If you are like most agency founders, you probably started as a freelancer or a consultant.
You found yourself in demand with more work than you could handle alone. So, you started an agency.
But, you quickly realized that scaling and running an agency is VERY different from being a freelancer.
The biggest barrier to growth for most agencies is their business model. It needs to be financially viable to not only keep the lights on but ensure you have the necessary team and resources in place to deliver quality work.
In this post, we’re sharing a framework to help you find a profitable agency business model.
How Do You Decide Which Business Model to Adopt?
There is no shortage of ways that agencies can charge for their services.
However, if you want to stay in business, you need to pick a business model that hits these key criteria:
- There is a defined market for the services you are offering and clients understand it and are willing to pay.
- You have a compelling offer(s) (i.e. value props)
- It is financially viable for the agency to deliver the services.
Note: Once you are clear on your agency’s business model, this makes it easier to identify and turn away clients that aren’t profitable or a good fit.
So, we reached out to 20 agency owners to learn more about their business models. Of the agencies we surveyed, 55% of them have more than 25 clients.
The majority of the agencies we spoke to prefer a simple flat-fee retainer or project-based model.
Related: Agency Reporting: 9 Tips to Effectively Prove Your Value to Clients
Which Business Models Are Most Profitable for Agencies?
From flat-fee retainers to projects, performance-based pricing, and a hybrid model, we’re taking a closer look at the most common agency business models.
The majority of the agencies we surveyed prefer the retainer model.
“As an agency, our recurring revenue model is based on a fixed monthly retainer fee for clients,” says Jonathan Zacharias of GR0. “Depending upon the client and their package, this retainer fee can fluctuate drastically. Specifically, as an agency that strives to turn organic search into a performance marketing channel, we focus on three main buckets: content writing, performance HR, and on-page optimization. Depending on the suite of services, we then adjust our retainer fee accordingly.”
Tanya Gauthier of ByMillennials Agency Inc adds, “We’ve tried it all – performance-based, hourly, retainer, per-project. Short answer is long-term retainers. They allow agency owners to plan ahead their talent and resources without needing to stress about filling their team’s schedules or searching for clients last minute.
At ByMillennials, we’ve worked on curating a monthly retainer model that is a win-win for both us (the agency) and the client – a month-by-month agreement with no “commitment”. Why? Gaining your client’s trust is absolutely crucial. We end every sales pitch by telling the client that there is no commitment. If the fit isn’t right, we can end it right away, which has given us an average client LTV of 8+ months. When the client feels in control rather than “stuck,” the relationship is a lot healthier.”
Related: Client Reporting 101: Tips and Best Practices for Agencies and Freelancers
Long-term collaboration is one of the biggest advantages of the retainer model.
In fact, 50% of the agencies we surveyed have up to 20 clients that have been working with them for over a year.
An added advantage of the retainer model is reducing some of the uncertainty and volatility that comes with having an agency. When you have clients paying a flat fee each month, you can better predict revenue and cash flow, which can help with allocating enough resources and managing team costs and related expenses.
“Obviously long-term retainers,” says Alex Birkett. “It’s not just the profitability, it’s the predictability and the ability to allocate resources properly. Project-based can work if the projects are large enough. Token / credit-based systems are silly unless you’re super small and agile (and want to deal with client success headaches). And in certain businesses (SEO, content, CRO), the longevity of a working relationship is a predictor of success, so this benefits the client too. Granted, it’s hard to walk into a long-term retainer contract. But if both sides have trust and the relationship works, that’s the best agency business model.”
Jonathan Saeidian of Brenton Way agrees, “We focus on long term MRR so we allocate more resources to each client and reduce profit margin to maintain relationships. This has reduced our churn rate to only 5% and provided 2 referrals for each client on average.”
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Simeon Prokopov of Agile Digital Agency adds, “The reason why monthly retainers prove to be the most profitable is that we pack them as a product.
- Our work is easy to plan
- We know exactly what we have to do every month, so scheduling it is easy.
- We are more efficient
- Each retainer has a strict workflow so there is no guesswork involved with projects.
In the end, this means more efficient project management and results delivery.
Retainers are scalable.
- We can quickly expand our capacity since we have a clear process in place.
- Easier to market and sell
- Instead of paying large amounts upfront, clients subscribe to a monthly fee.
They are also easy to explain. Since they are ‘productized’, they have specific features that we define and can list in the sales process. Our clients get a very clear picture of what we are doing on a monthly basis.
- Predictable invoice pipeline
- As retainers are recurring every month, and contracts are typically signed on an annual basis, we can plan our sales in the long run.
- Long-term client relationship
- The nature of retainers is based on a long-term relationship with your client.
This opens the door for upselling other services or higher retainers. Having said all this, it does not mean that everything about this model is perfect. The above is an ideal situation. Often clients require custom tweaks to our pre-made retainers and onboarding a new client or adding a legacy project takes time. However, I believe the advantages outweigh the downsides, and this is definitely our most profitable model.”
Related: 9 Ways Agency Reporting Can Help Create Transparency with Clients and Boost Client Retention
Project work tends to be the most profitable out of all of the business models. However, none of the agencies we surveyed use this model exclusively. That’s because it is also the hardest to scale and the most volatile.
“While finite, deliverable project work will likely always remain the highest margin component of our business, we tend to sacrifice profitability in our client campaigns for predictability by encouraging more long-term, recurring engagements,” says Nate Nead of SEO.co. “Yes, project work can often be long term as well, but when projects are complete, there is a cliff in predictable revenue, which we love to avoid.”
Hybrid retainer and project model
One way to get some of the best advantages of both the retainer and project models is to use a hybrid model.
“We work with clients on both a project and retainer basis and managing expectations is key especially around scope creep,” says Paige Arnof-Fenn of Mavens & Moguls. “Clear communication is the key to success.
Post the Great Recession, the majority of our work is now project-based (it used to skew to more retainer work before) so the scope creep potential is a lot less now to be honest which makes managing expectations a lot easier. Projects have a beginning, middle, and end so it all ties to the deliverable, very clearly defined. With Covid, many of our projects have slowed down (one with a monthly retainer asked that the fee be spread over 2 months instead, while another is waiting to start phase 2 of the project, for example). Two new projects supposed to kick off last year are now just starting.
When a client comes back after a project has been completed and asks for some additional work to be done on the project I am not shy about explaining that we would need to dedicate more hours on this new project this month in addition to what we had been paid for so it will be incremental time maybe even 25-30% more hours so I offer that we can add on a separate project fee if they would like us to help here too. I also offer to write a new scope of work if that is helpful to drive home the point that another fee is required. I also mention I will send another invoice that must be paid to start the new work. In my experience, they respect you for being in the professional service business especially if you have done great work for them in the past. They come back because they value your quality.”
An added advantage of the hybrid model is that you can grow faster.
For example, Anthony Gaenzle of Gaenzle Marketing says, “We’ve been able to grow quickly by utilizing a hybrid model where our key team members are in-house, and we leverage highly vetted, very talented contractors to scale up when larger projects come through the door. This helps keep overhead down while allowing us to provide top-notch service to our clients. It also allows us to attract and retain the best quality talent in-house because we aren’t overloaded with hiring for unnecessary or redundant roles.
This model also allows us to serve our clients on a project-by-project basis. Whether it’s a huge website redesign with a lot of content creation involved or a small, one-off piece of marketing collateral, we can easily scale up or down to be able to charge clients only for the services they need.
We also offer retainer fees on a fractional marketing basis where the client pays each month for a preset number of hours and then has access to pre-determined marketing services with the flexibility to switch in and out as needed to service all their marketing needs and essentially serve as the client’s marketing department.
Being flexible and offering both models allows Gaenzle Marketing to be there for clients, no matter what level of service they require. I’ve utilized this model with two other agencies, each of which saw a good deal of success with the direction.
I highly recommend the hybrid in-house/contractor model, as long as you really dig in and assess your contractors and make sure they’re a fit. That way, they sort of become a part of your team and you can build a level of trust with your team as well as your clients.”
Related: How Much Should Your Marketing Agency Charge for its Monthly Retainer Fee?
Flat-fee + commission
A least common model, but one that can work well for PPC agencies, is a hybrid flat fee model with a commission structure based on results generated. This allows your agency to partake in the upside of delivering exceptional results.
For example, Neil Jose of Aviv Digital says, “Here’s an outline of our business model at Aviv Digital.
- We focus on selling creative strategies to our clients.
- We charge our clients for running their ad campaigns and for their maintenance.
- Apart from that we offer consulting services to our clients and we also train the individual that we’re dealing with on how they can run their marketing campaigns more efficiently.
- And finally comes our monthly recurring revenue.
The reason why we opted for this business model is that here we don’t solely rely on our monthly recurring revenue. This business model provides us with other sources of revenue as well. Implementation of this business model has given us some great results. We’ve acquired a couple of long-term clients who are really satisfied with our services.”
With agencies, there is no one-size-fits-all business model. It all boils down to the types of clients you work with, the services you offer, and the results you can generate. Many agencies experiment with different business models based on the lifecycle and needs of the business. The only wrong business model is the one that isn’t financially viable for your agency.