#5 Let's make an agency salad
#5 Let's make an agency salad
Today, I unveil my hard-earned wisdom on mastering the art of engaging with diverse Ideal Customer Profiles (ICPs), laying out the strategic nuances that can make or break your business journey.
Catch up on ‘Newsletter #4 Delving into Engagement Models’ if you missed it.
We've already mixed in the core ingredients of offerings and engagement models in our previous newsletters. Now, it's time to add the 'tomatoes' to our agency salad — the client profiles.
It's crystal clear that the success of an agency is tightly intertwined with the types of clients it serves.
Broadly speaking, there are three main categories:
Small Businesses (1-100 employees)
Growth/Mid-size Companies (200-500 employees)
Enterprise Organizations (1,000+ employees)
The choice of client profile touches every aspect of your agency, influencing:
Average contract value (ACV);
Length of the sales cycle;
Customer acquisition costs (CAC);
Rates of client turnover (Churn).
And it doesn't stop there. Your client choice also shapes:
Opportunities for scaling your agency;
Market presence (distinct from market share);
Recruitment strategies.
Let's delve into the nuances of each client type:
Small Businesses
Dealing with small businesses has its own set of nuances:
1. Affordability is Key: Small businesses usually find anything over $10k/month steep cost. It's important to price your services attractively. Think $990 instead of $1,000, or $99 instead of $100. The message is clear: be affordable.
2. Balancing Quality and Costs: While aiming for quality, remember that the highest-priced tools or top-tier talent might be overkill given your pricing structure. The key is to balance cost and quality effectively.
3. Take the Lead: Small business clients often lack the internal guidance for your services, so you'll need to be proactive. Taking charge and making decisions will keep things moving smoothly and avoid delays in service delivery.
4. Client Support Matters: Good client relationships are vital. Your account managers should be accessible through various channels like email, phone, and messaging apps. However, dedicated customer service managers might be too costly, so emphasize efficient and automated processes.
5. Client Retention: If your service works, small businesses will likely stick with you. But if it doesn't, they'll move on quickly. Focus on efficiency and efficacy to retain them, cut the fluff.
6. Acquisition Channels: Word-of-mouth, local listings, and social media are effective for initial client acquisition and scaling. However, remember that...
7. Cold Outreach is More Effective: Cold emails and calls are especially effective for small businesses. They tend to engage more through these channels, and the customer acquisition cost is generally lower.
8. Managing Payments: Payment collection can be tricky. Some clients prefer post-service payment, while others might delay payments even if they pay upfront. A robust account receivable process is crucial. Don't hesitate to follow up persistently yet professionally for payments.
9. Choosing Engagement Models: For small businesses, pay-per-deliverable or retainer models work best. Avoid project-based or commission models as they can lead to inconsistent payment flows due to various factors like delayed approvals or project changes. Consistency in payments is crucial, so choose models that ensure regular cash flow.
Growth/Mid-size
When dealing with growth or mid-size companies, here are some key considerations:
1. Engaging POCs: Your main points of contact are driven not only by the company's success but also by their personal goals and key performance indicators (KPIs). It's crucial that your collaboration contributes positively to their objectives.
2. Maintaining Multiple POCs: In growth companies, rotations are common. Losing your primary point of contact (POC) can be challenging.
At Belkins, we've lost contracts when POCs left, and we didn't have established relationships with other team members.
Ensure you have connections with multiple contacts within the company.
3. Collaborative Environment: Mid-size clients often provide a more collaborative and responsive working environment. They typically adhere to processes, value relationships, and are supportive, making them ideal to work with.
4. Regular Communication and Planning: Establish regular check-ins, present clear plans, and follow them diligently. Hitting milestones is important, but focusing on final deliverables is key. Weekly sync-up calls are highly effective in this context.
5. Streamlined Buying Process: These companies usually have a less cumbersome buying process compared to larger organizations, providing easier access to decision-makers and budget holders. This enables more personal relationship building.
6. Budget Availability: Mid-size companies often have allocated budgets for growth, making them ideal targets. Your sales process should be efficient, predictable, and scalable to capitalize on this opportunity.
7. Utilizing Ratings and Testimonials: To attract these companies, leverage listings, ratings, client testimonials, and case studies. Platforms like Clutch.co, Goodfirms, and G2 are particularly useful, especially if you're transitioning from serving small businesses.
8. Flexible Payment Options: These companies are generally flexible with payments, often able to pay upfront or even for the entire contract in advance. They are compatible with various engagement models, including project-based, retainer, commission, and pay-per-deliverable.
9. Premium Pricing Strategy: Mid-size companies are often willing to pay a premium for quality services and results, making them lucrative for higher margins.
10. Structured Sales Process: Given the competitive landscape, having a well-structured sales process is vital. This approach helps in consistently building pipelines and securing contracts. Agency executives/managers should focus on building dedicated sales teams, as it can be more effective than handling sales personally.
Belkins serves as an example of a sales-driven organization thriving in the mid-size market. Our structured approach and skilled sales team have positioned us strongly in this sector, often outperforming individual agency executives in deal acquisition. Our strength has always been in a seamless customer journey.
Enterprise
Engaging with enterprise clients is a different ball game.
We consider enterprise clients as those who spend $30K+ monthly or have contracts of $250K/year. Even a smaller business spending this much falls into our enterprise category.
Sure, we've worked with big names like Cisco, TechData, Nvidia, and General Electric, but remember, these large clients were not our initial target; we attracted them organically over time.
Now, let's be clear: Working with enterprise clients is tough. If you don't already have them, think twice before pursuing them. Here's why:
Lengthy Sales Cycles: Expect the sales process to be long and complex.
Intensive SE Engagement: Tailored Statements of Work (SOW), specific terms, and conditions are the norm.
Extensive Compliance Requirements: Be prepared for lengthy compliance checklists.
Challenging Payment Terms: Often, you'll face unfavorable payment cycles like net 60, 90, or even 120 days.
When dealing with enterprise clients:
1. Focus on the POC's Needs: Your point of contact may be more concerned with their career advancement than the company's broader goals. Align your solutions to address their specific challenges and objectives.
2. Risk Mitigation is Key: For agencies, compliance with security and procedural requirements is non-negotiable.
For example, a few times we faced significant challenges while doing cold outreach for enterprise clients, such as setting up additional domains and navigating complex IT permissions, and these challenges delayed or made it impossible for Belkins to drive results.
3. Build Strong Relationships: Your POC is vital. They often move to other companies and can bring you along. Personal connections are crucial.
4. Patience is Essential: Everything moves slower in large organizations. Be prepared for delays and build your engagement models to accommodate this. Project-based, commission, or retainer models (with clear communication) can work well.
5. Start with Commission Engagements: Enterprises often start with smaller budgets for new vendors. Commission-based work can be a gateway to larger, more lucrative deals as trust is built.
6. Expect Lower Initial Margins: Initially, profits may be slim, but over time, as you prove your worth, better deals can be negotiated.
Lastly, working with enterprises requires a different mindset compared to small or mid-size businesses. They are monolithic and less flexible. It's crucial to understand and adapt to their style and processes to succeed in this demanding but potentially rewarding client category.
Alright, let's delve into how different agency models can impact growth, using Belkins as a case study. We'll explore three hypothetical variations of Belkins, each adopting a distinct approach to serving different client profiles.
Variant Belkins #1:
Pay-Per-Hour SDR Outsourcing for Small Businesses
This model involves providing sales development representative (SDR) services to small businesses, charging by the hour.
Key Considerations: The focus here is affordability and flexibility, crucial for small businesses. Pricing needs to be competitive yet profitable. The client base could be diverse, but the challenge lies in balancing quality service with cost-effective operations.
Impact on Growth: This model may offer steady revenue with a potentially high volume of clients. However, managing a large number of small accounts could be operationally challenging and may limit profit margins.
Variant Belkins #2:
Retainer-Based Appointment Setting for Mid-Size Companies
Currently, Belkins operates on a retainer model, providing appointment setting and marketing services to mid-size companies.
Key Considerations: This model offers stability through recurring revenue. It requires building strong relationships with line managers and understanding their KPIs to ensure the services align with their goals.
Impact on Growth: Given the structured buying process of mid-size companies and their allocated budgets for growth, this model can lead to scalable and predictable revenue. It also allows for deeper client relationships and potential upselling opportunities.
Variant Belkins #3:
Project-Based Consulting for Enterprise
This hypothetical model would have Belkins offering specialized consulting services to enterprise clients on a project basis.
Key Considerations: The enterprise segment requires navigating longer sales cycles and complex compliance requirements. The focus should be on building strong personal relationships with points of contact and aligning services with their specific needs and career goals.
Impact on Growth: While the initial profit margins might be lower and the sales cycle longer, successful projects can lead to substantial, high-value contracts in the long term. This model requires patience and a strategic approach to gradually build credibility and trust with enterprise clients.
Each of these models has its own set of challenges and opportunities. The key is to align your agency's strengths and capabilities with the needs and characteristics of your target client segment. Your decision will shape not only your agency's growth trajectory but also its operational dynamics and strategic focus.
Let’s dive deeper:
Variant #1: Pay-per-hour SDR Outsourcing for Small Businesses
Recognizing that small businesses often lack a marketing team and operate on tight budgets, I'd offer services at a maximum of $2,000 per month. This model is based on providing a full-time SDR (40 hours/week) at an effective rate of $50 per hour.
The SDR would be a dedicated resource, likely based offshore in countries like Ukraine, India, or the Philippines, where we'll handle hiring, training, equipping, and managing them.
My plan is to establish an offshore office in Ukraine, recruiting remote workers at $800 per month, plus $100 for tools, and $150 for overhead costs.
Including administrative, HR, recruitment, marketing, and sales expenses, the direct costs would sum up to approximately $1,600-$1,700 monthly spend. Factoring in commissions and unexpected expenses, this would leave a 20% margin, or about $200 profit per client each month.
As the CEO, I'd be hands-on in selling, marketing, and possibly team management to maintain these margins. This model is more akin to a small, lifestyle business rather than a large-scale operation.
Each small business client would likely require one or two SDRs, generating a profit of $200 to $400 per client monthly.
With ten clients, the agency's Monthly Recurring Revenue (MRR) would be around $20K, translating to an annual income of $240K, but my personal earnings would only be about $48K per year.
This setup is envisioned as a boutique, passive income source. Initially, ten clients may seem limited, but scaling up to 20 clients could potentially bring in $500K to $1M annually.
However, expanding to that level ($1M yearly) would significantly increase operational, training, marketing, and HR costs. Providing additional perks to a team of 30-40 people would reduce profit margins to around 10%.
Scaling beyond this point presents substantial challenges. With increasing needs for experienced staff, advanced tools, and more clients, the cost of marketing alone could become prohibitively expensive.
This scenario illustrates that staying within the small business outsourcing niche limits growth potential.
To scale and achieve significant growth, a transition is required: increasing fees, adding more value, and targeting upmarket mid-size companies or enterprises.
This would involve shifting to a hybrid engagement model and redefining the Ideal Customer Profile (ICP).
Essentially, if you find yourself plateauing in the small business sector and aspire for substantial growth, transformation and upscaling are essential.
Variant #2: Retainer-Based Appointment Setting for Mid-Size Companies
For each mid-size client, we set a fixed retainer fee of $6,000 per month. Additionally, there's a setup fee to cover technological costs, which is generally acceptable to mid-size clients.
This model isn't just about outsourcing; it's a comprehensive marketing service. Therefore, a team comprising various roles like SDR, Copywriter, Lead Generation Specialist, Account Manager, Graphic Designer, or CRM Specialist is essential.
One such team can efficiently manage 5-10 clients, generating up to $60K in monthly revenue.
In this scenario, clients are more focused on the results and deliverables rather than the time spent.
To maintain a sustainable business model, the Cost of Service (COS) should be kept at or below 40%. This includes salaries, taxes, and any additional bonuses.
High-grade tools are necessary for servicing growth-oriented mid-size companies. These tools can account for 5% to 10% of the monthly expenses.
Allocating 25%-30% of the retainer for sales and marketing is critical in this competitive niche. An experienced sales team and an in-house marketing team are indispensable.
Administrative and HR expenses might add another 10%, bringing total expenses up to 90%.
This leaves us with a margin of around 10%.
Due to the high Customer Acquisition Cost (CAC) in this segment, initial profits are modest, and it typically takes 4-5 months of engagement before agencies start seeing any returns.
With a client base of 20, like in the previous scenario, annual revenue could reach $1.5M. However, the profit margin might dip below 10% due to the high CAC.
Given these challenges, there are a few strategic options:
Scaling up to a larger number of clients (40-60-100) could potentially reduce CAC, tool costs, and overhead expenses due to economies of scale.
Maintaining a client base of 20 but reducing COS, possibly by hiring contractors instead of full-time employees.
Focusing on creating a service offering that is so valuable and 'sticky' that it ensures a high Lifetime Value (LTV) for each client.
Belkins opted for the first and third strategies (above). However, if I were to start all over again and faced with a decision to manage 20 clients, I would likely consider options 2 or 3 instead.
Another critical factor is the geographical location of your team.
For instance, a U.S.-based team would likely require a higher retainer (possibly $8,000 to $10,000 per month) to keep COS around 40%. In Belkins’ case, having a team in Ukraine allows us to offer competitive rates of $6K per month while still ensuring high living standards for our staff. However, I'm aware of agencies where the minimum feasible retainer is $10K per month which affects their cost Vs. delivery ratio.
The key is to balance your deliverables (COS) with your acquisition strategy (CAC). A higher retainer might mean lower CAC, but at the same time, it’s crucial to ensure that your deliverables (COS) justify your high rates. Conversely, if you can sell services at a lower retainer, your CAC goes up, so your COS must go down.
This balance is essential for creating a competitive yet profitable pricing model.
Variant #3: Project-Based Consulting for Enterprises
Imagine a 12-month project to establish an outbound function from scratch. This project would be divided into four phases – setup, launch, maintenance, and wrap-up – each lasting three months.
The total contract value for this project would be set at $120K, payable in quarterly installments of $30K, with net-60 terms.
To execute the project, a solution architect would be the lead, supported by a team of contractors handling specific tasks like designing landing pages, setting up infrastructure for send-outs, and content creation.
The cost allocation for this project would be 40% for the solution architect, 20% for tools and contractors, and 10% for administrative fees, summing up to 70% of the $120K contract value.
One solution architect could manage up to five clients per year, resulting in a potential annual revenue of $600K per architect. With three architects handling 15 clients, the total revenue could reach $1.8M.
This would generate a profit of approximately $20K per client, or $300K in total. Assuming half of this profit goes to sales efforts (as marketing is less critical in selling to enterprises), the net profit would be around $150K.
While this model is hypothetical, it closely mirrors real-world scenarios. In such a setup, the executive often plays the role of both solution architect and salesperson, with a compact, experienced team of around 7-10 people each earning $150K-$200K per year.
However, there's a notable challenge in this model: growth potential.
Actively acquiring new enterprise clients can be costly, and hiring skilled solution architects isn't cheap. While the profit margins are attractive, the model doesn't necessarily scale significantly beyond 20 clients, as evidenced by many successful consulting firms operating in the enterprise space with a small team and stable revenue.
Some recommendations and ideas for those considering starting an agency:
1. For young entrepreneurs in their 20s with a few years of experience:
If your clients are in the same location as you, consider a model focusing on Creation/Building services for Small/Mid-size companies on a Retainer basis.
If your clients are in a different geographical location (e.g., you're in Ukraine and your clients are in the U.S.), an Outsourcing model with Pay-per-hour or Retainer pricing targeting Mid-size/Enterprise clients can be effective.
2. For those in their late 30s with over 10 years of experience, a Consulting model with a combination of Retainer and Commission engagements for Mid-size/Enterprise clients can be a strong approach.
These are my personal recommendations based on experience and industry insights.
This concludes our three-part newsletter series aimed at guiding you through the foundational aspects of building an agency. The decisions you make in these early stages will significantly impact your agency's trajectory for the foreseeable future.
For a comprehensive understanding, I highly recommend reviewing all three newsletters in sequence:
Newsletter #5 (this edition)
Thank you for your patience and engagement with these extensive reads.
Your dedication to understanding these concepts is essential for laying a solid foundation for your agency.