The future of marketing agencies, How to increase your agency's value, & more

0:00All right, everybody. Today, we've got a special collaboration here. We are collaborating with the perpetual traffic podcast, which I've been a fan of since actually the inception. and Ralph. And this is a collaboration with Marketing School. So we're going to post this to both. So we got Ralph, we got Qasim, we got Neil, we got myself. It's going to be a conversation. We're going to see how long we can hold this for. The longer, the better. We can make some jokes with that, but we're going to keep going. And I think probably the best way to start this one off is to do some introductions. So maybe Ralph, if you wanted to start first, then you can popcorn it and then we'll get going on this thing.

0:34I think I met Neil Patel like 15 years ago when i was like an internet uh marketing newbie at like some conference when there was only like 50 people there and i was the only person that talked to him and i was like oh my god this guy ranks for everything and we were an seo agency at that point so that was the start of the love affair neil way back when 15 plus years ago uh and here we are on a podcast together so uh after that i got away from seo because it's too freaking hard and you still continue to figure it out but Uh, that we started an agency through the affiliate world and then just went full bore into Facebook ads in 2012, 2013.

1:16And now I have a full service agency. It's all virtual. Um, not quite as big as yours, but you know, we do a pretty damn good job doing what we're doing, uh, called tier 11. And we've been running the, uh, perpetual traffic podcast now for about eight, nine years. It was a collaboration with digital marketer and Ryan Dice bought it from those guys about a year and a half ago. I kept Kasim on as the co-host with his$10 million a year salary. And ever since then, it's just been, we've continued to grow and it's been a lot of fun. And we always listen to you guys as well. It's always funny to throw shade at marketing school and Neil and Eric.

1:55So it's kind of cool, full circle stuff here to be on the show with you guys today. So we're actually really excited to be here. So great to have you. appreciate that but go for it uh custom custom by the way are you are you indian pakistani i'm half i'm half pakistani and uh half white okay love it cool go for it go for the intro i'm a half breed i uh my name is kasim i own a owned a google ads agency that i sold a year and a half ago to a martech company that is trying to ai everything that we do by hand and uh that's been fun to be able to see from the inside looking out um i'm not going to apologize for all the shit that we've talked because because it was all it was all spoken and fun and uh uh all jokes aside it's it's fun to like be able to do this mashup here because i feel like the the crossover is going to be i don't know a little meta no pun intended and marketing school always outranks us for everything so at least now i know that we're going to get the we're going to get the blip that we need um my favorite joke that's recurring and neil i don't know if you've heard this but the recurring joke that me and ralph has is or have is that neil patel sold his soul for Google rankings.

3:19I figured that as much. It's not a joke. I just needed the verification. Yeah, man. Excited to chat with you guys and excited to see where it goes. Cool. Well, let me set the tone real quick before you do your intro, Neil, because it's going to go on both podcasts. So the way this started was because I was like, oh, they're talking about us. It's like, oh, it's those guys over at marketing school. If you want to go listen to them, it'd be really cool if we do a collab with them. And then you guys did a collab with marking against the grain. I was like, Oh shit. Yeah. So we did one with marking against the grain.

3:50I'm like, Oh, we should do one for perpetual traffic too. So this is how it all came about. Neil and I were, everything's a good fun. We make fun of each other all the time. So this is cool. We do. We actually make fun of each other a lot. My name is Neil Patel. I've been doing marketing school podcasts with Eric for seven years, have ad agency NP digital where we do all the types of marketing performance, paid SEO, email, etc um and this is gonna be fun i look forward to chatting with you guys and just shooting the shit for 90 minutes cool um on my end i'll be brief so eric sue have an ad agency called single grain been doing marketing school for what seven almost eight years now uh and i have another pod called leveling up and uh i hope this is the beginning of many collabs to come i think we can do a lot more maybe we'll do them in person in the future if these go really well and uh yeah let's just jump into it.

4:41It's going to be a nice conversation. Um, and there's, there's a lot going on. I here's what here. I think this is a good place to start. And you guys can feel free to chime in when you guys have any thoughts and I'll just jump around here. So, um, I believe Kassam, Ralph and myself, we, let's just start with Ralph and Kassam really quick. Where do you guys think agencies are going? And where do you think all those percentage of spend management fees are going? Uh, it's for, dude, we just had this conversation this morning with Perry Marshall. We have Perry Marshall on Perpetual Traffic. If you haven't talked to him in a while, it's worth revisiting because Perry's a philosopher before he's a marketer.

5:16And Perry's analogy was digital marketing agencies today are travel agencies just before the internet. And he goes, travel agencies died, but travel exploded, right? Like people travel now more than ever. And I wanted to fight him on that, but I don't think he's wrong. that doesn't mean that agencies won't exist but I think the media by agents agencies specifically that I am Ralph really isn't this quite as much and I don't think you guys are this so I'm allowed to say it because I'm the one that's you know I'm on I'm on the center of the planet that the media is hitting I think the media by specifically is over I think if you're not doing post click data analysis you know first party data like if you're not doing something value producing that has more story to it than just arbitrage, how could you survive an AI driven machine learning world?

6:20You know what I mean? You can't. And what's really sad is it's not new. Google rolled out smart shopping before Performance Max. And I remember our smart shopping campaigns, we'd have clients that would have six, seven, eight months without change in the change history. And we'd be coming to the client saying like, Hey, you know, we were doing feed optimizations. We're doing some creative, but we're not optimizing these campaigns. And the clients are like, that's okay. They paid us to watch it, but how long could that be true too? So I, and I'm not trying to play chicken little, and I don't think I am.

6:49I think that, you know, we have enough context now to be able to say this. If you're not willing as an agency, if you're an agency owner and you're listening to this, if you're not willing to expand and broaden your, your horizon uh i do think that you're living in a world of forced obsolescence and there's a there's a ton of meat on the bone but it requires depth not breadth everybody wanted to go for breadth because that's where the scale is well to the point that you just made eric about the percentage of spend you know i mean that's do this where i made all my money all of it and i i happen to have had the greatest exit, the greatest timed exit in history just by sheer luck because I sold my agency and then it feels like everything went to hell in a handbasket.

7:34So now I'm watching kind of from the outside, but still from the inside because I've got golden handcuffs. I've got a two-year earn out. We've lost more clients in the last four months than we have in two years combined. And I'm hearing that from all my media by agency friends. I've got a gentleman I do coaching with. He has a smaller agency, but super high end, really brilliant. He lost 67 % of his clients in Q4 of last year. Wow. And it's, it's a combination of factors, but I think one of the most important is people can't just have a media buyer. They effectively need like a CMO or a fractional CMO or an agency that's willing to dive deep.

8:06So I held the mic for too long there, but that's, that's more or less my impression of what's happening. You guys know what it's like being the co-host of perpetual traffic, long diatribes for a custom. I just want to ask Neil, like why you wrote the blog post, premier growth marketing agencies worth hiring and did not put Eric's agency on there. Oh, that's dude. I can't believe that. Wow. So, so. And guess who number one is? NP digital. Who would have thought? I don't know who wrote that, but whoever wrote that must be amazing. That's amazing. That's amazing, man. And why is, why is tier 11 and solutions 8 not in there too?

8:48No mention whatsoever. That's why I wanted it. I'm so offended. You know, I think it actually speaks to the point that I think there's just too many damn agencies. I mean, I read these, you know, we pay money for these reports that talk about like specifically how big the world is right now when it comes to global agencies. I believe at last count, there's 42 ,100 agencies in the U.S. alone. Now, I also saw another statistic that said that there's 37 ,456. So that happened within six months. And I also look at all the emails, which I'm sure you guys get as well every single day from private equity groups looking to buy agencies for roll ups, consolidation, arc of services, you name it.

9:37there's a list of 100 agencies that are for sale right now, you know, on, you know, we are Barney. I just think that agencies in general, like they're so out of date with how they're thinking because what they do, and we've shopped the competition before. Sorry, if you're listening to the show, like we do this because we want to find out like what other people are doing. People are just selling shit. Like, oh, I want Facebook ads. Oh, I'll sell you Facebook ads. Oh, I want Google ads. Oh, I want Google ads. I'll sell you Google ads. That is such an outdated model with percentage of ad spend because it doesn't care about like what the client actually wants.

10:17And I know this sounds, you know, Pollyanna and, and, you know, just overly optimistic, but like we run an agency now and we're hugely passionate about this is like, it's all about client success and it's not percentage of ad spend it's how much we need to put towards their their the work that we do in order to achieve their vision and then we add on a little bit of profit margin because as we know guys like 18 of ad spend you're spending millions per month you know that's like a 70 net profitability depending on like how many people that you have on it point is it's like that's unfair to clients.

10:57That's also how you create a lot of turnover. So we've figured out that to retain clients, you put them first and then you put your profit. Obviously you need to be profitable in order to be an agency. But I think there's a lot of agencies in 42 ,000 of them who thought, oh, this stuff is easy. Started their own shop with a VA in a basement in the recession. And now they're like, holy crap, this is hard. And how am I going to make it? And a lot of them are bailing out. Qasim is one of them. I'm not the one because he was created in a recession or created in 2020. Point is, is that I think there's too much that's out there right now.

11:35And I think they're focused more on themselves as opposed to the real success of the client. And unless that changes, then we're going to see more and more consolidation, more agencies. Sorry, going out of business. It's just going to be the way that it is. Speaking of which, Ralph, I don't know if you're buying agencies right now, but Niels, FYI, everyone, Neil's in the market right now. He's looking to buy. So it looks like Ralph is too, right? I'm looking at opportunities too, right? So just FYI for everyone. Go ahead, Neil. What are your thoughts on this? Yeah, so I think the model of percentage of media can still work.

12:08It depends how it's done. I think if someone's spending$10 million a month in media, call it$120 million a year, you can't charge 18%. You can't charge 10%. You can't even charge 5%, right? But when I say percentage of media model can still work, you're not really charging to manage the media. You're charging to manage the media, build the creatives, optimize the landing pages, create the email sequences. You're analyzing data. You're figuring out how to upsell and continually increase LTV. You're pretty much doing a lot, and you better be good at it to actually charge the rates. And I don't really look at it as a percentage of media or a fixed rate.

12:49I look at it as what's your cost and what's your margin? Most agencies that I've seen typically operate between 10 % and 20 % margins. And if you're doing that, then it's fine. If you're charging a percentage of media and you're inking out 70%, that's not going to last. People are not getting the value for it and you're doing a disservice as an agency owner. But if you're providing a better ROI and your profit margin is somewhere between 10 % and 20%, I don't think there's anything wrong with that. But it can't just be you're making 10 to 20 % by clicking a few buttons and letting the AI do its thing.

13:25You need to have the strategy. You need to figure out ways to actually provide value that the customer couldn't figure out on their own. That's where I think agencies still have a future now and 10, 20 years from now, right? It's being creative, thinking outside the box, and solving hard problems. Not clicking some buttons and letting some AI manage a lot of stuff. I get technology is going there, but people will always have problems. And the one thing I love telling people is, you know, everyone talks about how technology is moving so fast. And everyone's like, the cloud's going to change the internet, which it did.

14:03But how many big multi-billion dollar companies are still not on the cloud? There's a ton that still aren't on the cloud and haven't adapted. And I do think everything that's happened in the last few years, you know, we've seen the reckoning of agencies. And what I mean by this is we've seen the We Are Barney stuff too. We've talked to a lot of those agencies. People are coming at us and being like, we're 10 times, 15 times, 20 times profit. No, you're not. Companies like Berkshire Hathaway are buying companies for seven times profit. And these are massive organizations making billions of dollars, right?

14:39It's just like, what makes the agency so special? You know, even when you look at multiples like seven times profit, does your customer last seven years? No. Why are you worth seven years worth of profit when your customers don't even last that long, right? I do think there's a role for agencies. I do think they're worth something. I think the reality of what they're worth and the value has changed, especially with AI. I don't think the money is buying these agencies and automating it because at the end of the day, Google and Facebook are going to automate as much as possible. And I think, you know, the winner is going to be the platforms, not the people.

15:18It's just like people using chat GPT to create AI content for others and be like, look at this AI content. I can just go to chat GPT and do it for free. Why do I need to pay your company that's using someone else's software for this solution? But yeah, that's my thoughts on it. And I do still think there's a future. And I do think the value of agencies assuming as what Kasim said, going really deep is there. But I do also think the multiples are much more compressed. And I think what agencies are worth from a multiple of EBITDA is more realistic today than what it was a few years ago. I think it was just artificially inflated due to COVID.

15:59Let me ask you this then before I answer. So the 15 to 20X multiples, you know, at a really high range, right, that we saw a couple of years ago, do you think that comes back? If so, when? No. I think all those people are underwater and they've just lost their money. Lost some of those PE deals. Yep. I just don't see how an agency is worth 20 times. Yep. So look, on this topic, we can move on. I don't know if Ralph, Kasim, or Neil, you have anything from your side. Otherwise, I have a list over here. I'm going to click on what Neil said just real quick when Neil said the platforms win. When it comes to the automation, I think anybody who's trying to build automation that lives on top of the platform, it's an absurdity because you have this literal trillion dollar business spending hundreds of billions of dollars building AI for their system.

16:45And you think you're going to build a bolt on that's going to keep up with that. There's no way. So I think that was one of the most poignant statements I heard all day. It's the platforms that will win. Get out of the platform's way and then try to figure out where to provide value where they're not automating. I thought that was really - Don't suck up, Kostum. You said you were going to argue with Neil the entire time here, but you know - Oh, I've talked a lot. You know, here we are. Yeah. Hey, it's more entertaining if we fight each other. Just FYI for everyone, just for context here. So Ralph and Qasim are, in my opinion, very skilled.

17:18I mean, their bread and butter is around paid. And then Neil and I were more SEO guys, just context for everyone here. But here's how I see. I tend to agree more with Ralph and Qasim on this. It's the old way of doing it where you're just going to charge 15%, 20 % doing the same thing. That's going away, right? Because technology is very deflationary. It's going to eliminate a lot of these jobs. But going to Neil's point, it's like, okay, how are you going to add value? Let's be specific here. So when we think about doing SEO, you can't do SEO the same way anymore. How can you do programmatic SEO?

17:47How can you do AI-assisted SEO? How can you do AI meetings booked? You can use all the APIs out there. You can build this stuff. And I've been talking to a lot of people like, dude, we'll pay you per meeting. I talked about on an episode how Intercom is charging a dollar per solved ticket for you. zapier already charged charges per zap you can charge per meeting booked you can charge for per per page that you publish from a programmatic seo standpoint and a lot of people are willing to pay you a lot of money for that right so it's like how can you dance around and and make sure you don't put yourself at platform risk where you could get de-platformed or lose your entire business but what you're talking about big corporations don't like it doesn't fit in their playbook to pay you, I get they pay Google for a cost per click, but it doesn't fit their model to pay you a cost per lead, a percentage of revenue, cost per page.

18:39When you're big and you're highly profitable, like some of these companies making 10 billion a year, they just want to fix costs and they want to know what they're in for because they have the cash. I totally agree with you on the SMB side, the big corporations too, whether they're paying you 10, 15 % for a percentage of media or they're paying, which they don't by the way, because they're spending so much, or they're paying you X dollars for SEO. They're wise enough to know what others are charging because they have procurement divisions and they kind of have idea of what your margins are. And if they know it's too high, they're going to beat you up and they're not going to accept it.

19:13Dude, do you know how much revenue Centerfield drives? I don't. Okay, so Centerfield, they're a pay for performance agency, right? They work with AT &T, Verizon, I believe all the big telecoms companies. So they used to just gift wrap customers for these companies. I know it's on a CPA basis, right? And it's cost per lead basis. And then they switched over to actually just, they bought a call center and they're like, okay, we're going to just drive you, you know, new telecom companies. We're just going to drive you new customers, right? So I believe they were doing about$800 million or so, could be more than that.

19:44But that is an example of it. Like those are few and far between to Neil's point, but they do exist, right? So it's, I think we'll see in the next decade or so, this stuff is just coming out right now. But yeah, anybody have anything? Otherwise I'm going to pick something. No, well, I like what you said about the opportunity being in participation, because really what's fun about this discussion is, and it emerges everything that we've been talking about. Ralph said there's too many agencies and some of them need to burn off. Well, how do you build the hierarchy within which we identify who burns off and who stays?

20:15And the answer is competence, right? So now it's a competence hierarchy. but if it's based off of competence then the competence needs to needs to be tied in direct proportion to what it is that i'm executing on and neil earlier said you're not just driving media you're also landing page optimization post-click analysis whatever whatever whatever whatever so now we have to do so much more to justify our value well i'm not going to do that for a fee but i'll do it for a bite like a piece a cut a percentage right and so i think what and this is a brand new thought. So help me work through this together.

20:49The agency that can really execute on this stuff would almost have to be a partner. They'd almost have to participate because the amount of time, effort, energy I need to invest to learn your business, learn how to crack the code on this shit, but then hand you the keys to the kingdom and be usurpable. Why would I do that? If I'm going to go all the way to helping you build an assembly line for customers, which is what an agency is being asked to do. I want equity, phantom equity, profit share, participation, ownership, right? Like I'm not going to build all that shit for a monthly fee and then have you say, you know, good job, kid.

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23:36that's for you neil i i i believe agencies will do it for money because it depends on the corporate size but if you're working with a large account that's paying you 10 million dollars a year you're okay getting the fee because it's so large if you get the 10 million bucks for sure but what What customers are asking for versus like it's a problem of leverage. What they want and what it costs us to deliver that feels outweighed and outmoded now that we can't charge the way that we were charging. But the companies, what they're expecting, like what you're talking about, a lot of agencies have been doing it for a long time.

24:17It's just that they mainly do it with enterprise customers because they have the budgets. whether it's a million dollars a year or$10 million a year. The enterprise brands have the budget, so it's possible to do all that stuff. It takes forever to get the contracts, in many cases, six plus months, and you're going through legal and procurement and so many rounds of pitches that it truly becomes a partnership where they stick with you for three, four, five, six years. Right. Right? It's hard to do what we're all saying here for SMBs. And I do think that's where you got to either get a cut or there has to be something where they need to be well funded.

24:54But it's hard for SMBs to get all of that. And that's what they really need. And that's the challenge. Well, I think we're saying the same thing. So here's to make it more tangible. If I'm an HVAC agency, I just need to learn what an HVAC customer is really worth in the LTV algorithm of an HVAC business. And now I know, hey, that HVAC customer is worth$1 ,500 LTV. and you know now it's a factoring problem how much of the LTV do I deserve and you know that kind of creates a competitive landscape too but you end up needing to really know that business all the way inside out upside down it also requires the SMB to know their business and what we find is that SMBs or SMBs know their numbers for a reason is they typically don't know their numbers and even when you bring this sort of stuff up it's met on deaf ears they're like, wait a second here.

25:42I'd just rather pay you a fee, like a lower fee, the smaller I am, the higher potentially, the more profitable, the larger I am. I mean, we have tried to transition so many clients from a fee-based system over to a performance-based or over baseline or gross profitability, you name it. And it's just like, it's such a hard thing for business owners to let go of. And even at the enterprise level, to get that all the way through all the committees that need to go through things like all the way up to the CFO, I find it's a hard thing to transition to. And it's a hard thing to start on because you as an agency, there's a tremendous risk for you to start on a pure performance basis.