This article exposes the real costs and tricks of marketing and advertising agencies and helps small businesses make calculated decisions around how to best use their marketing budget.
Don't forget to subscribe for more content like this!
What Should I Know Before Hiring a Marketing Agency?
Most small business owners instinctively think the only way to grow your business is to either be a guru yourself or to hire a marketing agency to do it all for you, but this option rarely works for small businesses, and there are other alternatives that we will get into later, but first let’s go over what you need to know and the numbers that support it.
Your budget gets eaten up by service costs
When you have a total marketing budget of $3,000/mo or less, an agency has to eat a lot of your marketing dollars for their services. Typically about 50% or more.
Agency costs with budgets around $1,000/mo
For really limited budgets like $1,000/mo, marketing agencies usually charge about $500/mo, but you are not getting much for that. For this small of an account, either the agencies have to cut their costs by farming out work overseas to people who don’t understand your market and do poor work or they spend very little time on your account and don’t put much effort into it at all.
In many cases, small businesses with marketing spend at $1,000 per month do not qualify for most agencies, because they do not meet the agency’s account minimums. If you do manage to find one that will take you on, it will likely cost you 50% or more of your total marketing budget to cover their services.
Agency costs for higher budgets like $3,000/mo
With those lower $1,000/mo accounts, they are stripping things down so much that once someone has a bit more to spend, they start charging more to start managing the account better. You might start seeing offers in the $1,000/mo range at this point. However, you more commonly will spend $1,500/mo with them or more. So you are looking at a common 50% of your total marketing budget going towards service costs as well.
Why is it so expensive to hire a marketing agency?
Most marketing agencies have a lengthy sales and onboarding process to account for. Also, the management of each client has a lot of costs associated with it for the agency. Things like invoicing, project management, as well as fielding your questions, requests, and emails.
The hidden cost of the sales process
It can typically take between 10-20 hours of sales time before they acquire a new client. If you are closing at a 20% rate, and they are averaging 2-3hrs of time for each prospect, they are spending up to $800 just to move 1 person from prospect from closed. That doesn’t include the additional costs they have for paying out referral commissions or marketing before that, which adds up closer to $2,000 or more per client for agencies going after smaller accounts.
The hidden cost of the onboarding process
Once a new client is added to the roster, there are a lot of things they need from the small business to even start work. They need to account for setting up the client in their project management system, scheduling team members, and getting all the account access they need from you. There is also usually a kickoff meeting and an initial invoice that needs sent. This whole process can take them 3-5hrs to do. There are also costs for the software they are using to manage your account and their team. So this could cost the agency $250-300 to get you onboarded into their systems.
The hidden cost of client management
Most agencies find it hard to manage a lot of clients all at once. The reason for this is because it is utter chaos trying to manage all the incoming requests and communication for each one. If the agency is working with a lot of small clients, they need to account for more project management overhead. This trickles down you by inflating the cost of the services you are paying for.
The how are businesses charged for the hidden costs
Once you factor in these hidden costs, agencies bill it to you in a few different ways:
- Account Minimums – Many agencies won’t work with you unless you spend up to a certain threshold, this keeps them from the chaos of having too many small clients to manage.
- Less Time for Services – You may be charged hourly or a flat monthly retainer. If it’s hourly, they increase their hourly rate to account for this along with the account minimums. For monthly retainers, they reduce how much time they spend on servicing your account.
- Long Term Contracts – Most agencies require a 6-12 month commitment. They do this to make the sales and on-boarding time worth it for them.
How Much Do Agencies Spend on Actual Services?
The amount of time an agency spends varies for each client. There is usually a correlation between cost and time as well as cost and experience. A very common hourly rate for respectable agencies is $125-150/hr. You can find services below and above this, but below is usually going to hire out work overseas or use people with very limited experience to manage your account.
In most cases, 30% of the billed time goes towards project management and client communication, so the rate you pay for the performing of actual services is increased by 33.33%.
A formula to calculate hours for marketing firm monthly retainers:
Time Spent on Services = Total Monthly Fee / (Expected Hourly Rate * (1 + % for Project Management Time ) )
2.5 hrs/mo = $500 / ($150 * 1.3333)
5 hrs/mo = $1,000 / ($150 * 1.3333)
7.5 hrs/mo = $1,500 / ($150 * 1.3333)
This puts you close to $200/hr hour spent on actual services.
These calculations also don’t account for any other fees an agency might bake into a flat rate, such as onboarding and acquisition costs. So you could be paying even more per hour for them to do the actual services you hired them for.
Note about the fluctuation in hours – Normally an agency will spend more time in the first couple of months to set things up and then significantly less in the following months. This is notoriously true for advertising agencies that only provide paid advertising management services, also known as media buying.
Advertising agencies will typically charge higher hourly rates and require larger minimums for advertising budgets. They may call this being “efficient” but the reality is, ad management doesn’t take a lot of time whether you are “efficient” or not. So they charge more per hour.
How Much Time Does Hiring A Marketing Agency Save You?
You might look at the calculations above and think you are saving 5hrs a month for $1,000/mo but that really isn’t the case. Why? Because you need to account for the time you put into it as well.
The total time you spend hiring and working with a marketing agency:
- Research of Agencies – 1hr
- Sales Process – 2.5hrs
- Contract & Negotiations – 2hrs
- Onboarding & Account Access – 3hrs
- Meetings and Communication – 1.5hrs/mo
- Review & Approval of Work – .5hr/mo
Over 6 months you spend 20.5hrs on marketing with an agency
Over 12 months you spend 32.5hrs on marketing with an agency
These following examples are for a $1,000/mo retainer.
Total time savings over 6 months: 9.5hrs = 30hrs – 20.5hrs
Total time savings over 12 months: 27.5hrs = 60hrs – 32.5hrs
For a 6 month contract at $1,000/mo, you spent $6,000 to save 9.5hrs. That’s $950 per hour saved.
For a 12 month contract at $1,000/mo, you spent $12,000 to save 27.5hrs. That’s $436.36 per hour saved.
Marketing agencies really are designs for companies with bigger budgets, because that’s the only way they don’t cannibalize most of the marketing dollars you have to work with or provide you with so little time for services.
The Problem with 50% of Going Towards Service Fees
When you spend half your budget on service fees, it doesn’t leave a lot for you to spend on advertising. Would you really want to give your financial broker 50% of your assets to manage them for you? Marketing is an investment, so why would you put half of it toward management fees? This diminishes your returns by greatly reducing the amount that can be invested in advertising.
So What Other Options Are There?
Marketing your small business on your own is an option, but the two major issues for you might be lack of time and lack of expertise.
Overcoming the lack of time
As shown earlier, the time an agency spends on actual marketing services could be as little as 2.5hr a month. That is just over 30mins a week and you could be spending $950 for each hour they save you. For most small business owners, once you really break it down, it’s easy to see that marketing your business doesn’t have to take a lot of your time and your money could be better spent elsewhere. You just need to be selective with what marketing efforts to do.
Overcoming the lack of expertise
Instead of trying to do it all on your own without really knowing what you are doing, a better option it to get some expert advice along the way and have an on-demand support channel to get technical support when you need it.
After running a marketing agency for two years, when I saw how underserved small businesses were, I decided to step in and do something about it. Nuwave now offers both on-demand marketing advice and technical support, so you can successfully market the business yourself without having to be a marketing guru or take a 3-month course to do it. We do this through on-demand a la cart services that you can order entirely online. To get started, browse our services and learn more about the company.
So What Can Nuwave Do For You?
With Nuwave, you don't have to choose between hiring an expensive marketing agency or doing it entirely on your own. Our on-demand microservices make it easy for you to get the consulting and support you need from digital marketing experts to effectively grow your business. Get Started Today!