By Most small and medium-sized businesses (SMBs) can’t build large internal marketing teams. For them, marketing agencies are indispensable partners who provide convenient, consolidated access to a range of tools and services that would be too complex to source individually.
Learn how automations make you efficient, enhance your productivity, and help you win with local business. Download “Agency Marketing through Automation” today.
But for this relationship to be mutually beneficial, agency owners need to find a profitable, scalable agency business model through which to deliver their offerings. Without one, costs can get out of control and eat into profits even with a large roster of paying clients. If you’re starting an agency and want to ace your business model from the beginning, this blog post is for you.
What makes a business model profitable for marketing agencies?
Digital marketing agency business model profitability requires these key components:
- A clear value proposition
- Market differentiation
- Efficient resource allocation
- Cost management
- Scalability
- Client retention
- Recurring revenue
Let’s take a look at how each of these components of an agency business model contributes to its profitability and success.
Standing out with a value proposition and market differentiation
Many people start successful digital agencies even with little to no experience, while others flounder. Part of what sets thriving agencies apart is their well-defined value proposition and clear point of market differentiation.
A value proposition is a statement that summarizes the unique benefits of your digital agency startup, focusing on the needs, desires, and pain points of your target audience. A well-crafted value proposition distills the essence of your agency and helps your prospects understand the key, essential takeaway about why your agency should be the choice over the competition.
Similarly, market differentiation will help your agency stand out by defining how it differs from the competition, whether that’s your unique bundle of offerings, your experienced digital marketing team, or your unbeatable customer relationships.
Maximizing profits through resource allocation, cost management, and scalability
Agency startups can get distracted by the revenue part of the profit equation, without adequately factoring in costs. Understanding the costs associated with starting a digital marketing company can help you choose an agency business model that adequately accounts for them, leaving plenty for profits.
This becomes even more important as your agency grows: scaling is often costly, so building in healthy margins as your business becomes more complex is essential.
Future-proofing with client retention and recurring revenue
Whichever business model you choose, incentivizing long-term relationships with your clients is one of the best ways to ensure healthy profits. Lead generation is expensive, so the more payoff your agency can enjoy from each signed client, the less you’ll have to worry about constantly finding new clients. It’s also much easier to grow your business when you can count on a reliable stream of recurring revenue month after month from your long-term clients.
Check out this episode of Vendasta’s Conquer Local podcast for more on establishing long-term partnerships with clients.
Why are there different business models for agencies?
Different business models exist because agencies differ significantly when it comes to important parameters like their size, target market, and service offering. Each model has its benefits and drawbacks, and taking these into account along with your agency’s unique positioning can help you land on the ideal structure for your organization.
Agency size
Agency size impacts how an organization operates, how many clients it takes on, and how resources are allocated. Small agencies might position themselves as having an edge when it comes to agility and may prefer a marketing agency business model that maximizes flexibility and customization.
Target market
Researching client preferences in your target market will help you take the optimal approach to everything from marketing your digital agency to choosing the right business model.
Service offerings
How a service is best delivered can inform the ideal digital marketing agency business model. For example, agencies offering website builds may expect more short-term clients who purchase one-off website services compared to agencies offering search engine optimization (SEO) services, which require a longer timeline to reach maturity. These differences can influence the respective agencies’ business model.
Technological advancements
New tools are always emerging in the digital marketing space, and some of these can influence your business model of choice. For example, using AI to improve your lead generation and agency marketing strategy may lead to a large bump in new clients. As a result, you might need to change your digital marketing agency business model.
Changing client demands
Client preferences can shift over time, and successful marketing agencies take time to understand and address customer pain points. This can mean adapting your agency business model to better address client demands.
Different types of marketing agency business models
In basic terms, digital agencies exchange marketing tools and services with businesses for a fee, but there are many ways to go about structuring this relationship. Let’s explore 10 digital marketing agency business models along with the benefits and drawbacks of each.
1. Flat fee agencies
The flat fee business model involves charging clients a pre-established fee for each service delivered. Agencies using this business might have a variety of pricing options for different packages or bundles, but the prices are set in advance and are not impacted by variables like performance or hours spent delivering a service.
Pros:
This model is transparent and easy for clients to understand. They don’t have to work about fluctuating, unexpected costs. Agency owners also benefit from knowing what they will be paid for each project from the start.
Cons:
Scope creep is a perennial risk in the marketing world, and projects may become more complex as time goes on, causing agencies to spend more time on resources than initially planned. With this model, they wouldn’t be able to charge more, leading to diminished profits.
2. Performance or commission-based agencies
This business model is akin to a commission-based sales role in which the seller earns an agreed-upon fee for successful sales. Agencies earn a commission when certain metrics are achieved. These might be sales, traffic, or another key performance indicator (KPI). The commission can be a fixed amount, such as $500 for each new client, or a percentage, like 5 percent of every online sale.
Pros:
With this model, clients and agencies are aligned in their goals. When positive results are achieved, both parties make more money.
Cons:
If goals aren’t reached for any reason, agencies with this model risk not getting paid regardless of how much time and resources were spent on a client.
3. Hourly rate agencies
Hourly rate agencies charge a standard hourly for services rendered, regardless of what those services are.
Pros:
Hourly billing is transparent and easy to understand. Agencies can straightforwardly adapt to changing needs from month to month, charging for the amount of time they spend on each client, without the need for complex calculations.
Cons:
If you partner with a white-label platform, services may not be delivered in-house, making it difficult to calculate an appropriate hourly rate. It can also be challenging to anticipate the exact hours required for each project, and clients may feel they’re being charged more than they anticipated.
4. Retainer agencies
Customers may a recurring monthly fee for digital marketing services. Usually, this is a flat fee that can be used up to a certain level of service, beyond which extra charges might be incurred.
Pros:
Retainer relationships help agencies plan for the future by providing a reliable monthly, recurring source of income.
Cons:
The profit generated at the end of each billing cycle can vary significantly depending on how many services a retainer client used for a given period.
5. Project-based agencies
Agencies provide custom quotes to clients based on the specifics of each project. Typically, this agency business model prioritized one-off projects rather than long-term relationships.
Pros:
Since pricing is customized to each client’s needs, agencies can ensure they make their desired profit, while clients benefit from a personalized pricing schedule based on their specific needs.
Cons:
Agencies focusing on one-time projects have to spend more time on lead generation, since they always need more prospects in the pipeline to replace clients as their projects conclude.
6. Hybrid agencies
Hybrid agencies combine the business models we’ve looked at so far to create flexible pricing structures for clients. For example, they may have a basic hourly rate plus a commission based on performance, or a combination of flat fee and commission.
Pros:
A hybrid agency business model can provide a combination of transparency and flexibility that both client and agency appreciate. Agencies can be confident they’ll still get paid an agreed-upon base rate, while clients can feel confident knowing that commissions incentivize their agency partner to maximize their performance.
Cons:
This structure can be significantly more complicated to manage than one of the more straightforward options above.
7. Full-service agencies
Full-service agencies may use any of the pricing structures discussed so far. Their value proposition is based on their ability to deliver most or all of a client’s digital marketing needs under a single roof. Partnering with white-label service providers makes this possible without the need to hire in-house staff.
Pros:
Being a one-stop shop gives clients a major incentive to choose your agency over a combination of other service providers since they can consolidate their marketing spend and reduce the number of people they need to deal with.
Cons:
Managing a full-service agency requires a broad knowledge of the marketing space, and agencies run the risk of appearing to lack deep expertise in any single area.
8. Specialized niche agencies
Agencies using this model focus on a specific niche industry or service. Rather than being a jack-of-all-trades, they develop agency skills in an area of specialization.
Pros:
Specializing in either a specific industry or a particular marketing service can help agencies appear more knowledgeable, boosting credibility. They may also benefit from less competition, since fewer agencies may have their particular specialization.
Cons:
The more you specialize, the smaller your target client pool is. This isn’t necessarily a problem if you can market well to your target audience, but it’s important to be aware of the size of your prospective client pool.
9. Sole proprietor agencies
Individuals, usually with marketing experience, can set up solo agencies offering their specialized services. They may also offer a broad range of services, often by outsourcing work to white-label service providers.
Pros:
Solopreneur agency owners enjoy maximal flexibility and can forge strong, one-on-one relationships with their clients. They also have fewer costs, since they may not have staff or office space out of the home.
Cons:
As a one-person show, these agencies can have less capacity than their competitors. It can be difficult to wear many hats at once, from sales to accounting to delivery of services.
10. Consulting agencies
This agency business model focuses on advising clients rather than delivering service directly. For example, consulting agencies may help clients determine which bundle of digital marketing solutions is best for their needs.
Pros:
There are fewer costs associated with this model since agencies don’t need to be set up to deliver services. They can also benefit from long-term strategic partnerships with their clients.
Cons:
Consulting agencies should have deep, proven industry knowledge to deliver consulting services. They may also have a difficult time competing with agencies that offer advice and services under one roof.
How to choose the right business model for your marketing agency
Choosing the best agency business model requires well-defined goals, an honest appraisal of your capacity and capabilities, and a deep knowledge of your target market.
To make a decision, start by conducting research in your target market to understand who your competitors are and what your ideal clients need. Then, determine which services you can realistically deliver through your agency.
Once you have an idea of which digital marketing agency business model you prefer, go through the following questions:
- Is this model scalable? How quickly can I adapt if I get 5, 10, or 50 new clients in a short space of time?
- What is my profit structure? What will my costs realistically be? How can I ensure I hit my target profit margin on each sale?
- How can I maintain this business model long-term? Should I plan to hire staff? What aspects of my business can I outsource to free up time?
Addressing these questions before you start your agency can set you up for success by enabling you to anticipate costs and challenges before they become a problem. By choosing the right digital marketing agency business model, you can focus on growing your business rather than putting out fires and constantly restructuring how you do things.