“Are agencies good businesses,” I asked a small group of agency owners at an event recently.
“No,” one of them immediately replied, “They’re terrible.”
After a thoughtful pause, another owner said, “They can be.”
I’ve asked this question of most agency owners I encounter. It’s a question I’ve pondered for a long time. My general feeling is that agencies aren’t that good of a business model.
That evening, I spoke with someone with no agency experience who bought an agency. He told me that he purchased it based on its objective attributes. From his perspective a business is just a business. Whether you’re McDonalds or a small agency, your model can be reduced to financial documents and some attributes around how you create value (services vs products, inventory, recurring revenue, etc.) Any business can be exposed and evaluated apples-to-apples on a spreadsheet.
But when we spoke, the agency was eating his cash and time as he tried to navigate a rough patch. It reminded me of when Rob Walling, a well-known software entrepreneur, bought a PSD-to-HTML business early in his career. Within a month, he put it back on the market. And I know of yet another non-agency entrepreneur that bought an agency in the past two years and had it also cannibalize their cash and time as they tried to make it work.
Even though businesses are all the same family of organisms, how value is created can make them behave very differently. This is what makes business advice so context specific.
So do these three examples prove that agencies are bad businesses? Definitely not. There are many agencies that are amazing businesses.
They can be good or bad businesses depending upon how well the differences in their model are managed in relation to the market environment. This isn’t to say success or failure depends on management, just that you need to understand how a business is different in order to give yourself the best odds of making it work.
It’s like a truck competing with a sports car. If you have a truck, you shouldn’t race, but you should setup competitions around pulling things or carrying weight. How you drive it is different than a sports car. Though they’re both vehicles, what makes a truck successful has different criteria and requires a different approach.
The big question is do you understand what’s different about your business model and the ramifications for how you win?