calculator invoice and high cost of revenue based marketing fees

There are two ways that most marketing agencies charge for their services:

  1. A fee for a service, where the agency and the client agree to charge a fixed dollar amount for a service
  2. A fee as a percentage of revenue, where the agency takes a slice of the total in exchange for services

At first blush, a fee as a percentage of revenue might sound like a good deal. It ain’t. We explain why below.

How Much Does It Cost To Make Your New Business Grow?

If you have a brand new business, marketing is enormously expensive:

  • New businesses need lots of up-front marketing investment just to get to the point where they can start doing sales
  • Any marketing investment is huge if your company has little or no revenue
  • Even when a new company starts to grow, marketing remains a large expense as a percentage of the total

If someone comes along and offers to do all this expensive work for cheap, that sounds great! But can a marketing agency really deliver all the work you need for a percentage of your small revenue?

And, if this agency was good at what it did, why would they agree to accept a percentage of a small number?

How Much Does It Cost To Market An Established Business?

Let’s say your company does $20 million a year in revenue. What can marketing do for you?

  • Generate leads? You bet.
  • Grow sales? Maybe, assuming the “extra” leads are worked properly by the sales team.
  • Increase profits? Maybe. Profits have to do with more than just increased sales.

What’s the value of more leads that may lead to more sales and – hopefully – more profits? 10% of revenue? Hardly.

The fact is, if you have a $20 million dollar a year company, you can hire experienced marketing staff and retain a good agency for a set amount that’s less than 1% of your revenue.

And experienced staff and a good agency will generate more leads. That’s how they stay employed and/or keep collecting checks.

A Marketing Agency Is Really Going To Invest In Your Future?

Marketing agencies that work for a percentage of revenue often talk about “partnership,” but that’s a lie. All businesses exist to make a profit. If you pay an agency $500 a month for marketing, and they’re profitable, they have to do less than $500 worth of work.

And if you find an agency that’s not profitable, they’re not going to be a good partner. Either they won’t survive, or they’ll take advantage of you later.

New companies need a lot of marketing and advertising work:

  • They need a website
  • They need content for that website
  • They need a pay-per-click advertising strategy
  • They need a social media strategy
  • They need an email strategy
  • and son…

Can you get all of that for 10% of revenue? Or 3%? Of course not.

If some company offers to do these things for pennies on the dollar because of a “partnership,” they’re lying.

Revenue-Based Marketing Fees Are The Exact Opposite Of What Most Companies Need

If you’re a small company, paying a percentage of revenue for marketing is like spitting in the ocean. It has no meaningful impact.

And if you’re a big business coughing up a percentage of sales, why? Your company can afford to pay the best agency and hire the best staff, all of whom will agree to provide a service for a flat fee. Why share profits when you don’t have to??

We’re obviously biased here, but we think fee-for-a-service is the only reasonable way to hire a marketing agency. It’s the only way to spend exactly what marketing is worth. Any other arrangement is either paying too much or not enough.