Hiring a growth agency might be a massive mistake!
And I worked at one of them…
Hi there 👋,
I’m just going to get it out of the way and say it:
Hiring an agency as a startup might be a massive mistake.
This is what would get me cancelled, but I’m glad I can finally say it.
Keep in mind that I’m saying this as someone who worked at an agency for over five years.
I just don’t think they’re always the right fix for a problem, yet so often, struggling D2C startups will turn to them to run a channel or support their growth.
Agencies won’t tell you that you’re not in the right place to benefit from them; why would they?
Most agencies work with a flawed model:
You pay a fixed / per hour amount
They have high fixed running costs with salaries that go on even when they have fewer clients
They are spread thin over several clients
Just like freelancers… am I sabotaging myself with this newsletter?
Not really, as there are some crucial differences:
Agencies have more time going to overhead, having to cover a lot of time between various people working on the projects
Agencies must also cover other people’s costs, such as sales, account managers, HR, internal marketing, finance, etc.
This adds up to higher rates with less efficiency.
To put it bluntly, you’re not getting much bang for your buck.
I’m not saying that the solution is to hire me, or even another freelancer.
I’m just saying you need to consider when to use an agency, when to work with a freelancer, or when to use a different option. So let’s do that.
Challenge: An area that requires multiple skills you don’t have in-house
Let’s say that you want to successfully scale TikTok ads (the dreaded TikTok ads…).
But one little problem: none of your team have video editing capabilities, TikTok knowledge, ad experience or analytics capabilities.
Oops.
You need a range of skills, and you’re unlikely to find someone with all of those skills freelance or in-house. You don’t even know if TikTok will work for you yet!
This is when an agency is the ideal option for you, as they can bring in multiple people to help set you up for success.
Just ensure that your budget is large enough to cover their free and subsequent ad spend.
For this, I like to work a blended cost of acquisition (CAC) of them, tooling, ad spend and any other costs and what the ad spend CAC would then be.
It doesn’t need to be ROI-positive immediately, but if it’s unrealistic, you might want to reconsider.
For example, if the costs are per month:
Agency: £4,000
Ad tooling: £200
Internal team time: £1,000
Ad budget: £5,000
Total: £10,200
Ideal CAC: £20
510 new customers would be needed (£10,200/£20)
Then the platform CAC would need to be £5,000/510 = £9.80 to make the setup work. You can then look at benchmarks to decide if that is anywhere near realistic.
The alternative is to ask them what they would expect CAC to be in the beginning based on their experience, and then you can do the same calculation.
Again, it doesn’t have to be perfect, but if it looks like you are expecting the ad spend budget to be £40, you need to be conscious that the realistic CAC is actually:
£5000/£40= 125 new customers. So £10,200/125 = £81.60
Because it adds up, I would say agencies often work better when you have already built up an initial customer base and have the budget to be able to test a new channel.
When is freelance a better option?
If the skills are narrowed, for example, they could be covered by one or two individuals, I’d consider going freelance instead.
Often, the value for money will be better with freelancers. They tend to work with fewer customers, so they become more involved with your business.
However, with a freelancer, you’re limited to their area of expertise.
If they’re on holiday with no one to transfer the work to, things will halt.
For both agencies and freelancers, it’s a temporary solution.
They’re great ways to reduce the risk of testing new channels or solving temporary challenges with more in-depth experts.
When is in-house a better option?
Once you’ve determined that those skills will be needed long-term and you’d like more in-depth support, you’ll want to look at hiring someone in-house.
Don’t forget that this doesn’t have to be a full-time role. Many people are looking for part-time roles.
In-house does come with the extra costs surrounding employees and less flexibility to change directions or skills. That’s why you need to be sure that it’s an area you want to invest in.
Recommendation
In every edition of Growth Waves, I also share a related book, individual or newsletter to check out related to the week's topic.
If you’re looking for an agency or a freelancer, I recommend using a platform like Grwth club.
They look closely at your growth challenges, and curate a list of potential partners to help you tackle these problems.
There are no membership fees or unnecessary channels - you simply send over a brief and a team of experts will be working hands on to figure out the best people to match you with.
They cover everything from performance marketing, website development and SEO, to PR, offline media buying, brand and creative, so get in touch with your challenges now.
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All in all, consider the three options and determine which is best for your business, depending on:
The stage of growth you are at
Whether it is an area you are testing or a long-term growth area
The number of skills needed
Your budget
I’m not saying that an agency is never the right option, just that I’ve seen too many companies rush into something that costs more money than it’s worth.
Don’t assume that an agency will fix all your problems or make any channel work for you.
Daphne
Nice piece Daphne!