A CMO’s Guide To Hiring An Ad Agency
Having worked on Pearmill for almost 4 years, we’ve had ample experience partnering with companies in different ways to help them achieve growth, produce world-class advertising, improve conversion, and understand their growth formula through attribution modeling.
We’ve had to learn when to say yes to companies working with us and, more importantly, when to say no! In this post, we share the learnings gathered from working with 100+ companies to help you decide when and how to work with agencies.
When is the right time to start looking?
Based on our engagements, there are generally two conditions that lead companies to seek an agency’s help: needing extra resources, needing expertise, or both.
Partner for extra resources
You might be a single marketer, a founder working on marketing, or even have your own internal team, but you need extra help! Here are a few good reasons for considering a partnership with an agency to help your growth:
Focusing on higher-level needs
One of the most common reasons we’ve seen companies want to work with agencies is to free up their internal team for higher-level thinking and analysis while trusting another team to execute their current plans.
This is especially useful because agencies — at least the good ones — are process-driven and capable of detailed documentation of their work, empowering your internal team to communicate your learnings and successes to management.
In these engagements, the internal team focuses deeper on overall company growth while relying on their partner agency to scale up their existing and proven channels.
Giving yourself time to build a team
If you’re in a scenario where you need to hire a team to help you scale further, but want to de-risk having to maintain the status quo of your efforts, then it’s a good time to consider working with an agency.
Partnering with an agency in this scenario can help unlock extra time for you to recruit and put together your dream team. In the meantime, the agency you’ve partnered with can keep existing processes running and even help vet some of the candidates you’re considering.
Creative production takes a village
If you’re spending money on Meta, TikTok, YouTube, TV, and/or other creative-heavy ad channels, then it’s common to augment your team with an agency that specializes in these platforms.
You may still have an internal creative director and produce your own ads to some extent, but having people with deep knowledge of channels and creative capabilities (e.g. better casting, motion design, illustrations, etc.) can help you scale up your efforts faster.
Partner for expertise
Channel expansion and exploration
If you’re in a stage of hyper-growth and need to scale up aggressively, it’s a good time to partner with an agency.
Agencies inherently see more data (i.e. ad spend) than any an internal team, helping them understand the best current playbook for either scaling ad spend on an existing channel or launching new channels to reduce reliance on existing channels.
Partnering with an agency to help take your ad spend to the next level is one of the best reasons to work with an agency — especially one specializing in a high volume of spend.
Outsourcing the marketing discipline
There are plenty of companies that have no in-house growth team by design because their efforts, resources, and time are focused on other disciplines.
In order to succeed in your market, you may need to excel in financial engineering, be the best operator, or be extremely focused on building the best product in a hypercompetitive market. If the dynamics of your product or market require most of your organization’s attention, effort, and capital, then it’s a good idea to partner with an agency.
In these types of partnerships, you have to build trust and ensure that you have the right incentives built in for both parties. With the right relationship and incentives, you can reach incredible heights together.
Every marketing team wonders if they’ve found the most optimal mix of spend and performance with their budget for the product they’re working on. One of the best reasons to work with an agency is to have other experienced marketers analyze your strategy and give feedback on your execution.
Agencies — at least the good ones — tend to have more data across many types of markets within the channels they specialize in. They see more ad spend, more experimentation, and overall have a deeper understanding of the channels.
When trying to maximize your budget, partnering with an agency can give you the extra boost you need.
Agency & team composition
What’s the best way to work with an agency? Should you work with them for ad creative production? Landing page optimization? Media buying? Attribution modeling? All of them?
Depending on your needs, you may want to partner with an agency for a specific discipline that you’re missing within your existing team. Great marketing is the collective work of many disciplines coming together to tell your potential customers the story of a product or service.
Partnering with an agency for a discipline you’re missing or trying to improve on is common. Bringing on an agency with people who have been working for years to perfect their specific craft can elevate your efforts.
The best agency/client partnerships are made when the agency is given autonomy to problem solve and help allocate budget most effectively.
In order to do this, at least in modern digital marketing, they have to be able to think about every step of the process from awareness to conversion to maximize any given channel’s potential.
Full-stack agencies are usually laser-focused on a handful of channels, and work on media buying, landing page optimization, creative production, and analytics simultaneously to achieve the best results. Partnering with them requires trust in each discipline, as well as the processes behind how they think about the channels you’re trusting them with.
In these types of engagements, you’re trusting the agency with one or some of the channels you’re spending on, with a lot of ownership being put on the agency’s capabilities. The incentives you set up in the relationship are extremely important.
Incentives, models, fees, and responsibility
There are many different approaches that agencies may be open to regarding how they charge for their services. It’s outside of the scope of this guide for us to share our opinion on each specific model, but we’ll share our general philosophy and a few different options, which are commonly employed in the industry. First, let’s touch on responsibility and ownership of overall marketing spend.
Performance responsibility & incentives
As marketers have been given more tools to reach people, the discipline has effectively become a unique form of capital allocation.
All of the different aspects of modern advertising have costs associated with them — from creative production (cost of people and creativity) to the auctions we enter on ad networks (cost of reach). We make decisions about the best outcomes from our overall marketing budget — allocating as we see fit.
While there is an ethical responsibility for everyone involved to be stewards of the capital that’s entrusted to us by the company and its stakeholders, it is also their responsibility to ensure that everyone is operating with well-designed incentives. Whether we like it or not, incentives influence our behaviors as organizations.
Think carefully about someone's incentive, and you will know them well without ever having to meet.
– Charlie Munger
To ensure you have a fruitful partnership with an agency, have an honest discussion about the incentives underlying the agency’s pricing model so you can avoid its downfalls.
Common fee & incentive models
These are common pricing models that the industry currently uses. They all have their own trade-offs, and plenty of agencies may be open to building custom pricing models for your business.
1. Percentage of ad spend
The gold standard of the industry is to charge a percentage of ad spend. This pricing model is one that’s been in effect for decades, likely due to its simplicity.
The agency charges a percentage of the ad spend they manage for you, usually starting at a higher percentage and moving to a lower percentage as spend level increases.
Their main incentive is that you scale your ad spend with them which roughly translates to your company growing, but does not always correlate with performance.
2. Time/resource-based pricing
Some agencies will charge you a premium on what it costs them to pay their staff. This generally helps them maintain a desired gross margin, and it comes with the added transparency of what it takes to actually run your ad spend.
Because there is no variable part to this pricing model, the agency isn’t tied to the performance of the ad spend directly (at least not in their pricing). This can be both good (if they unlock ad spend, you’re paying them the same!) and bad (they may want to overstaff your account).
3. Differential CAC
Some agencies are so confident in their ability to perform well that they’re willing to price based on savings they achieve from your current Customer Acquisition Cost.
For example, if you’re currently paying $100 for each purchase and they’re able to get you purchasers for $80, then you owe them some amount of the $20 that they saved you.
This model is generally less sustainable for both parties. While the incentive is clear for the agency, the business itself suffers by losing out on the negative marginal costs gained by their work to a large degree.
4. Contribution pricing
Some agencies are willing to tie their success even closer to the company’s by charging a percentage of contribution (revenue - costs). In other words, they make more money if they’re able to get your business to make more money.
The incentives here are much more aligned with the bottom line of the business, but introduce accounting complications and only make sense when the business is profitable and the agency manages most, or all, of the ad spend.
5. Percentage of ad spend based on CAC
Some agencies still charge a percentage of ad spend, but instead of charging a percentage based on the volume of the spend that they manage, they charge based on different CAC buckets.
For example, if they’re able to get CAC within the $100-$200 range, they would charge you 10%. But if they achieve a CAC of $50-$99, then they would charge you 15%.
This model aligns incentives more closely for you and the agency, but still introduces some accounting complications.
When you shouldn’t hire an agency
With all of that said, plenty of scenarios indicate that it’s the wrong time to hire an agency. I wrote about a few of these scenarios in an earlier blog post that I recommend reading.
Work with a trusted partner
The most important aspect of partnering with an agency is simple: trust. Can you trust the agency’s process, their ability to hire great talent and train them, their creativity, and their focus on your specific account to help you achieve your goals?
If you’re considering working with an agency, reach out to us to see if we’re the right fit!