Thursday, 7 April 2022

Optimizing Your Agency For Profitability

Optimizing Your Agency For Profitability written by John Jantsch read more at Duct Tape Marketing

Marketing Podcast with Marcel Petitpas

In this episode of the Duct Tape Marketing Podcast, I interview Marcel Petitpas. Marcel is the CEO & Co-Founder of Parakeeto, a company dedicated to helping agencies measure and improve their profitability by streamlining their operations and reporting systems. Marcel is also the fractional COO at Gold Front and a speaker, podcast host, and consultant, specializing in Agency Profitability Optimization.

Key Takeaway:

The most profitable agencies have a winning formula that results in happy returning clients, steady growth, and continuous profit. In this episode, the CEO and Co-founder of Parakeeto, Marcel Petitpas, shares his insights on what that winning formula looks like and how agencies can optimize their businesses for profitability.

Questions I ask Marcel Petitpas:

  • [1:49] What should we be measuring if we want to optimize for profitability?
  • [4:14] When it comes to KPIs, how do we strike the right balance between too much information or narrowing in on the right things to track?
  • [6:40] Where can people find your agency profitability toolkit and checklist?
  • [7:24] One of the hardest things to measure is internal staff working on various accounts. How do you spread that kind of unit of labor across where it should be expended?
  • [11:03] What do you see as the most useful way to do billing?
  • [16:00] Everyone in the organization should be tracking their time. Yes or no?
  • [17:51] What kind of challenge does white labeling add to the pure optimization model?
  • [20:05] Why wouldn’t you use a resource plan with your white label partners to some degree?
  • [20:52] How much responsibility do you think that marketing agencies have to really get that deep inside an organization?
  • [23:04] Where can people find out more about Parakeeto and the work you do on behalf of agencies?

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John Jantsch (00:00): This episode of the duct tape marketing podcast is brought to you by the salesman podcast, hosted by will Barron and brought to you by the HubSpot podcast network. Look, if you work in sales, wanna learn how to sell, and frankly who doesn't check out the sales podcast, where host Will Barron helps sales professionals learn how to find buyers and win big business ineffective and ethical ways. And if you wanna start someplace, I recommend the four step process to influencing buying decisions. Listen to the salesman podcast, wherever you get your podcast.

John Jantsch (00:42): Hello, and welcome to another episode of the duct tape marketing podcast. This is John Jantsch and my guest today is Marcel Petitpas. He is the CEO and co-founder of Parakeeto a company dedicated to helping agencies measure and improve their profitability by streaming their operations and reporting systems. He's also a fr action COO at gold front and a speaker podcast, host and consultant specializing in agency profitability optimization. So Marcel, welcome to the show.

Marcel Petitpas (01:11): Thanks for having me, John. It's a pleasure to be here.

John Jantsch (01:14): Do, did you like how I nailed that French?

Marcel Petitpas (01:17): I, you know, you didn't even ask me how to pronounce my last name, which is the mistake most hosts make. And then I see their eyes just filled with fear as they realize, oh my God, I have to try and pronounce this thing. That's on the bio introduction, but you nailed it. I'm impressed.

John Jantsch (01:30): Well as somebody whose last name, uh, ends with five consonants, you know, I'm very, very aware of people's last names. Actually, my mother's maiden name was da Sonia and my, uh, wife's maiden name is Duval. So I'm also maybe a little French too, that might have helped.

Marcel Petitpas (01:46): I like it. No, you did a great job.

John Jantsch (01:48): All right. So a lot of agencies track revenue, some actually even track profit, but you, if we're gonna optimize, um, profitability, what, what should we be measuring?

Marcel Petitpas (02:00): That's a great question, John. The first thing that I, I think the first opportunity that almost every agency owner has is just making a couple of tweaks to the way that their accountant or bookkeeping team looks at their financial statements so that they can understand two important things that they're probably not seeing right now, or might not be obvious to them, where to look to see it. The first is understanding their agency gross income. So this is the understanding that you have the total amount of money that comes into your business, but you're not responsible for the efficiency or the profitability of all of that revenue. There's a certain amount of that for a lot of especially digital agencies that is passing through you onto other vendors. Simple examples of this would be things like advertising spend print budgets. Sometimes you might be using white label or outsource partners.

Marcel Petitpas (02:42): And so the way I would frame this question is it, if you're trying to determine what is pass through revenue and what is your revenue it's like, are we responsible for the margin on this revenue? If the answer's no it's probably pass through. And so the important thing that I think a lot more agencies should be paying attention to, especially if that's a factor for them is when we strip out all that past through revenue what's left over because that's a really important figure. That's the actual size of your business. That's what you should be benchmarking your profitability against. And it's what you should be using to benchmark other spending decisions in terms of, you know, how much we spend our office and our team and sales and marketing, all this other things. So isolating, AGI or gross income on your financial statements is kind of the first key thing that I think a lot of folks should do.

John Jantsch (03:24): And, and I'm guessing from your experience, that can be all over the map, right? I mean, wildly varying from agency to agency, right? Even, even if one says I'm a $10 million agency, there's a lot of 10 millions, right?

Marcel Petitpas (03:37): And that's, I think one of the powerful things us about our approach, this is how we level the playing field and actually benchmark agencies across each other. And when we put everyone on this level, AGI playing field, it's amazing how consistent the patterns and benchmarks and percentages of spending across different areas become. But until we do that, it's really hard to compare one agency to another. And so, yeah, I think that's a really important thing.

John Jantsch (03:59): I work with a lot of agencies as well. And one of the things we try to get 'em to do is obviously have some key performance indicators and because we can get so much data today, sometimes they have, you know, 273 of them. So, which I find is not very useful. So, so how do we get strike the right balance between, you know, too much information, really the right things to track?

Marcel Petitpas (04:22): Yeah, it, it's a really tough question because so much of this comes down to the nuance of the business model, but the way that I encourage people to think about this is number one, focus on four key areas of the business. So there's your core financials that of course includes AGI, which we've just talked about. It also includes what I call delivery margin, which your accountant we'll call gross margin, or maybe contribution margin. We don't use accounting terms cuz accountants get mad at us, um, for, you know, not doing everything G but for

John Jantsch (04:49): Izing their profession,

Marcel Petitpas (04:51): That's it right? They cause. And this is the funny thing about general accounting practice is our way of looking at a service business. And it's ironic because accountants run service businesses, it kind of flies in the face of general accounting practice. And it's important to understand that like general accounting practice is meant to satisfy a certain compliance around taxes, reporting to investors and shareholders and things of that nature. It's not necessarily designed to give you insight as a business owner. And so you kind of have to understand that there's a separation there. So when we strip out pass through, and then we measure the margin on that pass through, it's almost like we have two layers of cost of good sold, which is a concept that a lot of accountants kind of struggle with. So the second thing that we wanna do in core financials is understand what is our margin on AGI?

Marcel Petitpas (05:35): So for every dollar of AGI that I earn, how much did I have to spend to earn that? And that's mostly gonna be the labor cost of the work that we do for clients. So all the salaries and payroll that's allocated to the delivery function in your business, and then what we like to call, share delivery expenses, which would be some of the software or tools that you're paying for that aren't necessarily for one specific client, but you need to do the work. So your Figma, your stock footage, library, you know, your tools for managing ads and things of that nature. And generally you want to be aiming for 60% or higher delivery margins. So you don't wanna spend more than 40 cents on every dollar in AGI that you're earning. If you're lower than that, it's gonna be challenging to have a good bottom line profit without squeezing overhead spending kind of making a lot of cuts to the, I guess, the lifestyle expenditures of your business. So definitely pay attention to AGI, pay attention to delivery margin, and then pay attention to what percentage of your AGI is going to overhead. And you generally wanna keep that under 30% with eight to 12% going to admin eight to 14 ish percent going to sales and marketing and somewhere between four and six to going to facilities and rent.

John Jantsch (06:39): So, so, so do you have, is there somewhere we can send people to say here what you just said, if you wanna find like the checklist or the sheet for that?

Marcel Petitpas (06:48): Yeah. Yeah. We have a agency profitability toolkit, which we put together. It includes training videos, spreadsheet, templates, checklists, cheat sheets, with all these benchmarks. You can grab that@perketo.com for slash toolkit. So yeah, if you're listening to this in the gym or in the car and you're like, oh crap, I need to come back and take some notes. Uh, don't worry. It's all for you. It's all there for you in the toolkit.

John Jantsch (07:06): So one of the, probably the hardest units, I think that people have to measure, particularly when they have in a lot of internal, uh, staff working on various accounts, you know, how do you spread that? I mean, they're not spending every minute of their time, you know, in billable hours, so to speak, if we can use that ancient language, but you know, how do you spread that kind of unit of labor across where it should be expended, I guess?

Marcel Petitpas (07:31): Yeah. So I think this is where a lot of people make the mistake of trying to measure earning efficiency, purely using financials. And the reality is like, I think at the agency level using your financial statements is always gonna be the most accurate and truest form of measurement. But when we start slicing down to the client or project or phase or task or however your agency is structured and that's where there's some nuance where you really want to think about, you know, do I have distinct departments within those departments? Like what is the S of your business, because that's gonna inform what does your data need to be structured, like to get you good reports. But when we start getting more nuanced than just the agency level, I think using your accounting tool and your financial statements to try and measure profitability on clients is generally not the best idea because it's gonna require a ton of expense and time and investment.

Marcel Petitpas (08:18): The easier way to do that, the easier way to measure what I call earning efficiency is using what I like to call average billable race. And it's a very simple formula. What is the AGI in that bucket? And it could be a time period. It could be a subsection of the business or both, and how many hours were worked to earn that AGI. And so simple example, I have a $10,000. I spent a hundred hours on that client. I made a hundred dollars per hour on that client doesn't matter what it said on the rate card that I gave them or on the proposal, I made a hundred dollars an hour because I had to invest a hundred hours of my team's time on that using that metric, you can very quickly start to compare one time period to another one, client, to another one type of service to another.

Marcel Petitpas (09:02): It makes it very fast and easy to on a tighter time horizon, get a sense of what's more or less efficient than another service offering. And as long as you understand roughly what your average cost per hour is on labor, then can get a sense of how close is that to my target, you know, delivery margin or gross margin or contribution margin, and use that to much in a much simpler way, get touch points on earning efficiency. And that's how I would encourage people to do it on, you know, tighter time horizons or more specific subsections of the business, cuz it's just so much less expensive than trying to do. Cost-based accounting on projects in your accounting tool.

John Jantsch (09:37): And now let's hear from our sponsor. Look, if you're tired of slowing down your teams with clunky software processes and marketing that is difficult to scale, HubSpot is here to help you and your business grow better with collaboration tools and built in SEO optimizations. A HubSpot CRM platform is TA made to help you scale your marketing with ease, integrated calendars, tasks, and commenting, help hybrid teams stay connected while automated SEO recommendations, intuitively optimize your webpage content for increased organic traffic ditch, the difficult and dial up your marketing with tools that are easy to use and easy to scale learn how your business can grow better @ hubspot.com. Yeah, well, and it, it actually informs billing, right? I mean it informs what proposal should say in the proposal. It performs. If we're on a, a retainer, it informs how much we can actually do that month, you know, for the call.

John Jantsch (10:36): And I think that's where a lot of people get stuck is they're thinking our, you know, internal rate is X. And so we're gonna propose, you know, this. So, you know, how do you suggest that first off? How do you suggest billing? I mean, I'm a huge fan of retainers. A lot of people like projects, a lot of people like hourly. I like actually selling results. Like here's what you get matter. You know, how many hours we put in or, you know, what it takes to get you there, you get the result and here's what the result costs, but what's your advice or what do you see as maybe the most useful sort of way to do consider billing?

Marcel Petitpas (11:11): I'm gonna give you an unpopular answer, which is I think all I there's four ways of pricing for my perspective. And I think that there is a room there's room in the industry for all four. And it has to come down to what we evaluate this through a value and risk lens. And I have a, a podcast that people can go listen to how to price your agency services, where I kind of go into more detail, but I have this pricing quadrant that I think of. So if you can imagine you have a vertical access on that access, you have high value at the top. You low value at the bottom. So that's a question of asking what is the value of this service in the market? And generally that comes down to two things. How commoditized is your positioning around that service? So are you a graphic designer or are you a graphic design firm that specializes in helping B2B SaaS companies communicate visually like through their complicated data systems for enterprise customers like same service, graphic design.

Marcel Petitpas (11:59): One is clearly more scarce and more expert than the other. The other thing with value is sometimes it's relative to the client. So to your point, if I'm increasing the conversion rate on apple dot com's website, by 1%, that's worth hundreds of million S of dollars to apple. My aunt Shirley who sells, you know, handmade goods on Etsy, it's worth 10 bucks to her. It might take the same amount of work, but it's just not as valuable to aunt Shirley as it is to apple. So understanding the relative value is important. The other thing is risk. So how risky is this work? Are we building, you know, a website from a template for a legal client and we've done hundreds of them and we know kind of exactly how long that's gonna take that's low risk or are we trying to land a rocket ship on a barge in the middle of the ocean and building control systems for that on a new technology stack?

Marcel Petitpas (12:44): That's not very well documented. Well, it's impossible to scope how much time it's gonna take to do that work. So understand where your service falls on that value, risk continuum. If it's low value and high risk, you're probably gonna want to go towards some kind of time and materials billing model so that you can share risk with the client, build them for the hours that you're working. Because if you can't estimate how much time it's gonna take, then you need to try and create some protection in the contract for that. And then it becomes a game of billing for as many of the hours that you're working as possible. And just try to keep your average cost per hour, a level where you have enough margin in that hourly rate to be profitable, if you have high value, but still high risk. This is where I like what I call abstracted time materials.

Marcel Petitpas (13:23): So you're not talking about hours. You're saying, Hey, you need this enterprise website. I'm gonna lease you this, you know, cross-functional development team. It's 10 grand, every two weeks. We think it's gonna take 16 to 20 a sprints to do this, right? This is what companies like media monks for example are doing. It's the contract structure is time materials. So it helps absorb and share some risk with the client, but we arbitrage the value to level the conversation up from an hourly rate. So I like that model for high risk high value work. If it's low risk, low value, I like flat because John, if you asked me to build you a website and I told you it was gonna be 500 bucks an hour, you'd probably tell me to go pound sand. But if I said it was gonna be five grand and I could get it to you in two weeks, and it was gonna be blazing fast, SEO, optimized, prove it to convert for your industry, whatever you might say, that's a great deal.

Marcel Petitpas (14:09): I might still make $500 an hour because I know the risk and I can arbitrage that in the flat rate. And then if it's high value, low risk, that's where I really like value based pricing. So we can start anchoring the price to the value to the client and arbitrage the fact that we have low risk and really start to stretch the upside. But you could see how I think different pricing models for different moments and time for an agency. And as their products and services mature, they should migrate up into the left and ideally graduate to forms of pricing that allow them to arbitrage more value in that conversation with the client. So that might be the nerdiest way that's ever been explained, but that's how I think about it.

John Jantsch (14:47): Well, you know, as I listen to you talk about that high risk, you know, I think there's a huge amount of communication with the client that has to go in that too, because yeah, there may be a client out there that's trying to get a flat rate bid. Well, it's like remodeling a kitchen. It is never gonna be what that flat rate bid told you. Person told you it's going to be. And then all of a sudden it's like, well, yeah, we had 30% cost overruns, but I think that communication in that risk, you've gotta have a client willing to say, yeah, I'm, I'm in for part of the risk too. Right?

Marcel Petitpas (15:16): Yeah. And, and that is a challenge with time materials, billing models, right. As you're asking the client to share some risk, but that should be rooted in this conversation of, you know, a couple of ways to spend that number one, the process we need to use to solve this problem appropriate for you requires us to iterate together and learn together and change. So like, we, we can't predict this or putting the onus on the client to say, if we're gonna take on this risk, I need you to more clearly define what the deliverable is here. Yeah. And, you know, we need to be really aligned on what the scope of work is. And so those are kind of some of the things, but I, I think you're absolutely right. The, the scope management and expectation management becomes critically important when you're talking time materials, because you are asking the client to take on more risk. Yeah.

John Jantsch (15:59): All right. So you get a one word answer to this next question should pretty much everybody in the organization be tracking their time.

Marcel Petitpas (16:07): Yes. Short answer. Yes.

John Jantsch (16:10): No, that's now the follow up, cuz I knew you were gonna say that. That's why I only gave you one word, but it's a pain in the, but now go ahead.

Marcel Petitpas (16:19): Yeah. So the first is the why and why should be because that's your best insight into the efficiency of your own business. So I think the misconception with time tracking is it's something you do for the client. It really should be something you do for your own organization so that you, yeah.

John Jantsch (16:32): Even if you're not billing hourly, you're not even billing hourly. That's right.

Marcel Petitpas (16:36): Yeah. It'd be like, if you were running a restaurant and you had no idea what your food costs, you that'd be absolutely insane. That's what running an agency without time tracking looks like. But then the question I get is like, well, my team hates time sheets or pain in the ass. The software sucks, whatever cool. I understand that I don't like filling out time sheets either. So there is, is a way to adapt your business model and do this without time sheets. And it's called resource resource plan based time tracking. And this is again what companies like media monks are able to do, but it's because the way they staff their team is never working on more than a handful of projects at a time. So what the, that, what that gives them, the ability to do is have a project manager create an updated resource and on behalf of their team of eight, nine direct reports and do that through a series of weekly touch points.

Marcel Petitpas (17:19): And then the team doesn't have to fill out time sheets, the project manager, who's probably the person who's most excited about this. Anyway, they get to do it. And it, it maintains a high enough level of fidelity that you get insight, but you get, you're able to do that because you've reduced what I call client dilution, the amount of clients that a single person has to work on in a given day, which makes that a feasible model. So you can do it without time sheets, but it does require you to be very deliberate about how you resource plan people and try not to have one person working on a billion projects at a time.

John Jantsch (17:51): So a lot of organizations today have been able to scale their businesses, especially in the digital age, using third parties, white labels, you know, freelancers, some sort of mix of, you know, there's three of us sitting around here pulling all the levers, you know, 47 people all over. What does that do? What kind of challenge does that add to the sort of pure optimization model?

Marcel Petitpas (18:15): Yeah. There's benefits and there's cons to it. I can tell you that some of the most profitable agencies that we have ever audited were running a, like almost fully outsourced white label model where all of the high risk work was being done by external vendors. And they typically retained account management and some form of strategy. So they retained the highest value services and those companies were extremely profitable. However, they have an entire part of their business that they don't really have any direct control over and it's, you know, all of the execution. And so it requires you to have very good partners. It requires you to have some redundancy. So several of them that you can balance work between. It does require you to have somebody hovering over them and managing them very closely. And it does take a lot of the process and quality control out of your purview.

Marcel Petitpas (19:07): So those are some of the risks to watch out for. But I do think it's a model that can work well. If it's done intentionally, you apply enough margin to what those white label partners are charging. You have a contract structure in place that really does help you take downside risk off the table. Like if you think about you're doing high risk work, there's two ways to decrease the risk. Number one, you have to find a way to get better at scoping that whether that's tightening up the scope of work or getting better data, getting better estimating, or it's like just don't be responsible for the risk anymore. Give that to a white label partner. So it is a fast track to decreasing risk, but it does still leave you with a lot of responsibility for over service for overseeing that vendor. So I think the mistake a lot of people make is well, like I won't need to track time. I won't need to pay to profitability anymore. That's not true. You will still need some level of internal team and you still need to measure their efficiency. It just tends to be easier to make that efficiency very high when all the high risk stuff is off your plate.

John Jantsch (20:04): Well, and it would probably, as I listen to you talk about a resource plan, it would probably, why wouldn't you use a resource plan with your white label partners to some degree?

Marcel Petitpas (20:12): Yeah. I mean how that relationship is managed it, yeah. There's a lot of opportunity there to get it tighter, but like certainly there's still gonna be management required there and measurement of efficiency,

John Jantsch (20:22): You know, as a marketing agency, one of the things that we've learned over the years is to really scale with our clients. We actually have to help them operationalize some of their marketing as well, because I mean, it's not just a matter of yeah, we got your leads, you know, it's like we build onboarding for them. We do a lot of things for them that, that actually retain those clients and turn those clients into repeat clients because they're happy how much, and this may be outside of the area that you end up working with, but you know, how much, um, responsibility do you think that marketing agencies have to really get that deep inside an organization? If they, I, I, responsibility's probably the wrong word. Where do you think? I, I think there's a huge opportunity if they are willing to ago that deep. I'm curious if, because you do a lot of operationalizing of agencies, you know, if that's sort of a byproduct of doing that.

Marcel Petitpas (21:14): Yeah, I would agree. I think one of the things that often gets overlooked in the agency space is really deeply understanding the job the agencies being hired to do. We, we tend to think of what we do in terms of the or deliverables that are being rendered, but I really encourage listeners to zoom out and think about like, what's the problem we're solving. What's the job we're being hired to do. And how can we do that job better? And the deeper you go into this and the more creative you get with how much of a scope of responsibility you can take on the harder it becomes to fire you, the more context you build with that client, the easier it is for you to retain and expand the relationship you have with them. And it also puts an onus. I think there's another really important part of this, which comes down to client communication, which is the number one place that I see agencies falling short is just not communicating proactively enough with clients and managing expectations well, and in a proactive way. And I think if you can do those two things, well, it will, it'll set you apart from every other vendor that they work with in a big way and dramatically improve your retention, which you and I both know, John, it, it has a massive impact on the ed economics of your business. And of course, uh, can't be overstated in terms of its importance. Yeah.

John Jantsch (22:27): The, my longest running client, uh, has been a client since 2004. So I don't, I don't know how many millions that adds up to, but it's a lot. Yeah. But fortunately they've continued to grow, but I, I think you're absolutely right. I mean, we work with a lot of founders, business owners, direct owners, and you know, a lot of times I think making their life better is actually part a big part of our job. I don't think any of them actually ask for in a deliverable, but I think that's the problem in a lot of cases we're solving by helping them get some control over their marketing. So to your point, that's how we view it as well. So, so Marcel tell people where they find out more about per keyto and, and the work that you, uh, do on behalf of agencies.

Marcel Petitpas (23:08): Yeah. Parakeeto.com is, uh, the, the place where you'll find the most information. Also, if you're listening to podcasts and you like podcasts, we have a show called the agency profit podcast. John's been a guest on there. He's gonna come back for round two here soon. Um, so make sure you tune in there. If you want to nerd out some more with stuff like this. Um, and if you wanna connect with me directly, you can find me on LinkedIn. I'm wearing a shirt with birds on it. I'm not hard to spot, and I'm always happy to nerd out with you on agency profitability. If you got questions.

John Jantsch (23:34): So Marcel, thanks so much again for stopping by take time to stop by the duct tape marketing podcast. And, uh, hopefully we'll see you, uh, one of these days out there on the road.

Marcel Petitpas (23:41): Thanks, John.

John Jantsch (23:45): All right. That wraps up another episode of the duct tape marketing podcast. I wanna thank you so much for tuning in. Feel free to share this show. Feel free to give us reviews. You know, we love those things. Also, did you know that we had created training, marketing training for your team? If you've got employees, if you've got a staff member that wants learn a marketing system, how to install that marketing system in your business, check it out. It's called the certified marketing manager program from duct tape marketing. You can find it at ducttapemarketing.com and just scroll down a little and find that tab that says training for your team.

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