The (Marketing) Agency Problem

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If you’re running a business, you’ve likely considered working with a marketing agency. You may very well have already hired one, two, or more. Investing in outsourced marketing can definitely deliver value in some circumstances. However, we’re going to make the case for a different approach: Instead of spending money hiring a company for their services, invest in your own resources and create an internal marketing team.

At the core of this argument is the fact that there is a misalignment of incentives between an SMB and its marketing agency, and this mismatch exactly follows the more general “agency problem.” We’ll look at that in more detail below, but the key takeaway is building a lean internal marketing team is the best option for SMBs.

What is the “agency problem?”

The agency problem is more formally known as the Principal-Agent Problem, which is defined as:

A conflict in priorities between the owner of an asset (the principal) and the person or organization to whom control of the asset has been delegated (the agent).

The “asset” here is your financial resources, specifically the money your business is investing in its marketing, brand, and market share. The problem stems from the inherent conflict of interest in any relationship where one party is expected to act in another’s best interests. More often than not, human nature is to act in one’s own best interest.

This Principal-Agent Problem exists at many levels, for example, in politics, where a population feels their elected officials are not acting in the voters’ best interest, or in corporate finance, where a company’s shareholders do not trust or approve of the management. These principals (voters, shareholders) expect their agents (elected officials, corporate managers) to act in the principals’ best interests and make decisions for their benefit, even though it is essentially contrary to human nature.

Other examples include the real estate agent, eager for their commission, urging you to sell your home at a lower price rather than waiting for better offers, or the financial advisor, who collects their fees whether the market goes up or down, recommending investments for which they receive an extra commission.

This is not to say that marketing agencies are always a waste of money. On the contrary, many SMBs find at least short-term success by outsourcing their marketing, so let’s take a look at some of the positives.

Marketing agencies: The positives

When you hire a marketing agency, there’s an obvious win-win dynamic to the relationship: They earn recurring revenue from your business and, if they deliver results, can keep you as a client and maintain the revenue stream. This means your motivations are in alignment. The longer they keep you happy, the higher your lifetime value to them will be. In an ideal situation, you will keep running campaigns and getting leads, and the agency will keep getting paid.

The agency is also the one responsible for making the investment into hiring and training more marketing specialists. As a result, they should be able to run campaigns more efficiently than you could on your own. And of course, if you’re not happy, you have the freedom to simply move to another agency.

All of this appears to reflect the benefits of outsourcing to service providers and hiring contract workers and freelancers. However, there are some serious issues here that are related to the specific nature of marketing, the long-term viability of your business, and the ultimate return on your investment.

Marketing agency issues

It’s important to think about what agencies optimize for. Obviously, like any business, the answer is their profit, and there’s nothing wrong with that. But how can an agency optimize its profit? There are basically three ways:

  • Increase the amount they earn per client
  • Increase the number of clients they serve
  • Decrease expenditures

To survive, any business must operate efficiently. This means achieving economies of scale. For an agency, scaling their services means spreading their attention across a growing list of clients while they simultaneously try to cut costs. For you as a client, it means that your marketing strategy and campaigns — your business growth — becomes deprioritized down to a number on a spreadsheet. The agency is working for their clients’ profit, yes, but mostly they’re working on their own marketing and their own profit. Again, this is completely logical and what any business should do. But is it really in your best interest?

There is a typical life cycle for the client-agency relationship, one with a predictable outcome that is definitely not in your best interest. Let’s take a closer look.

The typical agency life cycle

  1. You search for an agency, vet several, and select one that seems relatively affordable.
  2. You are assigned a talented account manager who shares some great ideas and you feel like they are trying to impress you.
  3. You get some good results, and things are looking positive.
  4. After a few months, you’re receiving less attention and hearing fewer ideas. You might suddenly be assigned a new, less experienced marketer, and your results decline.
  5. You complain. Your previous account manager, or maybe the head of the agency doing damage control, comes to the rescue. They look over your account, share some new ideas, and get you excited again.
  6. The improvement is short lived because the most talented individuals are focused on new clients that they need to impress.
  7. You get frustrated and search for another agency.
  8. During your vetting process, the new agencies identify issues with your prior agency’s campaigns. They impress you with new ideas.

You can see that each time this cycle ends, you’re left with nothing. The agencies eventually stop trying to impress you and start doing just enough to prevent you from leaving, while they focus on getting new clients. You spend a lot of money, and yet, you develop no internal marketing expertise or resources. You remain fully dependent on agencies for the growth of your business.

Don’t blame your agency

Let’s make it clear again that the agency isn’t doing anything wrong. The objective of this article is not to demean agencies or imply they are taking advantage of their clients. The vast majority are good people acting in good faith. They can provide a lot of value, they want to help their clients, and they feel successful when they do. If you ran an agency, chances are you’d operate in a similar way.

The issue isn’t the agencies, it’s the misalignment of incentives once the agency model is applied to marketing. Many other services can be standardized to the point of achieving economies of scale and for these, agencies can be a great option. Think of accounting firms: They can develop a deep understanding of the tax system and then gather your information and documentation to optimize the handling of your tax returns. They can do this efficiently at scale for you and multiple other clients.

But marketing isn’t so straightforward. Marketing isn’t effective when it’s standardized and in the form of a template. Marketing is all about connecting with customers through messaging, and if the message is generic, it will blend in with everything else. For an agency to work at scale, multiple clients need to be running the same campaigns, and If your campaigns aren’t unique to your business, it’s nearly impossible for your message to connect.

There are exceptions

Of course, some agencies may be able to consistently deliver the highest-quality services. They may be able to create customized campaigns at scale for a large number of clients. If you do find such an agency, know that their prices will be at the top of the range and increase every year to attract the best talent.

Such an agency may be well worth the cost. But you have to be willing to pay the premium they will demand. Also, they will likely be picky about the clients they work with. They likely won’t be fighting for your business, because, if they’re that good, they will have a line of potential clients waiting for a spot.

What’s the solution? Move the accountability in-house

Okay, so we’ve seen that for SMBs, marketing agencies have their issues. But what other choice do you have? You can’t hire a big internal marketing team with 10 specialists, right? No, but what you can do is move your marketing accountability in-house. No one will care about your business success as much as you do, so rather than looking for an agency to solve your marketing problems, accept the fact that you need to own it: Your marketing leadership and accountability must come from within your company.

This does not mean hiring a large, full-function marketing team with all the resources to replace a marketing agency. But it does require creating what is known as the minimum viable marketing team (MVMT) within your organization. This team will start with just one person — an experienced marketing leader — and will grow to a minimum of three people over the course of a year.

The internal minimum viable marketing team (MVMT)

The MVMT is a lean team that contains, at least, three roles:

  • A marketing leader (Head of Marketing, Marketing Director, CMO, etc.) to own your marketing strategy and outcomes and build the rest of the team.
  • An analytical/technical marketer (Marketing Coordinator, Marketing Technician, etc.) to track campaign data and handle website maintenance or ads.
  • A creative/content producer (Content Manager, Managing Editor, etc.) to create and publish quality content on a consistent basis.

Agencies and freelancers will still be necessary, but as tools for completing projects, rather than owners of your campaigns. Over time, the roles outsourced to agencies can be brought in-house once your internal team starts paying for itself and you can afford to hire more marketers.

The MVMT is covered in detail here: How to Build a Modern, Agile Inbound Marketing Team

Agencies can still be invaluable

Knowing what agencies are optimized for, they can be an excellent source of upskilling once your minimum viable marketing team is operational. Think of them as a way to tap into new marketing methods in areas where your internal team doesn’t yet excel. Using an agency’s services to train on new platforms and marketing mediums is efficient. It’s faster to learn from an agency that’s experienced in the newest marketing tools and trends than to make all the mistakes on your own.

The process looks like this:

  1. Select an agency with a good reputation that is recommended by people you trust. (It’ll likely be expensive but it’s only temporary.)
  2. Contract them to manage a campaign for six months and train you in the process.
  3. Post-campaign, transition the agency into a consultant/advisory role for another three months.
  4. Your in-house team achieves competence in the new tools and processes within six to nine months.

Where to start

But what if you don’t have an internal team yet? Most SMBs have no internal marketers, and their first marketing hire is typically some kind of administrator, not a leader who can set strategy, build an internal team, and vet agency partners. This describes the role of a chief marketing officer (CMO). For any company, one of their biggest challenges is finding this marketing leader who can get their internal team set up and ready to roll out campaigns.

Rather than dealing with the time commitment and risk of recruiting a full-time internal CMO at the outset, consider working with one part time. This “fractional” CMO is an experienced marketing expert for hire — someone who specializes in building and leading marketing teams on a part-time basis, typically splitting their time between two or three clients.

Bringing a fractional CMO (fCMO) on board for six to twelve months is a great solution if you need help building a lean, high-performing in-house marketing team. They will give you the leadership and strategizing you need while allowing you to reduce the cost and risk of an expensive full-time C-level hire.

You may be asking, aren’t I going to have the same agency problem with an fCMO? The answer is no, for two reasons. First, the low volume of clients an fCMO works with makes them much more accountable to their clients. They aren’t diversified like an agency, so their incentives will be much more aligned with yours. Second, an fCMO will have deep experience working with agencies and know exactly how to leverage their services with maximum efficiency.

Let’s talk

As a fractional CMO, I’ve had the opportunity to work with a lot of great businesses, helping each of them build an effective marketing strategy and team.

Every business is unique, and that’s why it’s so important to meet you where you are on your journey, rather than trying to provide you with an off-the-shelf solution.

Let’s have a chat, discuss where you are, and see if I can help.

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