The High Cost Of Revenue-Based Marketing Fees
There are two ways that most marketing agencies charge for their services:
- A fee for a service, where the agency and the client agree to charge a fixed dollar amount for a service
- 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.
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