Most businesses understand the importance of marketing, and many see hiring an advertising agency as a way to increase their visibility and reach new customers.
However, what many SMB owners don’t know is that there are often hidden costs associated with working with an agency.
In this blog post, we will explore some of those costs and offer tips on how to avoid them.
Most agencies operate under a retainer, where they get a flat fee for their services (usually online advertising for startups) that's paid out monthly.
Here's a typical paid ads structure for small businesses:
Established companies with traditional advertising has similar marketing budget structure with agencies. But SMBs and startup marketing budget considerations often involve more hidden marketing costs.
Answer these questions about your marketing team:
Agencies will continue to say their marketing channels lead to the highest marketing ROI. An agency's business objective is to maintain that retainer more often than to lower your marketing costs.
Truth be told, if an SMB needs thought leadership of its marketing strategy from an agency to inform its marketing budget, more often than not you'll come away from agencies disappointed.
SMBs should restructure retainers to pay a heavier upfront marketing cost to have a greater marketing budget.
The above example had its marketing budgets be $1,600 in fees + $900 in paid advertising. But, ask your agency what goes into a monthly management that alters the business and campaign goals.
Headline, not much.
Agencies often spend the first couple of months setting a few strategies they've used for a sales and marketing process. Then, paid advertising occurs more on autopilot with way less minimal involvement since monitoring tools and algorithms allocates funds/optimize for campaign goals.
This isn't a win-win situation. Structure business objectives differently.
Ask agencies to hit a specific gross revenue goal. For every revenue generated on top of that, agencies can get paid more.
In essence, figure out a way where business objectives on agency and client side are incentivized to do more.
Remember that established companies can't do deals like this as extra gross revenue can't be redistributed into more marketing.
Agencies ask for retainers because it is guaranteed revenue for X months. It rarely is to do business as usual to achieve its sales and marketing for you.
In that example above, I'd say negotiate with them to do $4,800 upfront, with still 3-month minimum retainer and $900/month marketing budget.
But, then say you'll pay the agency a media commission of 15 percent for doing its management.
That way there is some structure for the agency to get a monthly revenue and also, especially if combined with the structure above, the agency is absolutely incentivized to increase your gross revenue.
A startup marketing budget shouldn't be held hostage to a heavy maintenance fee.
According to a survey, the average marketing expenditure is around 7-11.2 percent from gross revenues. I've seen studies that small businesses spend 1-3 percent of their budget.
But rather than focusing on a percentage, I think SMBs can optimize how to structure deals to maximize their marketing budget.
Traditional advertising will ask you to fund market research, find your customer lifetime value sooner than later, and build brand awareness to move your target audience down a funnel.
I'm here to say don't create your marketing budget around that. Instead, restructure deals with agencies so both parties are aligned on business goals, where there is a data-driven approach to both share revenue.
Feels like this post drove that home well, but we'll do it again.
Best way to lower marketing costs is not to invest in more lead monitoring tools or diversify marketing channels or managing marketing expenses tightly.
Instead, a startup marketing budget should be influenced more by a business structure, where a client's sales are highly incentivizing an agency's revenue. Marketing goals and business goals should align to both company's total revenue goals.
And yes — sales, sales and more sales will address how much companies spend in marketing. But the biggest marketing decision a startup can have on its marketing budget may have nothing to do with paid ads and more to do with a business structure.
Tony Lee (aka @sheckii) is a digital advertising entrepreneur who worked on brands like 20th Century Fox, Sam’s Club, ABC Entertainment, Nintendo, Starz, sweetgreen, outdoor voices, First Republic Bank, Kane’s Furniture and more. He currently works as a lead for Performance Marketing at Shopify for international paid social media acquisition. He’s also the host of welcome to sheckiiville podcast available on Apple and iOS devices.