CWC 26: Nick Petroski of Promethean Research
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Nick Petroski of Promethean Research joined to talk about the outlook for digital marketing agencies in 2019 and beyond.
Among the findings of his firm’s research:
- There is a movement from retainer-based revenue to project work for many digital agencies, with 55% of revenue now coming from project-based engagements.
- Web design and development work remains the biggest revenue generator for most digital firms.
- Digital agency owners are optimistic about 2019 and see top- and bottom-line numbers rising.
- These firms expect growth to come largely at the expense of their competitors, although Promethean does see overall market growth likely.
Listen in for more details as well as other observations from Nick’s research.
The following is an automated transcript. Please listen to the audio to verify accuracy.
CHIP: 00:00 Hello and welcome to another episode of chats with chip podcast. I’m your host, chip Griffin. And my guest today is Nick Petroski of Promethian research. Welcome to the show, Nick. Thanks. Rather than, man, it’s good to hear. It is great to have you here. And sort of the motivation for bringing you on was to talk about, uh, a survey that you have just worked on, but before we jump into the results of that, um, why don’t you share a little bit about promethian research and, and tell us what you do.
NICK: 00:46 Yeah, so we’re a strategic consultancy. We’re a small boutique for a, started in early 2016 with one of our key focuses being digital agencies are work. They’re really kind of organically stemmed from some conversations I’ve had with friends who are agency owners and noticed a lot of the challenges they were facing were stuff that we were solving for larger companies or companies in different industries or sectors. Uh, so about three years ago we started working pretty heavily in this space to boil it all down with what we really try to do is help owners solve some of their most challenging problems, uh, and, and add some pretty significant value in a, in a quick way.
CHIP: 01:29 So you work primarily with, uh, with digital agencies for the purposes of this discussion, but you’ve got other industries that you do work with as well, is that correct?
NICK: 01:39 Right, right. We have a network of analysts that covers pretty much every industry and sector you can imagine.
CHIP: 01:46 Gotcha. Alright. Well, let’s see. In the digital space, you, the report that you came out with I think had some, some interesting nuggets in there and there’s a lot of a digital agency owners out there and they’ve got a variety of challenges to solve, but you know, from the sounds of your report, you know, most of the ones that you’re talking to are expecting to see a much more competitive 2019 than perhaps they’ve, they’ve seen over the last couple of years. Is that correct?
NICK: 02:12 Yeah, definitely. So we, this is um, a little background on the report, this is a kind of a periodic check that we do that adds onto our additional research that we, we kind of do throughout the year that’s kind of used to confirm or update a clients on, on what the different trends are and where they are in their cycles. So competition wise, this was something we’ve seen coming for a little while now. You have a lot of forces at play and they’re coming to bear a little quicker now that we head into 2019 and we’re seeing a lot more of that picked up in the responses to the survey
CHIP: 02:57 now. What are the, for the survey, what the average size of the agency, you know, revenue wise or headcount wise, however you measure it, what would, how would you describe your, your survey base?
NICK: 03:10 So it was kind of skewed towards the lower end size wise. So if you look at the distribution of digital agencies by revenue, they really skew towards, you know, around a million dollars per year being the peak. If you have like a plus minus on that, have a few million, but that’s where the bulk of your, your agency’s fall. Um, and that, that makes a lot of sense because there’s really flow and few barriers to entry. You can, you know, for better or worse, it can go start up an agency tomorrow I’m hanging your shingle and go throw up a website and, and be in business. Uh, what we’re seeing though is unless you really have a reason to be in this space, you’re going to get shaken out pretty soon as far as. Sorry, as far as the size wise goes. Um, you know, we had some that were in the, you know, I think top was around 80 employees and then the lower end was, was more like a five to five to 15 years employees.
CHIP: 04:20 Yeah, I mean it is, it is very easy to get started in particularly on the web development side of, of the digital agency space these days. Our social media marketing, right. Any one of those things. You know, 20 years ago there was a, I think, a higher barrier to entry because you need to have more technical skills and more access to, you know, to hardware and technology to be effective. But today, you know, pretty much anybody can, you know, go online, buy a basic theme, start tweaking it and call themselves a, a web designer. So it, it, it, it certainly has changed the competitive landscape a bit. But I think as you say, you know, a lot of folks ended up, uh, getting shaken out in part because a lot of those folks ended up realizing, Geez, you know, I don’t really want to run a business.
CHIP: 05:03 Right. You know, it’s, uh, they, they thought it sounded cool and then they realized all the things that come along with that. And it’s um, you know, as I always say in the, in the PR and marketing space, there are a lot of accidental agency owners. Um, you know, people who may have come to owning an agency because perhaps they were between jobs, hung out a shingle and all of a sudden started generating business. And you know, that a few years down the road realize, Geez, now I’ve got to deal with employees and management and all those kinds of things. So, um, you know, it, it, it, it does sort of weed out people pretty quickly. But, you know, one of the things that I found interesting as you did your, your surveys that there seems to be a skew or movement towards more project based revenue rather than retainer based revenue. And obviously most agencies like to get the retainer business because that’s the kind of thing that, you know, stabilizes cashflow and all that. But it seems like very much in the digital space you’re seeing that movement towards project fees instead.
NICK: 06:04 Yeah. That’s something we’ve been watching for I think about two years now. Maybe three. I don’t recall the real start date of it, but it’s something, I think it coincides with this in housing, uh, that the brands are doing of marketing talent. So you’re seeing them build up their own internal teams and then they don’t necessarily. I wouldn’t say they don’t need it, but some of them don’t want, um, you know, a fixed longterm contract so that they’re moving, they’re saying, okay, we can do, you know, x, Y, and z and house, let’s just pull in more expert level services for, for expertise that we don’t have in house and we’ll do that on a project basis. So we’re seeing that this survey across the 50 slash 50 line as far as expectations go for next year, um, before it was more, you know, in the 60 percent, 70 percent was still retainer work and now it looks like it’s, it’s probably more like half and half and you hit the nail on the head, you know, it’s retainer work definitely smooths out cash flow. It makes it easier to plan, easier to budget. Um, with this project work, uh, you’re seeing some issues with, you know, how far out can I realistically look, how far out can I forecast my business? And, and that’s, that’s just making it even more challenging.
CHIP: 07:33 So are the agencies that you’re talking to, are they, are they taking steps to try to combat this? You know, to, to try to drive more retainer based revenue or are they trying to take steps simply to sort of deal with the new reality and figure out what that means from a management perspective. You know, what, what’s the reaction of this movement?
NICK: 07:53 Yeah. So you’re, you’re seeing essentially those two things. You’re seeing some companies that just say, well, there’s not much I can do a, this is the new world we’re playing in. And so this is, you know, this is just how we’re going to have to deal with it. And the other hand, it’s funny if you, if you describe something as a subscription rather than a retainer contract for some reason that, that seems to still get through that. If you say you were almost productizing our services, um, and then building a subscription model, brands are still more okay and more apt to say yes to that. So you’re seeing some of that. And that’s the product ties services is always, it seems like for the smaller agencies, they think that’s the holy grail. It’s not always, it’s not always a positive, let’s put it that way right
CHIP: 08:48 now. Are you, are, are you seeing agencies also working to sort of layer on additional services? So, you know, I know you found the majority of these agencies are focused on sort of the design and development space, but are they, are they working to layer on things like social media, marketing, content marketing, those kinds of things in order to, to try to help generate that steady flow or they really are the folks that you’re talking to much more heavily focused on the design Dev world and so therefore not necessarily suited towards moving beyond that into content.
NICK: 09:19 Um, so what we’re seeing is yes they are, they’re, they’re looking at adding additional services. A lot of them are, that’s kind of in contrast with how we have counseled. A lot of brands aren’t looking, at least the ones that we’ve done survey work for. They’re not looking for one stop shops. I mean, right. Uh, that was the old model that was the agency of record model. Uh, that’s gone out the window. So what we’re kind of, we’re advising more is find your specialty. You have to be really damn good at one thing. And then blow that out of the water. So when we see agencies doing that, there’s a lot more that the brands that don’t have that skill in house are going to pay much more to do projects with those kinds of agencies, uh, and then they’re much more willing to, to work with them. And that kind of insulates you from that hole in housing issue also. Right
CHIP: 10:21 now as you talked about the market becoming more competitive in this space. One of the other things that I found interesting in, in your results were that folks were anticipating that their growth would come by stealing growth from other firms as opposed to seeing the market itself expanding. You know, so. So do you think we’ve sort of hit a point where pretty much everybody who’s going to be using digital services is. And so you know, it’s going to be just rearranging the deck chairs as opposed to increasing the actual size of the pie?
NICK: 10:56 No, no. Far From It. We’re, we’re still expecting 10 to 15 percent growth in this space, in the overall market per year. And it’s funny that you can. So there is still room to grow in that 10 to 15 percent range organically without taking. What’s. What was interesting is when we dug into the numbers, we saw that a lot of these people are, a lot of these agencies are expecting growth significantly higher than that. Ten to 20 percent to 15 percent. Um, and, and unfortunately everybody can’t take share. So that’s where, that’s where one of those big red flags comes out and you say, well, okay, we can all take share in the market is only growing at x some we’re going to see some people lose out.
CHIP: 11:47 Have you done research on how either these agencies are similar ones have, have matched up against expectations in the past. In other words, if they were expecting 30 percent growth, you know, did they actually end up realizing it? I’m curious what you might know about this market’s ability to properly project what their growth is going to be.
NICK: 12:06 So it’s becoming more challenging to predict that in a large part because of that switched to to project based stuff. Your visibility into your sales cycle just as not as far out as it used to be. Uh, an agency owners tend to be a little more optimistic than reality. Absolutely. So if we’re, if they say, you know, we’re expecting 30 percent growth next year, you knock that down five to 10 percent to get to to reality, right.
CHIP: 12:36 Know as you’ve seen this movement towards project work or are you seeing folks, you know, sort of shifting their mindset on how they resource. In other words, are they perhaps using more contract labor instead of fulltime employee labor? Has that caused any shifts in that regard?
NICK: 12:53 Not that we’ve picked up yet. The structure of the agency is still fairly stable. Again, this shift, even though it’s gone from, you know, almost all retainer to half and half, it looks like the dollar figures overall dollar figures are still pretty stable and growing a little bit. So it’s not like they’re losing revenue overall. They’re just losing how um, how that revenue is build really. So it hasn’t forced any changes yet. I think if it, if there was a shock to the market, you know, if there was a, an overall downturn in the economy and people pulled back, um, you know, the opposite thing you should do, but if you pull back marketing dollars or digital spent, um, you’re gonna see some structural shifts then because then your, your overall dollars fall
CHIP: 13:53 as you’ve seen the shift. Has It, has it impacted profitability of the agencies at all? I know you say that the sort of the revenue has, it’s been more of a shift as opposed to, you know, causing any revenue to be lost. But has it impacted profitability at all?
NICK: 14:05 Um, so if you look at the, at least what we believe, the reasons behind the shift are in housing. Um, you’re looking at brands really shopping harder for specialists. So when you, when you do that, it’s actually positive for profitability. You know, it’s, it’s a, it’s a tail wind to profitability because you can say, okay, well you would need our specialty. You need are what we, our secret sauce, what we do. Uh, it’s gonna cost, you know, x plus if you want to do it on a project basis so you can actually pull more profitable work out of it. It’s just, you’re, you’re seeing a lot more competition for that profitability.
CHIP: 14:49 And in the survey you also looked at average revenue per employee, which is obviously a popular metric for most agencies, um, to benchmark against him. And so what did you find in that regard?
NICK: 15:01 Yeah, so in that space we found an average of about 170 per employee under 70,000 per employee. That I believe is a little high. A lot of times when you do is you do what is your Agi per employee adjusted gross income per employee and that weeds out all of that media resell. So which is super low margin, high revenue business. Um, but that can juice up your, your revenue per employee number. We asked for top line revenue per employee, uh, just for this check survey and my guess is taken into account with the other survey work we did and the other other research, it should be closer to one slash 50, one 65.
CHIP: 15:45 Right? Which is, and that’s fairly standard for all kinds of agencies, you know, if you, if you sort of had to pick a, a ballpark number, um, although, you know, one of the challenges these days is that, you know, agencies are structuring themselves so differently both in terms of revenue as you mentioned, things like ad spend, but also from a resourcing perspective where they’re using a mixed model where they may have contract workers and full time employees and all that kind of stuff. So, so these calculations I don’t think have the same, um, you know, uniform applicability that maybe they had 30 years ago. And so I always advise agency owners to sort of look at these metrics and understand them, but, you know, put an asterisk next to them because you know, you’re not necessarily getting the full picture. Um, you know, when you’re comparing to someone else.
NICK: 16:34 That’s why you’re, you really have to look at it. These are, these are nice to have on an aggregate basis, but you really have to apply it to your specific situation right
CHIP: 16:44 now, if you were, if you were sitting there talking with a digital agency owner right now, you know, what would they do you think, tell you their top three or top couple of concerns are for 2019, you know, is it, is it this shift a project or is it, do they have bigger picture concerns? You know, what, what are the things that are keeping them up at night?
NICK: 17:07 Well, the, so they have these, these, it’s interesting, these trends that we’re seeing that are making the market more competitive don’t seem to be a top of mind in the list of concerns yet that agency owners are, you know, thinking about on a day to day basis or even expecting to worry about other in the company here. We’re seeing, you know, we, we asked that question, what are your, what kind of challenges? What are the biggest challenges that you expect to face or did you face in 2018? And it essentially revolved around managing growth, expanding the business. There was some in housing concern, but it was a little lower than
CHIP: 17:50 the top issues. A sales lead Gen in new business. I think that’s, that’s a big concern just because of the, your sales teams or whoever’s responsible for sales at your agency, uh, they’re getting a lot more pressure as this competition increases and they still are expected to perform at the, you know, your, your annual growth targets and there there’s a lot more as competition increases, it’s a lot more difficult. And the agencies that you were talking to or do they typically have no dedicated business development resources or is this something that, you know, as is typical in many agencies, it’s being sort of layered on top of someone who already has client service responsibilities and other sorts of things. Yeah, it goes by size. So once you get above, you know, 40 to 50 employees, usually that’s when somebody breaks off. And does, I actually, it’s a little less than that.
CHIP: 18:47 It’s probably 30 to 40 employees. That’s when somebody breaks off and does, you know, full time. And that’s under that though, where a lot of the lot of the agencies actually are your ca owners essentially look out into their pipeline and see, okay, well shit, we gotta we have to do something numbers, we’re gonna, we’re not gonna hit what we’re expected to hit. So I’m going to go out and shift my duties from CEO to salesman or from owner to sales and drum up some business and it’s usually a last minute kind of thing unfortunately. Um, and I think it’s just a function of, you know, what’s, what kind of bandwidth everybody has and how much actually needs to get done. I think it’s fair to say that, that most agencies have a habit, and this is typical for many businesses, but I think agencies in particular will, will tend to start thinking about sales too late.
CHIP: 19:43 Right? They start thinking about it, you know, once they’re seeing that the negative impact to their, uh, their top line. And, and as I always tell agency owners, you know, when your busiest with client work, that’s when you need to double down and spend more time on business development because otherwise you end up being on that rollercoaster of a high revenue, high paced work and then all of a sudden boom, you know, particularly as you’re seeing movement towards projects that becomes even more acute. Right. You know, you get busy with those projects and it’s so easy to lose sight of the need to continue to, to build that pipeline. Yeah, definitely. So what, um, you know, you said that the, that you do obviously research throughout the year, not just this, uh, this one report that will link to in the show notes, but um, what other, um, you know, important trends are there out there in the, in the digital agency space, you know, what, what are you keeping an eye out for? Maybe that, that hasn’t even hit the research yet, but that she’ll be looking for in 20, 19 and beyond. Yeah. So we covered the, the in housing, uh, the shift to
NICK: 20:48 more project the, um, I guess the next biggest issue would be the large consultancies moving in at the top end of the market. You have, you know, you have these giant brands that work with these management consultancies, Bain and company, accenture, Mckinsey, all of the myths that have been around for ages of cms that essentially own most of the CSUITE already, right? They handled everything for the cfos. They handled everything for the CTO has a, they do everything for operations. They have logistics teams now they’re, they’re buying up agencies because that’s how they move into market. They’re buying up larger agencies and midsize agencies and moving into the cmo space that’s going to accelerate it. We expect that to accelerate because they essentially to hit their growth numbers, they need to move into adjacent markets. And so picking up the cmo suite is just an easy, easy pickup for them and they have the resource to do it and they usually pretty damn good.
CHIP: 22:06 Yeah. No, I think that’s something that we’ve seen in and they’ve even gotten involved to some degree on the technology side, not just the human capital side of digital and marketing and, and that’s clearly been a trend over the last few years and you know, like, you, I would expect that that will continue. I think the positive for the smaller agencies is that, you know, as, as you get the big boys coming in and, and you know, they’re sort of softening the ground for the specialists in some, in some ways because they’re helping to, you know, to educate the cmo in ways that many of the smaller players might not have the resources or the gravitas necessarily to do, but then, you know, it does create that opportunity for the specialist to come in and execute better. Um, you know, over the longterm. So I, I think the advice that you mentioned earlier on the show about encouraging digital agencies to be more specialized as opposed to trying to be all things to all people is, is right on the mark.
NICK: 23:02 Yeah.
CHIP: 23:03 So I guess, uh, you know, we’re, we’re sort of creeping up on the, uh, the end of our time together. Are there, are there other things that you think it would be useful for agency owners and executives who are listening to this, to, to know about, to think about, um, or other things that perhaps that you might like to share about your own practice?
NICK: 23:24 I think that the, if there’s, if there’s one takeaway from this report for owners, for agency owners to be as proactive as you can with your strategic planning. This is something that a lot of times, I don’t know, it was just me, but this seems like the perfect time of year to do it. I don’t when this airs, we’re, we’re recording it early December around December. I usually for the last five or six years and take a step back and you kind of assess where you’re at and it’s a good kind of reflection time. So take this and take some time and really spend it on a, on a strong strategic planning process. Um, you know, do the research, get up and ask your customers or potential customers what they need, why they choose you, all of that. I mean, you should be doing that on a regular basis anyway, but if you don’t definitely spend some time to do that now because it’s, it’s, we’ll get more difficult throughout the next year and there’s, there’s no real signs that it’s going to become easier. So that would be my big takeaway from this.
CHIP: 24:34 I think that makes a lot of sense and this is absolutely the time of year to be, to be thinking about that. Um, you know, just sort of feels natural to do it. Um, you know, we were, we tend to do that in our own personal lives, you know, looking ahead to January first and say, okay, you know, what do we want to do? Uh, you know, differently perhaps in 2019, you know, we should be thinking the same way about our businesses and, and you know, what adjustments we might need to make and, and, um, you know, so, uh, I, I would second that advice neck. Um, if someone wants to learn more about you and Promethian, uh, you know, how can they find you online?
NICK: 25:08 Yeah, jump over to Promethian reports.com. Promethian is spelled p, r o m e t h e a n, uh, we have essentially all of our stuff there and there’s, there’s a benchmark section for once you get to the agency pays. There’s a section with some benchmarks. There’s an overall agency primer. There’s some more good resources there and then, and then you can contact us right there if you’d like.
CHIP: 25:35 Excellent. Well we’ll include a link in the show notes here and nick, I really appreciate you taking the time to share the results of this study and also share some of your other insights. I think it’s been a really useful and I’m sure my listeners will, uh, will, will take away some useful nuggets here is they’re thinking ahead to their own 2019 planning. So thanks again for joining me. Yeah, not a problem. Thanks for having me again. My guest today was nick Petroski from Promethian research.