Can You Do It Cheaper? Running The Numbers On Agency Pricing

Michael Costin

February 18, 2021

Can you do it cheaper?

We get asked this from time to time by business owners we have prepared a proposal for.

Our feedback is often “please be careful, and give some thought to what you are (or aren’t) getting with your investment”.

There’s a sea of digital marketing services out there. Without being in the industry, it’s hard for you to tell the good from the bad.

Every agency is more or less saying the same thing. Services like SEO and Google Ads are seemingly a commodity, they’re all the same at the end of the day… right? 

You can probably shop around, get the lowest price for what’s essentially the same thing and then sit back as the leads/sales come in.

The problem is, it doesn’t work like that… far from it. The difference between services and the results they achieve is massive.

Making the wrong decision about where to invest advertising spend can set a business back many months (or years). If you invest in a poor service, not only do you lose the time spent with them, but your competitors that are using a decent service continue to widen the gap.

This article will:

  1. Break down agency pricing models
  2. Explain what you can realistically expect to receive for your investment (with different scenarios modelled so you can see what you get for your spend)
  3. Show you realistic Australian numbers for wages & costs incurred by agencies, so you can see how far your advertising dollar will or won’t go

But first…

Let’s frame our thinking a little.

There are two ways business owners will look at their advertising spend.

The first is as a cost. You have your budget, and you don’t want to increase it. Your advertising costs you money each year. The mentality here is you want this cost to be as little as possible because, well… costs are bad.

People in camp one…

The second is that you look at your advertising spend as an investment. 

Sure, advertising “costs” money. But the increase in leads, sales, revenue and profit it generates make the investment worthwhile. 

The mentality here is you want your advertising spend to be ever increasing because your business is growing.

People in camp two...

If you look at your advertising simply as a cost, then you’re highly likely to just look at the agency services from a price point of view, and go with the lowest price service (and probably suffer for it in the long term).

If you look at your advertising as an investment, you’ll look at these services from a ‘value provided’ point of view, and you’ll want to put your smart money where it generates the most return.

And I get it – I’m from an agency, so I am going to say that investing more is good right?

Well, I’ve included some numbers to give context. 

Numbers don’t lie (but dodgy agencies certainly might).

As business owners, we can all appreciate what goes into running a business from a P&L point of view. 

The numbers I present show in a black and white manner what your advertising investment can realistically achieve each month.

This article will hopefully help business owners in both camps make informed decisions about how they spend their advertising dollars.

Behind the scenes: The agency financial landscape

Let’s start by looking at what the financial landscape is for digital marketing agencies.

If you get a good understanding of the baseline costs involved with running a marketing agency, you can figure out what the different levels of investment of your marketing spend really buys you.

  • Is the agency able to afford to give your campaign enough time and attention?
  • Are they able to invest enough of your spend into areas that move the needle?
  • Are their margins so fine you get very little for your spend?

What it comes down to is the all important question – are you getting value or not?

Let’s find out.

All agencies have these four main financial pillars to focus on:

  • Revenue
  • People Costs
  • Overhead/Operations
  • Profit Margin

The revenue part is simple – that’s the gross total they generate each month by charging their clients for services rendered.

A good profit margin target for a digital marketing agency (or service business in general) is about 20%. This does vary. For example, if the business is trying to aggressively grow then maybe they are happy to target a 10% margin while they invest heavily in marketing and people.

When I say margin, I am referring to earnings before interest and taxes or EBIT – this is the profit left over after the agency has paid all its expenses, but before income tax is paid

As a service based business, an agency is in the business of their people. As such, the people costs in an agency are the biggest line item, and a good target range is to have that cost the business about 50% to 60% of revenue.

This leaves about 25% left over for Overheads/Operating Costs. An awful lot ends up in this bucket – things like the office rent, advertising, software tools, tech equipment, team amenities, Ubers to meetings, phones, internet etc as well as any other costs the agency incurs to deliver or provide the service or promote or grow their own business.

So that’s a generalised breakdown of how a typical agency’s revenue is divided up.

With that in mind, let’s figure out what you get for your spend.

We will start with a hypothetical SEO campaign.

The business in this story is a financial services business looking to generate leads. They are based in Sydney, and have done no SEO before. Their competitors are well established, with strong SEO foundations already in place. This business needs to close the gap.

They speak to two SEO companies.

One proposes their standard $750 per month for their “gold package” without really looking too much into the business. This package is a cookie cutter approach. The agency claims the client gets 5 x links per month and 2 x articles written, plus all the usual onsite optimisation, technical optimisation etc

Another proposes $3,000 per month. This is not a cookie cutter approach, but a bespoke plan based on analysing the business, their website, the market and figuring out the investment necessary to get results. The agency claims the client will receive at least 5 but more likely between 7 to 10 quality links per month + all the onsite, technical etc optimisation.

What’s the difference between them?

If you were focused just on price, then that first one is a no brainer right? Pay a fraction for the same thing and sit back and watch as your business “skyrockets”?

Let’s work out the numbers.

Delivering The Service

Let’s say that for an SEO campaign each agency targets a gross margin of 50% on the monthly billings. That means, out of the monthly retainer they are charging the client, they are keeping 50% of it for their people, profit and overhead costs. 

Any time the agency team members spend on the onsite optimisation, keyword research, technical audits, client meetings, reporting etc come out of the 50% the agency has kept for people, overhead and profit.

The other 50% can be invested into the costs involved delivering the SEO service itself. For most campaigns, these costs are largely made up of links and content.

By the way, that 50/50 split may or may not be the case. Some agencies keep 60% for themselves, some will keep as much as 100% for themselves. But in this case, I’m assuming both of these agencies have some integrity and actually invest in their client campaigns.

In our hypothetical scenario above, this means that for the cost of delivering the service the first agency sets aside $350 and the second agency sets aside $1,500.

Here’s where it gets really interesting.

Links are essential for SEO. Everyone that has had even a slight interaction with SEO knows that.

Links also cost money to build, no matter how you build them. 

Whether you’re straight up paying website owners for links, or trying to earn them for free, there are costs involved. Publishing fees, content writing costs, asset design fees, third party vendor fees, software subscription fees – all these and more are unavoidable if you want to build good links.

According to Ahrefs (one of the most trusted brands in SEO) to build links for SEO averages out at about $361.44 per link. That’s USD too.

In reality, we achieve better than that. We build thousands of links a year via our inhouse outreach team, and the cost we achieve averages out closer to $200 per link AUD.

Based on the budget available to each agency, this would mean:

  • Cheap agency – can afford to build 1 x link
  • Higher priced agency – can afford to build 8 links

You can’t hide from the math.

So when the cheap agency says they are building 7 links for their “gold” package, the numbers don’t stack up.

The piddly $350 they have set aside for delivering the service will buy next to nothing.

So what’s really going on?

A few common approaches:

  1. The agency doesn’t build any links, and pull the wool over the client’s eyes until the client gets jack of it and leaves, and swears off the entire concept of SEO as no good
  2. The agency builds cheap and nasty links like comment spam, forum profile spam etc. Sure, they might hit their link targets with this approach, but it does nothing for Google rankings and in the long run the client has a bad experience.
  3. The agency builds PBN links which are links on a network of sites they own just to build links on. Great for the agency as it keeps costs down, but Google hates PBNs and will find and penalise them eventually. Just look at these headlines:

Whichever of the above approach it is, it’s the client that loses out.

And the real kicker is that as SEO takes time, the client may invest in good faith for 6 or 12 months while this is going on, and at the end realise they’ve flushed that money and time down the toilet.

They will have, at absolute best, 12 decent links at the end of a year.

That much is a sure thing. The numbers involved can’t mean any other outcome, no matter what the cheap agency promises you.

And it gets worse.

While you’ve been investing with a cheap agency and getting nothing for it, your competitors will have continued to invest in their own campaigns, and some of them will have pulled even further ahead.

What a waste of money and time. The cheaper service might have a lower cost on paper, but it ends up hurting and costing more in the long run.

And as I said before? It’s unlikely an agency charging $750 a month is going to be so generous as to dedicate 50% of that investment into costs of delivering the service. They’ll likely pocket the bulk, if not all of it, and deliver very little tangible results.

If the hypothetical business in this scenario had invested with the more expensive service, the value is evident – the agency has enough budget to work with to actually do decent work, and the client would have close to 70 odd quality new links, and likely closed the gap between them and their competitors.

At the end of the day, what you invest should be largely irrelevant – it’s the results that matter – the return your business sees in traffic, rankings, leads and revenue.

Are you likely to generate a massive increase in revenue with a bargain basement service? Unlikely.

Massive results from minimum investment rarely go hand in hand.

Does a scrappy startup dominate their market by bootstrapping their way there slowly, or is it the well funded startups awash with VC funds that get there quicker?

Does a Formula 1 team with the smallest investment sweep everything, or is it Mercedes beating all comers thanks largely to the biggest investment?

In 2019, Mercedes had a $500 million dollar budget. Williams had a $130 million dollar budget.

Mercedes have won seven titles straight.

Williams are rooted to the bottom of pretty much everything.

Is a cheap digital agency the Williams or Mercedes of the industry?

Will an Australian business dominate their market in Google using a cheap and nasty SEO service, or is it the ones that treat the campaign seriously and invest properly that do well and reap the huge rewards that go with it?

How Many Clients Per Team Member

The other thing to consider is, how many clients is each team member forced to service to make things profitable for the agency.

At the end of the day, Australian employees are expensive. You know this as a business owner.

So if an agency charges next to nothing, something’s got to give.

Are you one of 50 + clients an overwhelmed media buyer is looking after?

Let’s break it down.

If an agency is charging a bargain basement price, like $500 per month for their service, it probably means their team members are overloaded and your campaign has very little attention or resource dedicated to it.

There’s simply not enough revenue there to go around.

At a low monthly price point, agencies will do one or a combination of the following to try and make money:

  • Outsource the work to another agency (usually overseas based)
  • Outsource the work to overseas freelancers or team members where the labor costs are lower
  • Overload local staff members with too many accounts to ensure profit

This is not to say all overseas work is terrible.

It’s just that most of it is!

We’ve all been spammed with the emails from low quality overseas operations.

Most of us just ignore them.

You’d hate to find out the local agency you thought was doing the work for you was just palming it off on these overseas operations.

So let’s look at a scenario of a local agency using local staff.

And we will use that $500 per month fee as an example – that’s a price point some Google Ads or social ads agencies will charge their clients.

In Australia, a media buyer specialist role (the person doing the work in the ad account) will cost an agency anywhere from $50k to $120k per year, depending on experience and seniority.

Let’s model a few scenarios:

Junior Media Buyer

Let’s say your account is given to a junior media buyer on $55k a year.

According to Pay Calculator that will cost the agency:

  • $4,185.69 in salary
  • $397.64 in superannuation

Let’s throw in another $500 per month for things like tools, tech, perks etc.

That is a total of $5,083.33 in costs the agency incurs every month.

This means to break even, that team member needs to look after 10 x clients. But of course, the agency has overheads and profits to think about too.

So perhaps the agency is aiming for the team member’s costs being a third of what they manage in fees.

This means they would need to look after 30 clients.

Most full time team members work for 37.5 hours per week. 

If you take out time for:

  • Internal meetings
  • Phone calls
  • Training
  • Onboarding new clients
  • Offboarding old clients
  • Holidays
  • Sick Days
  • etc

How many hours per week are they actually working on campaigns?

At best, your campaign is looking at about 30 mins of attention per week.

How much analysis, account work, reporting, communication with you does that allow for?

That’s also with a junior team member, who may not be as skilled or knowledgeable due to their short timeframe in the industry.

And the stark reality? Media buyers at agencies that operate with this business model will often have between 50 to 100 clients each.

Their time is basically spent treading water – focusing on wherever the latest fire is, giving oil to the squeaky wheels and letting other campaigns coast along and not giving accounts the attention they deserve.

Sure, you might be getting a cheap monthly price. 

But do you think your campaign is going to perform as well as if it was managed by an agency with a higher price point, with a team member with less accounts and more time to focus on your campaign?

Are you going to “explode your business” as these services tend to say if that is the financial equation they are operating with?

Unlikely.

Mid to Senior Level Media Buyer

This scenario, the salary is set at $80k a year.

That works out as a cost of about $7,166 per month to the agency.

That’s about 15 clients the agency needs that person to manage just to break even, or about 45 clients they need to manage if we go with that 33% target of employee costs vs billings under management.

Already… that’s not a pretty scenario for your account.

Just one of forty five accounts this person has to manage!

The other problem is that at this level, these team members have been in the industry a few years. They don’t want to be overloaded with that many accounts.

The churn of employees at these types of agencies is through the roof.

A new face on your account every other month is a common occurrence.

This means someone new learning the account, your business and you as a person, before the process repeats itself.

In Summary

I could keep going with examples here, but hopefully you see the point I’m making.

Look at it from a maths + finance & business point of view.

There is always someone that will do it cheaper:

But is a dirt cheap monthly price the best outcome for your business?

When investing, as a general principal, if you’re expecting a big return, do you want to invest as little as possible or as much as possible?

Do you drop $500 in a penny stock of your choosing and hope for it to balloon and make you a massive return? Or is the time proven path investing a large deposit and leveraging into a property with capital growth potential and decent yield, to make large returns over a longer period?

A legitimate agency with a team dedicated to servicing your account can’t charge $750 a month for SEO or $500 a month for media buying services. 

That investment won’t generate those big returns for you. Fighting with an agency on price, only means they have to cut links or content or load staff up with more accounts, which is at your detriment.

As this article has shown, the one that loses in that scenario is the client.

So what does it cost?

I get it. As an agency owner that doesn’t operate in the bargain bin, I am incentivised to sing the virtues of spending a bit more on campaigns.

But at the end of the day, it really is just a bit more.

We’re not talking 10 times the investment of a cheaper service.

A more reasonable investment is pretty much about double the cheap and nasty options I gave above – starting at $1,500 for SEO and $1000 for paid media management – and it goes up from there depending on your goals and the market you’re operating in.

As this article and the black and white numbers have highlighted, with that level of spend you can expect money to actually be spent on your campaign instead of going in the agency’s pocket, and you can expect enough resource to be dedicated to your campaign that it receives the attention it deserves.

With the above in mind, we don’t simply drop our fees and do work for cheaper than what we have quoted – and we’re proud of it, as our clients are getting the attention they deserve.

Did You Know?

We can estimate a competitor’s ad spend & SEO investment using a range of fancy (and expensive) tools, so you can get a good idea of your probability of success BEFORE investing money! Find out what’s possible for your business by clicking that free proposal button in the header now.
About Michael Costin

Michael is the co-founder at Local Digital. He has a decade of experience in the digital marketing space, and is a big enough nerd that he's well practised in all the common digital marketing channels, from SEO to copywriting, paid social to analytics and tracking.