. Hey Marcel!

Nick, it's so good to be here. Thank you for having me, and thank you for gassing me up with that intro.

Come on, I'm lowballing you, brother. So let's start with this, Marcel. I know there is a lot to talk about agency with the AI coming in and disrupting many services that people used to pay for, and now it's a click of a button. There is a lot changing in the AI space. Before we get into the meats and potatoes, I would love to understand you as a person for our audience. Can you give us a little walkthrough of who Marcel is? What's the context? How did you get into entrepreneurship? What's your journey like?

Yeah, so I started my career in mostly sales and account management. My first real job was with a little company that you might have heard of out of California. They make cell phones and tablets and computers. They're called Apple. And so I worked with Apple as an account manager, mostly overseeing a Best Buy sort of account management role. And I did a lot of sales training in that role and really sort of developed a passion for technology and for sales. And then I actually left that job to start my first business, which was a small agency. We were doing virtual tours for real estate before you could do it with your iPhone. So, you know, turning houses into 3D models that you could tour with a VR headset or on like a 3D model on a computer. And I struggled with that business with having really bad margins. At the time, houses were not selling very fast. Real estate agents were not willing to invest a lot of money in the media around their properties, and it was a very labor-intensive thing to do. And I realized very early in that business that I wasn't going to be able to achieve the unit economics I needed to scale. And so that's where I became familiar with this problem that we help people with today. And then I became interested in software. I tried to build a couple of SaaS startups, you know, a few of those failed. And then one day, a mentor of mine who's still, you know, a board member and investor in my company today by the name of Dan Martell, which some people might be familiar with, he gave me a call and he said, hey, a friend of mine is building a product that every agency I've ever talked to needs. You should connect with him. And, uh, that person was a guy by the name of Jared Ferguson. And, uh, we connected. He told me about how he would spend a couple days a week in spreadsheets trying to answer these questions that, you know, agency owners answer every day about, are we making money on our clients and projects? Are we, you know, profitable? Are we keeping our team busy enough? Who and when do we need to hire? And he said, you know, there's got to be an easier way to answer these questions. And I resonate with that immediately. And that's what sort of led us to start Paraquito. This was back in 2018. So we're, you know, a little over 6 years now, uh, trying to solve this problem. And it's been quite a ride.

Yeah, makes sense. I mean, that's quite an interesting journey. I mean, who doesn't know Dan Martell, especially somebody who's in the entrepreneur space who value their time? It's a well-known author, uh, in that space with his bestselling book, Buy Back Your Time. And his new book looks like you just have it behind you, Software as Science. And I'm actually listening to it right now. It's a pretty interesting take I have on that. So makes sense. So you went from an agency owner to finding a mentor and creating this business. So walk us through the journey and what was your biggest learnings of you actually working and consulting with a lot of agencies on their profitability? Where do you see most agencies are going wrong?

Yeah, so, um, the really interesting thing is that most agencies are suffering from indigestion, not starvation, but they often feel the same and they often look the same in the data that they're using to run their business. So I can't tell you how many firms get stuck in what I call the cycle of insolvency. Um, and you know, if this resonates at all, Nick, with your experience scaling your business, and then let me know. But the story goes a lot like this: they start the business, they They go out and they sell some services. They're super pumped. They're excited when they close some deals. Then they have a team that's starting to do the work, and very quickly the team starts to get overwhelmed with all the new work and all the new clients. And they're like, oh my God, we're so busy. How are we gonna get all this done? And so the founders are like, okay, no worries. They roll up their sleeves. Okay, I'm gonna help kind of get through this temporary crunch and client work. Then they realize like, oh no, I'm working in the business. I need to be working on the business. Let me hire some people, get back outta the weeds. While they're training and hiring and recruiting and onboarding new employees, they're not really as focused on sales as they were. So, you know, the pipeline sort of slows down. They're Payroll goes up and then they're like, oh shit, we need more work to keep this team busy. So they go back to selling really hard. It works. They close some deals and just when it starts to feel like, okay, the money's coming in, we're starting to get profitable again, the team starts squabbling. Oh no, we're busy. We're so overwhelmed. You need to hire some people. And the cycle repeats itself. And what I hear from people is no matter how big they get, no matter how many clients they have, no matter how many team members, no matter how busy they are, it seems like the same profit and cash flow problems keep catching up to them. And in some cases, the bigger they get, the worse those problems become. And so the question there is, right, is the problem really starvation? And the way that often they're framing this problem is, I just need one more client, I just need one more retainer, I just need a little bit more revenue and everything will be okay. But obviously that's not the problem if the same problems keep cropping up. The problem is that there's indigestion happening, something between when you get the revenue from the client and you incur the cost to do the work and to run the business that's not leaving you with enough left over at the bottom. And that's the problem that we need to diagnose. It just happens that it's much harder to diagnose and measure that problem. And I think that's where a lot of people run into a trap. They try to eat their way out of an ingestion problem or sell their way out, I should say, of an inefficiency problem in their agency.

Yeah, I mean, I could totally see how that is the most common problem, you know, you suffer as an agency owner. And I think that phase of life is inevitable, especially when you don't have the muscle to, to build that productized service that you could scale. So I'm curious, Leaning into that, what's been the most effective method for an agency to scale in this type of situation? Because this entrepreneur shiny object syndrome of juggling between sales and fulfillment and constantly keeping the business at risk is something most agencies are doing. I'm curious what has been the most effective solution you found.

So what's interesting, you just alluded to something there that I want to address, which is the presumption that building a productized service is sort of a precursor to being able to scale. And while it's certainly true that there's a lot of advantages to productizing your service, It's a growing trend in the industry. There's a lot of benefits to that. I'm certainly not going to sit here and say that it's bad to productize services. What I do have to address is that that is absolutely not a prerequisite to scaling your business. And I think this is actually one of the really important misconceptions in how we've been talking about pricing in our industry over the last decade or so. Um, obviously there's been this big trend in our industry and the agency industry to like, you shouldn't bill by the hour, you shouldn't be selling time, you should be selling value, you should shift to value-based pricing models. And that's great. There are a lot of virtues to that. However, what that starts to frame the conversation around the agency model around is limiting risk inside of engagements, right? Mm-hmm. So if you're gonna charge a flat rate or a value-based rate or an outcome-based rate, you need to be able to price the risk of the engagement in. What I mean by that is you need to be able to reasonably accurately predict what it will cost you to complete the work for the client.

Hmm.

And sometimes you can do that, but sometimes you can't. And sometimes no matter how much information you have, the thing you're doing is just risky, right? So let's take custom software development, for example. There's a lot of people making a lot of money building custom software for people.

Hmm.

That's just inherently complex. And in a lot of cases, let's say you're using the agile methodology to build software. The whole point is to not try to guess what it's gonna take upfront, cuz that's not agile. Agile is about making small incremental improvements. It's inherently iterative. So the question there becomes, okay, well, if I'm doing high-risk work, Should I be using a flat rate pricing model, or if I'm doing work that's inherently iterative where we know that the scope is gonna be constantly changing because we don't know what the answer to the question is, we don't know what the solution to the problem is, we don't even know if the client really has clear requirements yet, right? How do we handle those situations? And I'm here to say when we're dealing with that kind of work, and I'm certain that there's people here that are listening to this that are doing that kind of work, selling time is actually really, really useful.

Mm-hmm.

Because it doesn't matter how much time it takes. What's important is that you make the right margin on that time. And that's the important thing about any pricing model. The, the question that I often ask people is, what's the point of pricing? And the answer they initially give me is to get paid as much money as possible. And I think that there's, there's missing nuance in that because the answer is to make the best margin possible on a consistent basis. And so that's really the question we want to be asking is, is building a productized service the right answer to the type of work that we do? And is that going to allow us to have better margins and be more scalable? Or are we going to continue to do highly customized, highly fluid, highly uncertain work, which there's a market for and people need solutions to that and you can build a scalable business on that, but use pricing models that allow us to still protect our margins even if there is a lot of inherent unpredictability. And that to me is the more important piece here when we talk about business strategy. And it's also one of the first places that we need to look when an agency is suffering from indigestion is what are you eating? And that's a metaphor for how do you price things and scope things and are you setting the business up for success at the, the point of ingestion? Suggestion, which is making promises to clients and having a solid understanding of what the assumptions around cost are behind that. And is that setting you up for enough profit to be able to run the business? And we could talk more tactically about what the benchmarks are there.

Yeah, I would, I would love that. Overall, this makes a lot of sense. Yeah, you're right. Like, you can't just be like a performance agency, you know, who's charging on result, but then you see variably there's more going into the project to make successful. And when you look at the billable hours, you're actually spending more than what you're charging your client. And then you have your team handling a few more projects at the same time. So it totally gets messy and you are probably going to lose money on this project. So I'm kind of curious to lean in a little bit more if you could share what kind of models or frameworks are working the best to put that into execution to keep higher profit margins.

Yeah, uh, excellent question. And so I'm gonna talk about two important things. The first is how much should you charge, independent of the pricing model, and how do you know that you're charging enough? And the formula that we generally want to look at there is what we call direct delivery margin. And it's quite simple to figure out. You want to take the revenue that you're getting paid, and you want to extract from that revenue pass-through expenses. And so pass-through expenses are money that you collect from clients that isn't yours. So let's say, for example, you run paid advertising. If a client gives you $20,000 a month, but you spend $15,000 on Facebook ads, that's not a $20,000 a month client, that's a $5,000 a month client, right? That $15,000 is pass-through expenses. That was never your money. That was money that was meant for Facebook that passed through you onto another vendor. Um, some more examples of pass-through expenses: travel, hard costs, print budgets, materials. Um, let's say you do website design, but you never do development. You always hire a white label partner for that. That's a pass-through expense, right? So the formula, again, coming back to direct labor margin is what's your revenue after you remove pass-through minus your delivery costs. So what it actually costs you to complete the work for the client. So generally that's gonna be how much time your team is spending on that multiplied by the cost per hour of that team.

Hmm.

And you, then you divide that by agency gross income or, or revenue. So to give you an example, if I get paid $10,000 for a project, and I spend $3,000 to do it, then I have a 70% direct delivery margin. And that should be the sort of floor. When you sell something, you want to try to aim for a minimum of a 70% direct delivery margin. Now you might be thinking, that sounds really high. Why is it so high? And I'll tell you why. There's 3 layers of costs really that you need to be considering and paying for when you sell something at the direct level. So the second layer of cost here The first layer of cost, of course, is your direct delivery expenses. What, what are you gonna have to spend to deliver the promise to the client? So let's assume that takes up 30%. The second piece is gonna be indirect delivery expenses. So this would be, for example, you know, you have a Figma subscription if you did design, or you have an Adobe Creative Cloud subscription if you're creating ad creatives for people, or you, you have got your ChatGPT Pro subscription to write all the copy for your client stuff. So you have these tools that You're not canceling them or increasing them or decreasing them every time you get or lose a client. These are just tools that you always have in the tool belt that you're always paying for. Those are generally gonna eat up another 2 to 8% of your margin. And then you're gonna have other indirect delivery costs like unutilized time. Like you have a website designer, for example, and you pay them a salary and sometimes they're on vacation and sometimes they're sick and sometimes they're in internal meetings that are not producing revenue from clients. And sometimes, you know, they have internal responsibilities, they're working on your website, your socials. And so those unutilized hours are an indirect cost of supporting the delivery function in the business. And those indirect costs are generally going to take another 10 to 20% off of your margin. So now we've gone from 100% of the money to 70% to get the work done. Now we're maybe at 50 or 60% leftover after indirect costs. And then there's one last thing we have to do, which is run the business. We have to acquire customers, we got to do our bookkeeping and accounting, we need lawyers, we need to pay for the website hosting, we need administrative help, we got to pay ourselves a salary, right? So you have the sales and marketing, the administrative, and in some cases facilities expenses, we might need to rent an office or have a coworking space for our team or, you know, pay for some home office stipends for our team to be able to be comfortable at work, that's going to generally eat up another 20 to 30% of your margin. So if we're trying to aim for a 20 to 30% profit margin in our business, you need to be selling things with a 70% margin to be able to handle the indirect costs and then the overhead costs and still leave you with enough room to be profitable. So that's why we set the bar so high in terms of what do I need to be charging. So that's sort of the first key methodology, and hopefully that's useful. And for the listeners, I'm happy to send a link to put in the show notes to a simple calculator that'll help you figure out what this looks like for a given project that you might be selling right now.

Yeah, that's really helpful. I think this is, this comes from real life experience of getting hands dirty and assuming that you have that 20% margin, but then realizing like, holy smokes, we actually lost money servicing this client. And I think that type of dissective insights are really helpful for any business fundamentally before you scale. Otherwise it could create big trouble. Now I'm curious, there's two different approaches, right? I mean, you might come up with something interesting here. The one side is you could go premium boutique custom solutions tailored towards businesses, like you're saying, you know, custom software development for an example. The other side is like a very templated, like copy-paste type of fulfillment, and you can't charge the premium. But then this has, you know, lower churn because the subscriptions are smaller as well. From my perspective. And you know, on the boutique side, there is higher churn, I'm assuming. I'm curious, what model have you seen working the best? And is there some preferable delivery model or type of clients you see in an agency world that you could basically create sustainability with?

Yeah, so, um, and this is a good question, and I think my answer might surprise you. I'm gonna sort of separate my answer into two parts. So part one is a business strategy question. Mm-hmm. Um, and then, and then there's another side of this that you're not necessarily directly asking about, but I think is related, which is a pricing model question.

Yeah.

And those two things are often related, but they're not intrinsically linked. And so the, the first question you're asking is like, yeah, what's the best model? Should I have, you know, productized services that are very clearly defined? Should I do much more custom sort of bespoke work? Should I be trying to go upmarket and sell to bigger companies, higher value stuff? Should I be competing for more commoditized services, but there's a lot of demand for them. And there isn't a clear answer to that question. And this is sort of contrary to a lot of the zeitgeist that exists in the marketing that we receive, you and I, as agency owners. There's a lot of bros in t-shirts with whiteboards saying things in the hook for their ad like, you can't possibly scale your agency selling time materials. The agency model is broken. You need to productize your services if you wanna scale. You need a value price if you wanna scale. You need to go upmarket if you wanna scale. And what I'm here to tell you is that looking at the data empirically, none of that is true. I've seen businesses selling highly commoditized services that are very low value being highly profitable because they understand how to build a business in that strategic space. Mm-hmm. They're good at efficiency. I've seen people make tons of money selling high ticket, high value services to big clients that are sometimes very custom, sometimes very bespoke, again, because they understand what game they're playing. Like, look at Design Pickle, for example. They're doing everything you're not supposed to do to be profitable, and yet look at how successful they've become. They're selling extremely commoditized, extremely low-value services that are completely custom, and they're doing it based on a time and materials billing model, right? Unlimited graphic design for $400 a month, which really means they're selling you like 25% of a designer's capacity in South America somewhere for a fixed rate per month. Right? So like, theoretically, they shouldn't— that business shouldn't work. And yet, we know that they're killing it. They've been killing it. So the short answer here is that there isn't really a common thread. I've seen very profitable and very unprofitable businesses in all of those spaces. One trend that I can point to that has been an outlier in the data is what I would call internal specialization. And this is sort of, it's somewhat independent from positioning. But two things that tend to correlate to higher profits are external positioning. So being really clear about who you serve and being an expert in that space. So rather than saying I am an expert in Facebook ads, you would say I'm an expert in lead generation for, you know, landscaping companies that sell to upper middle class families, for example. That's, that's very tight positioning. So that's number one, of course, that's a pretty well-known fact. The next step to that is what I call internal specialization. This is not as commonly known. But that's where a business not only knows who they serve from a customer perspective, they also really know themselves from an operational DNA perspective. And they are very deliberate about what functions of the business they build internally, and which functions of the business they build externally. So I'll give you an example of that. We had a client that sold SEO. They had a very clear target market, extremely clear. They sold in the legal space to a very specific type of lawyer. They had premium pricing. That was all great. Internally, they only did account management, sales, strategy, and they had one web developer in case a client's website, like, went up in flames in the middle of the night. Everything else that they did from a technical SEO perspective, content writing, backlink building, all the grunt work, all the hard stuff. They had white label partners that they paid a certain percentage of the deal and they did all of that work. They had multiple 8-figure revenues. They were incredibly profitable. They were growing crazy fast. Right. So that is an example of really good internal specialization where they as a founding team said, that's not our expertise. Our expertise is strategy, account management, relationship building, sales. We're not good at the operations stuff. So we're gonna let somebody else that's good at that take care of that part. And we're not going to try to bring that in-house. And they were much better off because of it. So that is a thing that I can point to that I've seen multiple times lead to significantly higher profits. It's independent of what you sell and who you sell it to. It has a lot more to do with knowing what game you're playing and being really good at it.

Hmm, totally love that. I mean, that example can really set a different perspective for many agency owners struggling to fulfill. Like so many people come to me and they have the same questions like, should I hire more people? Should I hire better employees? I'm like, you don't have to. There's so many people who are already good at what you're trying to deliver. Just partner with them and, you know, be the, be the guy who creates the deal. You know, I liked that perspective overall. Now I'm curious with AI coming in so fast, and there is a lot of commoditization and a lot of business owners who used to sell so-called services are, especially the ones who are below, like, you know, the bottom, you know, who are not that good, who don't have a lot of clients, who don't have a big portfolio, they don't have enterprise-level clients, they're being flushed out like very easily. I'm curious, but I believe there is also new opportunities popping up with AI services coming in. So I'm curious, where do you see that trend? What kind of offers and services do see have huge demand and can be big potential agencies in the next 5 to 10 years?

Yeah, it's interesting because I can point to stuff that I can see today, but the reality is the biggest opportunities are probably things that we can't even see yet.

Mm-hmm.

You know what I mean? Because like the disruption from AI is, we're just still at the very, very beginning of that. And so there's problems that will exist in a couple of years that we can't even imagine currently. But to your point, that is the opportunity. Like at a fundamental level, business is just solving problems. And unlocking the value that's created from solving that problem. And so it's true that, let's say for example, you do SEO right now. Well, what does SEO look like when Google Search doesn't exist anymore and it's just Gemini? Which, like, that's happening whether we want it to or not. That's happening, right? And so, like, if you run an SEO agency right now, 2 years from now, the way that your world exists today probably doesn't exist. And so then you have 2 choices. You can either die, or you can figure out how to solve for Gemini search optimization and ChatGPT search optimization and reverse engineer that in the same way you've been reverse engineering the Google algorithms for the last 30 years. Um, and the same thing's gonna be true about copywriting and graphic design. And, you know, to your point, the, the friction— website design development— the friction to all of that is going away. So I think the first major idea for people as they're thinking about this is if you're on the fence right now, between do— being in the business of producing deliverables or being in the business of providing strategy and being an expert and a trusted advisor, the sea, it will part and you will have to choose. And if you want to play the game of delivering deliverables, that will become an increasingly ruthless game of efficiency. And so if that's your skill set, you could probably win there. And then you want to be on the right side of AI in the sense of you're trying to utilize it to get as efficient as you possibly can at producing those outputs. And understand that that's a race to the bottom. The other side of that being strategic, there will always be demand for that, right? I mean, you and I both know, even sitting here as, you know, fairly young, you're probably a lot younger than I am, but fairly young, I would consider myself to be like reasonably tech savvy. I can barely hang on to like all the stuff that's going on with AI, right? And so imagine a $50 or $100 million business or a billion-dollar business and the boomer CEO that's sitting in there and his board of investors every quarter is like, what are you doing with AI? What's your strategy? Where is it being implemented? How are you capitalizing on this, right? They need help. That business is massive and it, it can't generally quickly adapt to this. And that's where the opportunity is for a lot of people that want to be on the right side of not just AI, but, but everything. How is AI going to change the problem that you're an expert at solving? And if you can figure that out, then you're going to be positioned to win in that next world. But it has to come from a place of that actually being geared towards helping companies better solve their problems, more efficiently solve their problems. And of course, there's going to be a lot of problems that emerge with AI. The one that I can point to right now is going to be data. Data hygiene is massive. There's so many things that companies want to do with AI that require clean and structured data. And now they're finally realizing that all this data ops debt that they've been pushing off and not investing in for 20 years is catching up to them. And it's a blocker for them to be able to like, automate this reporting and get customer insights from that thing. It's like, oh, your data's a mess. So AI is useless until you fix that. So that's an opportunity, uh, that I can point to right now that is like extremely pervasive.

Hmm. Interesting. Makes sense. I've recently heard Mark's podcast where he was talking about how Meta ads is in the future. Like he kind of put it like, I'm not going to say the word to word verbatim, but he was like, hey, a business owner should come on our platform, explain his product and goal. And tell us how much he's willing to spend. And it's Meta AI's job to basically advertise that product and get him the sales required. And it was exciting to hear, but at the same time I was like, holy smoke, I know like thousands of Facebook ad agency owners that are literally like now their business is having a full stop. And not everybody, basically there's always going to be that top 10% who are good, who will still crush it. But I'm curious if you have to envision futuristic agencies in the next 5 to 10 years, Do you envision like one person having AI agents doing all the client fulfillment and him just using AI avatars for his sales and lead gen? I don't know. How would you, where do you see the visions agency owners who are tuning in could be like, yep, that's some area I need to upskill and, you know, build strong foundations because that's the industry dynamics changing overall.

Yeah. I think that increasingly it's just going, agencies will become smaller. You're not going to see 10,000-person agencies as much that fragmentation is gonna happen. Cuz what the, what AI's gonna do is it's gonna hollow out the middle of most organizations, uh, and most processes. So if we think about Facebook ads, for example, you know, there's the 10% on the front end, which is the highest value in the whole thing, which is like determining the strategy. Somebody still needs to do that. Now, I think that there will be some places where that will get completely disrupted. And so like if you sell, I don't know, lawn mowing services in Detroit, well, yeah, okay, that, that's going to get completely disrupted. There isn't really a strategy there. You drop a pin and there's a playbook for that. There's keywords and advertising that just works. That's just mostly a math heuristic. But let's assume for a moment that you're a SaaS company and you have a fairly innovative product and it doesn't actually look like anything else that's out on the market and it has different features and different benefits and it's for a very specific use case and there's nuance to that. Yes, you could probably just like throw enough money at Facebook that it eventually figures out like what ads get clicks and gets conversions and gets people on to book a demo. But that's not going to be based on actual judgment. It's probably going to be based on just very brute force sort of data. And so the real value in that engagement is starting off with a real strategy that's based in nuance and human psychology and like, who is our customer and how do they feel and what are their pain points and how are we different? That I think there will still be a lot of leverage in and will help accelerate the execution part of it. The running of the ads, that's gonna be almost completely automated probably.

Yeah.

And then there's the last 10%, which is interpreting what's happening and adjusting the strategy. So if you think about like there's 10% on the front end and there's 10% on the back end and everything in the middle is basically going away.

Mm-hmm.

But the good news is all the value is in the 10% that's on the front end and the 10% that's on the back end and the relationship with the client. And that's the thing that human beings will still have a big advantage at.

Yeah, I agree. I think the redundant work is what is being replaced. You gotta be creatively enabled with AI to keep up with that trend and, you know, what's about to change. Now I'm curious, from an agency perspective, what's been the most interesting way to generate leads with AI enabling account creation, outreach, and many more? I've seen increasing amount of spam on email, LinkedIn, ads, content. Now it's like there's just more options and there's just more noise. So what have you seen working the best in still like, you know, getting new accounts signed up for agencies?

Yeah, this isn't, candidly, this is not an area that we play in a whole lot from an advisory perspective. We tend to focus on what happens after you figure out how to get clients. But I can speak to this anecdotally as a fellow agency owner and my thesis remains fairly unchanged with this, which is that expertise is the highest possible leverage. It just happens to take a little bit of time, but the shortcut is exactly what you and I are doing right now, right? So you are positioning yourself as an expert and creating content that resonates with people because you're not an AI agent right now. You're not writing AI copy. Maybe I am, you know, we're— yeah, maybe I'm talking to an AI bot, but if so, it's pretty good. Um, but like, you know, we have opinions and points of view here that are interesting and there's insight. And so like, this is the thing that I think is true, is the more AI content goes out into the market, the clearer it becomes who actually has a point of view, because that's the thing that AI doesn't have. AI doesn't have a contrarian point of view. And the reason it doesn't have a contrarian point of view is because it's designed to consume what everybody else already thinks and then reiterate that and paraphrase it.

Right?

But like what makes a point of view compelling is that it's different and it's contrarian. So that is, I think is an advantage that, um, we still have in terms of creating content. And I think that that is gonna stand out even more. And then the flip side of that is the thing that's worked the best for me and that I, I still think is like the, the most foolproof path for most people that are truly trying to build expertise is to develop that point of view, publish that point of view on the internet, and then go borrow attention from people that already have it. It's what I'm doing right now. You have an audience. I'm here borrowing attention from that audience. I'm doing that by hopefully creating value and sharing my point of view, which is compelling and interesting. And in doing that, I'm being positioned as an expert. People will know who I am. Some of them will subscribe to my podcast and my newsletter and come to my website. And that is my favorite way, um, still, and I think one of the most efficient ways to get new clients and to validate the things that when you do start doing paid advertising, You do start doing SEO, you do start doing cold outreach, you know what messaging actually resonates and works, and you've figured out a funnel and a buyer's journey and positioning that, you know, works by having much more contact with the market in this medium. So that's how I like to sequence things. And I mean, I wrote, so that you're reading Software as a Science, I wrote the chapters on the marketing funnel. And so, you know, you'll, you'll recognize the sort of 4 channels in that. My default tends to be start with earned media. All things being equal.

Yeah, yeah, I think, I think that's where you could differentiate as well. It's so easy to just send outbound messages right now that actually speaking to a camera about your real expertise and sharing real-life examples of what's actually helping your clients, that's rare. So if you could actually do that and show results, you are incentivized to differentiate. So that's really helpful. Now I'm curious, many agency owners are super confused on the long-term perspective of it in a changing dynamic. And you know, there is always services being disrupted. You got to reinvent and you got to come up with new stuff every time. The same playbook that used to work with your clients 3 months ago don't work anymore. So I've seen agencies kind of having a lack of clear vision. And there is 2 ways, right? Like you could create a cash cow agency, produces a lot of cash. You know, you could build your personal network there. The other way around is creating an agency that you could sell. So I'm kind of curious which one you think is better playbook to run and how do you see like most people have this misconception, this is the second part of the question, that agencies are not sellable, they're not getting better multiples. It's like the face is attached to it, you can't sell it. So I'm kind of curious on your opinion on how it would look like.

That's a good question. And again, my answer might surprise you a little bit here. My default position tends to be build a business that you'd never need to sell. That way, if you sell it, you do it on good terms. So generally speaking, agencies and professional services firms in general are cash businesses. That's what they generate for the ownership team, whether it's the founding team or the acquiring team. They're generally not businesses that are trading at high multiples in terms of enterprise value. That's not always the case. Sometimes there's a strategic reason that a firm is going to exit and they're going to get some crazy multiple on EBITDA or even get, get valued on top line. Sometimes they build IP that has outsized value relative to the cash flow that they produce. But in the other 90% of cases that aren't those, people that buy an agency are buying future discounted cash flows. So there isn't actually really a difference, a whole lot of difference, I should say, between building a cash cow agency and building an agency that's built to sell. Those are basically the same thing. And where there are differences and nuances, that really only becomes a factor in the last 1 to 3 years prior to exit, where you might make some slightly different decisions in terms of what you're using cash for to try and eke out a little bit of extra enterprise value. So generally speaking, the best policy is to build an agency that grows reasonably consistently. With good margins and good cash flow. And by doing that, you're pretty much putting yourself in the best possible position to sell and doing so with enough leverage that you don't need to, so you actually have grounds for negotiation. And the other thing that should be noted is that your value and your likelihood of selling will massively increase when you exceed $1 million in profit as a business. The second you cross over that milestone, your multiples go up significantly, the likelihood that you'll be able to sell go up significantly, and the interest level in buying your agency go up significantly. Short of that, you're gonna be in much more of a soft landing territory and acquisitions are gonna look a lot more like getting a job and some stock in the company that gave you that job.

Yeah, yeah, totally with you. Now I've seen like many companies who sell sub $1 million have that 1x multiple on their, you know, yearly profits type of typical exit. Where do you see, like, what's like a good exit point? Beyond that million dollars in profit, what kind of multiple you think? Again, this is very dynamic. It's not same for each business because every business has their own IP and their own processes and, you know, methods to run their business and whatnot. But I'm curious what kind of change in multiples you've observed that's actually highly leverageable for agencies who are doing over a million dollars in profit.

So even when you're doing under a million dollars in profit, you're generally looking at, a multiple on EBITDA of anywhere from 2 to maybe 5. That's sort of like the standard range, excluding, again, you know, IP and highly strategic exits and these sort of like confounding factors that might push you outside of that. And the determinant between whether you're at like a 2 or a 5 really comes down to what is the risk profile of your revenue. So they're going to be looking at vectors like how much of your work is project-based versus recurring, and if it is project-based, what is your sort of resale rate on projects. So like if you have clients that keep buying projects for you for years at a time, that's just as good as having recurring revenue. And they're going to look at your contracts, they're going to look at your documentation, they're going to look at key people in the agency and how risky, you know, it is that they leave and something like doesn't function the way that it used to before. Generally, the founding team being one of the key elements of that, they're going to pay attention to the unit economics. So what does your utilization look like? What does your project profitability look like? What's the difference between your sort of delivery margins and your profit margins as a business? So those are some of the things that they're paying attention to. And to the degree that those things index towards lower risk, then you're likely to get a higher multiple, right? So the simple way to think about this is if I buy your business for 5 times profit, basically the bet that I'm placing is that there's a high chance that over the next 5 years you're going to make the same or more profit, right? So the higher the likelihood of that happening, the more years out ahead I'm willing to pay for that profit. Profit. But the lower the likelihood of that happening, the fewer years out ahead I'm willing to pay for that profit. So that's really the heuristic. Now, when you get up over $1 million, that range starts to move more in like the 6 to 8 kind of range, typically, maybe 4 or 5 if you have like a pretty shaky business that just happens to be big. But it's also possible if there's a highly strategic acquisition, or you're growing really fast, or you, you know, you have some IP that you could be looking at 10, 12, 15x multiples or even higher. Right? Again, that's not an expectation that you should have, but the standard tends to be sort of in that range.

Hmm. Makes sense. If you have to give a profit masterclass, there is an agency listening, might be making $500,000 to $3 million in that range. And yeah, they're doing revenue, but they're struggling with profits. What have you seen as like the, okay, you know, check this and cut it, cut it, cut it. Like what's like the profit playbook you typically play? When you actually advise clients?

Yeah, so great question. The first thing that we are typically gonna look at is, is this an overhead problem or is it a delivery margin problem? Um, and the way that we do that is we look at the profit and loss statement in the business. We make some transformations to it so we can differentiate between how much of this business's expenses are going towards delivery. So people and time and expenses that are related to doing client work versus overhead. And what percentage of this agency's income is going towards delivery versus overhead? And what we found is that very few agencies struggle with overhead, very few. Um, most of the time their issue is that their delivery margin is not high enough. Hmm. So then, and even if they are struggling with overhead, you can fix that by just improving your delivery margin. So, so basically like the precursor to profit is delivery margin and the highest lever for increasing profit is delivery margin. So then what we do is we ask the question of why, why is their delivery margin not as high as they want it to be? Is, we believe it should be. And there's only 3 ways that we can affect that number. The first way is looking at average cost per hour, right? So what is the average cost of an hour of labor in this business? What do they spend on the people that do the work? And is there opportunity to lower the average cost of an hour of labor? Typically, we do that by building better processes, better documentation, better training, better systems that lower the amount of judgment required to get something done. The second is by looking at utilization. Utilization asks What percentage of the time that you buy from your team is actually getting used to do client work? To the degree that we can increase the percentage of time that you buy that's being used for client work, we can increase the profitability of the firm. And then the last piece is what we call average billable rate, which basically looks at for every hour of time spent doing client work, on average, how much money does that generate for the business, right? And this is not to be confused with billing by the hour. The way we do that math is we look at any given subsection of work could be a single client, could be a group of clients, could be a different product that we sell compared to another. And we could look at it for any time period, a day, a week, a month, a quarter. What we're paying attention to is what was our revenue after we remove pass-through, and we divide that by the amount of time we spent to do the work. We don't care. It's not a billable hour. I don't care if you billed the client. I don't care if it affected how much they paid you. How much did you get paid? How many hours did it take? That's it. And that starts to give you a sense of, oh, interesting. When we build websites, we only make $75 for every hour of effort that we put in. But when we build funnels, we make $200 for every hour of effort we put in. That's interesting. What can we learn from that? Is there something about our process that's better that we can apply to websites? Should we sell more funnels and less websites? Um, so those are really the 3 levers. Average cost per hour, which is about lowering the cost of delivery. And utilization and average billable rate, which is about increasing the revenue that your team can produce. And I'll just kind of run you through a simple example of how this stuff comes together, because these numbers are sort of abstract. So let's imagine we have an agency with 100,000 hours of capacity. That's roughly a team of 50 people. That business, let's say they spend $3 million on delivery expenses, payroll and software and so on, and they spend $1.5 million on overhead. In scenario 1, let's imagine they are 50% utilized and their average billable rate is $100 per hour of effort. So if we do some simple math there, they have 100,000 hours of capacity, they spend 50% of that doing work, so that's 50,000 hours, and they earn $100 for every hour. So they can make $5 million in revenue. Cool. They spend $3 million to do the work, so they have $2 million left over. That's 40% delivery margin. And then they spend $1.5 million to run the business. So they're left with a half a million dollar profit. That's 10%.

Yeah. Right.

So that's simple math. So that's like an okay outcome, but it's not great. I want more than 10% margin. So let's imagine that firm, they increase their utilization from 50% to 60%. So now we have 100,000 hours, 60% are being used for client work. That's 60,000 hours. Let's assume their rate stays the same, $100 an hour. They can now make $6 million. They spend $3 million to do the work. They have $3 million in delivery profit. That's 50%. They spend $1.5 million to run the business. They now have $1.5 million in profit. It's a 25% profit, but we're not done yet. We maintain that 60% utilization. We increase our average billable rate to $125. And for the purpose of this example, let's imagine we do that without raising our prices at all. We increase our rate by getting more efficient, doing things in less time, right? Just for the sake of example. And we go from $100 to $125 on average per hour. So now we have 60,000 hours multiplied by $125 per hour. Now our business is making $7.5 million in revenue. We spend $3 million to get it done. We have a $4.5 million delivery profit. That's 60%. And we have a $3 million profit margin. That's 40%. So we've only talked about two levers, utilization and average billable rate. And we went from a 10% to a 40% profit. We haven't talked about lowering average cost per hour. We haven't talked about lowering overhead. We haven't talked about any of those things. So that's the power in focusing on delivery margin and focusing on the levers that affect delivery margin. And so that is the place that we overwhelmingly focus on with clients is really getting insight into delivery margin and then getting control over the metrics that control that metric. And that is what puts the power in the ownership team's hands, because if you have that much delivery margin, you can start to choose, do I want a 40% profit? Or do I want to spend more on sales and marketing and grow faster? Or do I want to spend more on admin and work 10 hours a week? Or do I want to do a little bit of both? You have the choice now, but without delivery margin, you don't have that choice. The business is happening to you, not for you. So that's why we focus there.

I love that. I mean, that's a lot of numbers for people who are listening. They might be like, that's a little over the head, but I'm sorry if you're at the gym. Yeah, but like, if you really understand the business, like, this is so powerful. Like, somebody who's listening in could be like, holy smokes. I could just 4x my business doing nothing, literally doing some internal optimizations in a very short— because this is something you 100% control. It's your team, your delivery systems, your effectiveness of delivery, and everything. Basically, without even talking to your clients, you could do everything and 4x your margins just by increasing, you know, winning more accounts and increasing your utilization of the team. That's why I kind of liked agency, because once you dial that service mode and you have that fulfillment engine, The more you could increase the amount of clients you could actually work with and the more you keep your team organized well, the more margins you could make and it is really, really scalable. Now let's get into a different set of questions, Marcel. I know we have limited time here. Walk us through different tools you'd use on a daily basis to manage your clients, your personal productivity, your projects and whatnot.

Yeah, this is an interesting question and I don't love talking about tools because I think a lot of times people think their problem is that they don't have the right tool, but most of the time it's that they're not measuring the right doing the right thing and they're not using the tools in the right way. But I will, I will talk about some of the things that we use. So our project management tool, we're a fully remote company. And so our project management tool is the heartbeat of our company. We happen to use Asana. That's not me endorsing Asana, although I think it's fine. But there's lots of other great project management tools out there. But that's a big one for us. And we are super, super, super regimented about making sure that almost all of the communication that we have as a team happens inside of the project management tool. And the reason for that is that it forces good communication hygiene. Cuz when you create a task inside of a project management tool, it forces you to be clear about a couple of things. Whose responsibility is this? When are we expecting to get it back? What do you expect from other people? All the context is contained there about the discussion and how we came to conclusions and what the decisions were. And so, um, that's really why I think it's important as a remote team, cuz you need to be better at communication and it forces you to do that. So that's a big one. Um, Another tool that I absolutely love and that we get an insane amount of value from, but it's not that fancy, is a tool called Miro or Miro. Yeah, it's a virtual whiteboard. We use it internally for all kinds of meetings and brainstorming. We use it with our clients all the time. It's just such an easy way to visually communicate things, create stickies and whiteboards, and really kind of collaborate and interact with each other. Um, and one that I've really been excited about recently has been Descript. I don't know if you're familiar with Descript, but it's the best way to edit video and record, you know, like record content and edit content. So I'm really a big fan of Descript for this kind of stuff, recording videos and podcasts and so on.

Makes sense. Appreciate that. Can you walk us through an average day of Marcel? I know you're a remote company, so you do have the freedom, but walk us through like how an average day look like.

It's boring. Um, I wake up, uh, usually around 6. I go to the gym, I come home, I have coffee with my wife, and then I stand in front of my computer for like 10 hours, and then I eat and I go to sleep. And I do that basically every day until the weekend, and that's my life. Um, and like it or not, that's basically the life of an entrepreneur. It's not very glamorous.

Yeah, a lot of meetings and a lot of brainstorming. If you could go back and give advice to the 20-year-old yourself who is young, energetic, a little confused about life, what would that suggestion be?

Wow, what a good question. You know, I think one of the most important mindset shifts that I'm still having, but I think would've saved me a lot of heartache at that time, is to stop trying to prove yourself right and instead try to prove yourself wrong as quickly as possible. And I think that that was sort of like the misconception that I had when I was early on in my entrepreneurial journey is I would have an idea for a business and then I would try so hard to make that idea work and prove to myself and other people that my idea was right instead of the slightly nuanced shift of saying, how do I figure out what's wrong with this idea as quickly as possible? How do I figure out all the reasons that this is going to fail as quickly as possible? That seems like the same thing, but they're, they're slightly different and they require a different way of thinking and they massively change execution. And what I've learned is that the path to success is trying to figure out what assumptions are incorrect as early as possible and trying to fail as early as possible so that you know what does work. Um, because otherwise you often end up investing an inordinate amount of time and energy building a business on assumptions that are incorrect and they always come back to bite you.

Yeah, I think ego as an entrepreneur is a big thing and you gotta try to minimize that and make sure it's not masking your vision. And see the truth and data, like your cap says, which is pretty interesting. You literally have a cap that says data. So can you walk us through your life's biggest achievements and what are your next big goals?

Oh wow, very deep question. So what are some of my biggest achievements? You know, I'm pretty happy with the business that we've built at Paraquito. Publishing a book with Dan Martell is obviously a pretty cool accomplishment, and just having been a part of SaaS Academy and having him as part of the business has been pretty cool. I think more than anything, I'm proud of the team that we've built here and the value that we've created for our clients and the relationship that I've been able to maintain with my family through all of this. As I'm sure you know, being an entrepreneur is really challenging. You have to make a lot of sacrifices and often it means you're spending your evenings and weekends working on the business. Like it or not, in the early days, that's what's required. And I've certainly done my fair share of that, but I've been able to maintain my health and my fitness and my relationships. And that's not something that a lot of people are able to accomplish. So I would say that that's, of all the things, the thing I'm most proud of is I, I never compromised on the things that were actually the most important to me, but I was willing to compromise on a lot of things that weren't that important, like, you know, spending time partying or hanging out with people that I don't actually care that much about, or, you know, those kinds of things.

Makes sense. Appreciate that. I would love to know what inspires you, what wakes you up every day to get it and get working.

It's funny, you're catching me at a time where I'm doing a lot of soul searching right now, and so I don't have the answer to a question like that off the tip of my tongue. But I think that when things get hard, you start to fantasize about like like, you know, what if I just sold the business and did nothing?

Yeah.

Right. And for like a moment you, you think like, oh wow, that would be so nice to not have to worry about all this stuff anymore. And then I don't know about you, but like for me, I'll like take a week off and I'll be so bored by the end of it.

Yeah.

And I realize like I actually, I, I really do like to work. Um, I just, you know, sometimes, sometimes I'm a little bit out of, out of balance. And so, mm, I think, um, Yeah, what inspires me is that there's so many problems in the world to solve and that I'm equipped to solve a lot of them. Um, and it's the level of fulfillment that you get from solving problems for people that are deeply meaningful and building a team that is able to grow personally, grow professionally, and affect more people in terms of solving those problems. Like, just the game of business, I just find it fascinating. It fires me up. And, you know, when I'm not feeling tired from having overworked myself, that is something that really does get me excited.

Sure. Okay. If you could save us from one big mistake that you made that you probably will save us from repeating, what would that be?

Honestly, I think it's the thing I said earlier about proving myself wrong versus proving myself right. But I'll get more— a little bit more tactical on that. Which is that a lot of people talk about building an MVP when you're starting a business, minimum viable product, and sort of a popular catchphrase, especially in the tech world. And I've really sort of reframed that to be like, the first MVP should actually be the problem, right? Before you start thinking about product, you should really fall in love with a problem, get really clear on what problem it is that you're solving. Then the second MVP is your point of view on that problem. You should be really clear on why that problem even exists in the first place. And why it's not being solved or what's wrong with the current solutions or what's changed about the world. That means the solutions that used to work don't work anymore.

Hmm.

And you should be crystal clear on that. It should resonate with people. The third P is the process. This is where I really like services. I think a lot of people want to build SaaS or they want to build a course or they want to build product, right? But this is the beauty of services is it's the most— and this is why I think services are never going to die. You're just never going to kill them. They are such a great medium for solving problems because they're so malleable. You can just start doing things, you can just start fixing things, and then you can change your process every time that you do it based on what you learned last time. And so it's so adaptable. And that's like the third piece is what is the step 1, 2, 3, 4, 5 to solve this problem consistently? And only once you've figured out the problem, your point of view on the problem, and a process that actually works should you start thinking about product, which is really just how do you leverage that process and make it happen better, faster, more consistently, more scalably, more efficiently, et cetera. And so I think that's a really big lesson is I, I have made the mistake so many times of jumping to product before I really understood the first 3, and I have failed every single time. And I've seen a lot of other people fail doing the same thing. So hopefully that framework helps serve people that are maybe reinventing their business or starting a new business at this point in their life.

Yeah, that's really helpful. Appreciate that. Such a smart individual, Marcel. I'm pretty impressed. If somebody is listening to this and maybe they want to grow their agency profit, How do they get in touch? What's the best place to connect with you?

Yeah. Well, I would encourage you to go and check out a lot of the free content and resources that we have. We have a podcast called the Agency Profit Podcast. You can find that everywhere that you listen to podcasts, probably where you're listening to this. We also have the Agency Profit Toolkit, which is a collection of tools, videos, templates that'll go much deeper into the things I talked about on today's episode and allow you to do it at your own pace. And so you can find that at periquito.com/toolkit. And if you want to connect with me and send me a DM and chat, you can find me on LinkedIn. LinkedIn only. There's not a lot of Marcel Pedepas, so I'll be easy to find. And of course, if you want to learn more about us and Paraquito, you can head to our website and book a consultation and speak to us about how we can help you get these numbers dialed in in your business and improve your profits.

Pretty awesome. So that was really insightful. And, uh, coming from somebody who's built successful agencies and consulted a lot, you really did show that muscle of expertise. I've heard somebody say like the, the depth of somebody's knowledge will be known when they explain in simple terms, and that's what you've done on this podcast, simplifying profitability for Agencies is not that easy, but you've done it like it's a slice of cake. Any last words before we conclude the whole show for today?

Uh, I'll just leave everybody with this: it's supposed to be hard. Don't forget that. Yeah, if it feels like it sucks right now, it's because that's how it's supposed to feel. So hang in there, and I appreciate all of you, and I admire anyone that has the courage to strike out on their own and try to build something.

I appreciate that. One last question, I'm genuinely curious. You're in SaaS Academy, but you're building a service-based agency. Any specific reason that you're like, oh, I tried a bunch of SaaS, that's not my game, I just pick agency and consulting agencies. Why did you make that?

Yeah, it's a good question. We actually do have a lot of proprietary technology inside of Periquito that we built to enable us to do what we've done. So there is sort of a SaaS component to Periquito, but we started originally trying to be a software company, and this insight that, you know, we, we were skipping over the the problem, the point of view, and especially the process. And we were building technology. And the great thing about code is that it, it's really good at making things repeatable. But if you don't know what things to make repeatable yet, it's just a really slow and inexpensive— it's a slow and expensive way to figure out what works. And so we had a recollection about 3 years into the business where it was like, we're over-engineering assumptions that are incorrect. We need to just throw all of that out and attack the problem and get hands-on and get our hands dirty. And so we really sort of reinvented ourselves as a, as a service-based business and switched our product and our technology thesis to taking things we're doing manually and leveraging them or automating them. And that has served us significantly better in terms of finding product market fit and building software revenue and software functionality inside of our business. So yeah, that's the short story there. I still have a passion, of course, for software. I still believe in that business model, but I think that the industry is shifting a little bit and you're seeing services come back in style in the SaaS industry more broadly, especially at the enterprise level.

Yeah, I agree. I think, I think the people at the highest level who are winning, they are willing to pay the price to get the stuff done and get those insights. So appreciate you jumping on, Marcel. And guys, hopefully you enjoyed the podcast. Share this with your agency friends and Check out Marcel if you need some help. Thanks for tuning in. I'll be back with another amazing guest just like Marcel. Thank you so much. Thank you.