Stop Losing Money: Track & Grow Your Agency

All right, so we have a little treat for you. So this is a coaching call from the Agency Owners Association. This is a group that Neil and I have for agency owners to help you grow faster. So if you're in the agency space, you are a services business, this is applicable to you. It's a little preview of a call. It's probably 10, 15 minutes or so, and you get a sense for what it looks like to be in the group. If you want to learn more about the group, you can go to marketingschool.io/agency. Again, it's marketingschool.io/agency. Hope you enjoy the episode.

Yeah, Neil, Eric, obviously you guys are in the acquisition marketplace, you know, looking to roll up agencies, you know, as, as, uh, agent, you know, you're adding to your agency. There's a lot of people out there doing that. You know, it's— we learned yesterday from Marcel, there was, you know, some really insightful things that I probably wasn't aware of from a financial perspective because my accountant's looking more, and he said it, more from a tax perspective, and he's looking more from a management perspective, you know, about, you know, average, um, or what was it called, um, like, uh, average dollars per hour, like trying to roll things up that you can manage. I was just curious if, if you guys, uh, do that in-house, um, you know, in your agencies to be able to track your efficiency, your billable hours. Even though you might not bill on— like, what was interesting is you might not bill on an hourly basis, but it's still good to know your billable hour and profitability that way. So I'm just curious. And then do you look for that from agencies that you're buying for that sophistication? Because he was saying about 70, 80% of agencies are not doing this.

So it's— we definitely do track our hours that we're putting on projects, the people, the time people are spending, even how much time they spend in meetings. And we do it just to make sure that we're running profitably per campaign. And it allows us to see where there's wastage. And doing this allows you to operate a solid P&L and adjust based on gaining of clients or losses of clients or figuring out— the team always will say, we need more people. That's very common in the agency world. We're overworked. Are you really overworked? Do you really need more people? Doing this gives you a lot of visibility into things. But going back to buying corporations, most agencies, as you mentioned, don't do it. And almost every company we buy does not do it, and we're happy with that because adding that brings in efficiencies and it helps us make more money, right? So for example, I'm looking at an agency right now They have quite a bit of revenue, very little profit. And the reason we believe the profit is so low is because the company is just mismanaged, right? So we like these kinds of things. It creates opportunities for us as a buyer. Now, one thing you have to keep in mind though, is when you're buying corporations, and I'm going to make up some numbers, but let's say you're buying a company that's doing $4 million in revenue and $400 grand in profit. 10% is really low, right? And let's say they have a lot of employees, like 150 employees, because they're in a country where labor is cheap. Well, for us to put our systems onto that corporation, it may end up costing $150,000 because software is not discounted because something's in Mexico or Brazil or India. So in reality, it may be doing $400,000 in profit, but the moment we integrate it, your $450,000 becomes $250,000. So then you got to climb back up to that $400,000 number and hopefully get to beyond that. And you have to take all those things into the equation. But yes, companies, ideally, if you want to operate at the best levels, you got to end up, you know, tracking efficiencies. But it costs more to do that. So just keep that in mind as well.

Amazing. Thank you, Eric. Did you have any thoughts on that from I know you're more US-based, or you might be expanding globally.

I have nothing to add much there. I mean, we're kind of an LOI with an email marketing company right now, but the way we do it, it's not too different than Neil's. We do time tracking, but the other thing we do that I don't think you guys do, Neil, is we do these daily standups, right? And so I'll give you an example here. Here's one of our people. So let me share my screen. So it's interesting that I look at this like, okay, last 7 days or so, this guy on our team over here, and it's like reporting, reporting updates, reporting, you know, it's like, man, you spend a lot of time in meetings and reporting, right? And then to me, I'm just like, man, you know, how do we optimize this for the future? And so there's the qualitative piece where we have the time tracking, but sometimes you can just see like the top, what are your top 3 for today? What's the top 3 you did yesterday? And we can see historically What people focus on. And then also we can see if people are becoming disengaged or not, or we can see if people are really driving value. Um, so, you know, this is also, this is like a checks and balances for us. Um, but it, it serves pretty well as like a, a pairing to the time tracking.

Got it. Is, is that like, uh, Coda is like a Notion?

Yeah, it's like a Notion. We don't like Notion. Sorry, Notion.

Yeah, I don't, I do not like Notion.

And Notion, you paid us for advertising. We would like you.

Right. Awesome. Thank you.

If you're an agency owner and you want to grow faster, check out the Agency Owners Association that's hosted by my podcast co-host Neil Patel and myself. And we have other agency owners that are doing 8 figures a year. They were doing 9 figures a year. They sold their business for hundreds of millions of dollars, and they're going to share their experiences with you. There's a whole host of other benefits. And the cool thing is that there's a 7-day free trial, and you should check it out now because we're going to take the prices up. So just go to marketingschool.io/aoa.

Yeah, I have a quick question. What percentage of revenue do you think is optimal to spend on marketing for agencies?

You want the ChatGPT answer?

No more than 10%.

From your experience.

You don't look at it as just agencies, just in businesses in general, around 10% of your, you know, turnover should be spent on marketing.

Yeah, unless it's a bull market again, then if you raise a bunch of money, you can spend 30% if you want. But yeah, ideally to be conservative around 10%.

And if you're spending too little, then you're not investing in growth. If you're spending too much, just not being financially responsible.

Yeah, I think in my case maybe it's too little. But if you drew a pie chart, you know, you have labor, overhead, sort of marketing profit, I guess. Where would you like put the other pieces?

It depends on what kind of marketing agency, but labor's gonna be the biggest one, of course. I would end up saying, generally speaking, if you're an agency and you're doing 20% profit, you're doing a good job. That's just a general rule of thumb. Mm-hmm.

Yeah, I think in my case, you know, maybe the profit is higher and then the marketing expenditure is lower. So it's a great feedback. I just wanted to kind of validate that.

You don't want to be, you could be higher than 20%, but if you start getting too much higher, you'll find that your growth isn't going to be as good because you're not reinvesting enough.

Yeah.

And by the way, that's most smaller agencies tend to say they have 40, 50% profit margins, but then the problem with it is it's mostly founder-run and they're keeping a lot of the profit for themselves, which is fine. It's great for a great business for them, but it's not an attractive target for someone else to buy because there's too much risk there.

And at that point you haven't built out a management team. You know, Eric and I have a mutual friend from Canada. He deals with private equity and he does their marketing for a lot of private equity firms when they buy these portfolio companies. This guy's operating, call it 50% margins, and he wants to sell. And I was like, your biggest problem is you don't have a built-out management team and it's too reliant on you, and that would decrease your profits. And that's what a buyer is going to look for because they want sustainability. And when you have high margins like 40%, 50%, it's hard to get Thank you guys.

By the way, that's a pro tip too. Like if you guys are looking to sell at some point, you don't want to go to somebody else and say, well, we have 50% profit margins. And then, you know, because there's a lot of people that do that and it actually ends up being a pain for the other agency owner and they just don't want to talk to you anymore at that point.

So.

Although there is one brokerage, what is it called? They changed their name. They used to be called We Are Barney.

They're called—

yeah, God, what are they called now?

They sell a lot of agents.

Palmer?

No, not Palmer. Palmer's another broker that works with them though. We Are Barney.

They emailed me recently.

They changed the name though. Okay.

Um, yeah, they changed the name from We Are Barney to— is it GoMerge?

Just search for— oh, Merge. It's called Merge.

Yeah, yeah, gomerge.com. But yeah, I tend not to— I don't like some of the— they have a lot of companies in there that have like the 50-plus percent margins and they're able to do well for some of these companies. We don't believe in that. We just know it's not sustainable, but they're sometimes able to convince entrepreneurs that it's great, which I of course think it's a huge mistake, but You know, they're able to convince certain people that, hey, you should buy some of these companies. And then I think some people buy 'em and they're left with a can of worms.

Yeah. By the way, there's a good guy, his name's Todd Tasky and he works, he's worked with like Power Digital. He's talked to like acceleration partners and a lot. So a lot of the, he's helped put together or helped broker some of these big platform deals. And a platform is where one agency decides to, you know, private equity invests in, and then this agency decides to roll up other agencies. And usually the platform agency is doing, you know, let's say $4 or $5 million in EBITDA. A good example of this would be like a Tenuity, right? And then, Neil, I think there's a couple others, but this guy's name is Todd Tasky. And so if you do, I spoke to him like 2 months ago or so, and he's like, look, even if you get to $3 million EBITDA, you could build a platform, but usually it's around $5 or so. But Neil, feel free to add anything to this.

No, I think you're spot on.

I want to take a second to tell you about my podcast co-host's agency. So NP Digital, so Neil Patel Digital. What they do is they do a whole host of marketing services and they are global. They're worldwide. They have SMB services as well. They have mid-market to enterprise services as well. They cover the entire gamut. So you can just go to npdigital.com to learn more about it. And now back to the Amber asked, do you disclose in contract if agency is using AI creating content? Yeah, we, we do disclose that on our end. I don't know about you guys, Neil. Yeah.

And some businesses will even require you to sign a contract saying you won't use AI to create content. So they all have different requirements.

Can I ask why that is?

Why? It's because some people are worried about lawsuits.

Cool. I see that growing every day.

AI laws are different for every country. So you just gotta— some companies are just really particular and careful because of that.

Scott, did you have something?

Yeah, are you guys seeing a growing trend among those enterprise clients, the larger clients, basically putting it into contract that no AI allowed? It's just increasing more and more. We're seeing that, yes. Yeah, but I think it, you know, really varies. Per company and what's the risk appetite. We don't really see it with SMBs. We really typically see it with large corporations.

Yeah. And large corporations just want to de-risk, so easier thing to do.

As we approach the end of the year, I know Anita was looking, or she had just had a meeting with her team about projecting for 2025 and recapping everything from 2024. Do you guys have like a process that you go through toward the end of the year as far as like a reflection process and then like a year ahead planning process?

Neil will never answer this. I'll answer this. So I can share a template that I've used for the last couple years or so. I just write— this I do use Notion for because my template's in there. And so, you know, it is just what went well, what didn't go well, what I'm looking forward to next year. And then, you know, how am I trending towards our 3? Because I like to plan in 3 years. I think you get too much done in, in one, like a year goes by too quickly, right? This is what Jeff Bezos said as well. So, but in 3 years, you know, you can really move the needle. And I, I do it for, I do it for personal and I do it for business as well. It, it takes a couple hours to do, but it's, it's fun, right? I, we, so Neil and I, we have a mutual friend, Syed, and let me, let me see if I can pull this here. Let me share my screen real quick. Okay, cool. Syed has a good template. You guys should just copy Syed over here. So this happened to me in 2023, year in review. So can't believe it's 2024. Days have been flying fast. Personal highlights, business highlights, acquisitions and investments, lessons learned, favorite reads, my goals. Let's just go to like business highlights, see what he's got going on here. You know, it's outstanding year full of great accomplishments. We completed 12 business acquisitions for growth fund, blah, blah, blah. And the cool thing is he saves a lot of the pictures. And so like this is one of the tools that he bought or plugins that he invested in. So, You guys can decide how you want to play. I would just type in Syed Year in Review, um, and you'll find it. So yeah, any questions on this? Oh yeah, look, my goals for 2024. I wonder if I'm in any of these pictures. Nope, I'm not. But anyway, um, hope that was helpful.

I was just going to mention, we, we Do every year. We, um, go through all our services and we see what we can throw away, um, because sometimes you just start adding things on and, um, it's not monetized correctly. It's not, you know, like, do we throw it away? Do we fix it? Do we charge more? Um, we also look at our pricing every year. Um, I know last year we raised it by about 25%. This year we're probably gonna— and it just comes with more confidence as, you know, this last year we've nailed some bigger clients. We're increasing our pricing to weed out maybe some of the smaller clients that we were bringing in for our, like, our sales team we're bringing in. Not that I have a big sale, I have one guy, but, you know, like, just to clarify kind of what we're trying to shoot for. And then we also look at What are our growth goals for the year from not just revenue but more about HR and stuff? Because that's— we run a very flat organization, try not to get too many managers or too much senior management involved. So that we're kind of growing out of that now. Like, we went from 5 employees last year to 15 right now, and we're probably gonna bring on 3 more by the end of the year. So, um, that's— we blew past our goals. And, uh, you know, it's, it's good, but it— I'm, I'm the only one really putting the check in place on making sure we're profitable. So because we're very flat, you know, kind of thing. So anyways, those are some things that we, we analyze, um, you know, year to year. But I like the 3-year idea. Eric?

Yeah, Kevin, you bring up a good point on the price increase piece. So I have a friend, David Rodnitzky, and he sold his agency called 3Q Digital. I think he sold it for $65 million the first time. He collected $30 million upfront and then he was able to buy it back and then sell it again. And so he got a second bite of the apple because private equity couldn't pay him the second time. But yeah, we'll come back to Neil in a second. But the whole thing is he actually worked with the agency coach, and I know Neil loves coaches, but he worked with the agency coach at the time. And the coach was like, hey, you need to increase your prices. And so at the time he was charging, he was doing paid media for a lot of tech companies. He was charging like $1,500 a month or a percentage of ad spend, right? And he's like, okay, double it to $3,000. Okay, made it $3,000. Okay, now make it $5,000. Now make it $7,500. Now make it $10,000. Now make it $25,000 or so, right? And every time he did it, the whole objective here is that you want to, out of 10 customers you bring this to, maybe 3 are going to complain and maybe they'll churn, but the 7 will probably take you up on it and you're going to make more money that way, right? So Neil, I'm curious from your guys is then over the years how you guys have price increased, if at all?

You're muted. I don't know the answer. I honestly don't know if we have ever done price increases or not. I'm assuming we have. I could be wrong though. I just have never been involved in those conversations or decisions.

Austin wants to know why Neil won't share his end-of-year reviews and planning.

I don't, I don't, I'm not involved in any of those. So Eric knows this, but if I shared it with you, I'd be making it up literally out of thin air.

No, it's more so he doesn't do it, so that's why. But, um, yeah, that's not his jam.