TL;DR

• ​Get your copy of our free industry primer!​
• The agency industry is made up of a ton of small companies, which directly impacts your strategic options as a leader.
• ​This also impacts how SaaS and PaaS firms work with agencies. We help them too.​
• Prospects have a ton of options. They know more about pricing, and it's harder to stand out.
• Niching, referrals, and acquisitions are the predominant growth vectors.
• Quality varies dramatically from one agency to another, so demonstrating expertise in a niche makes sales easier.
• Pricing power is lower than in consolidated industries.
• Margin comes from differentiation that creates pricing power, NOT economies of scale.
• Rollups can be attractive, but they come with their own challenges.
• Market share doesn't matter.
• Brand recognition is near impossible.
• Audience building is critical.
• It's hard enough to run a shop, no sense in making it harder by fighting how the industry's structured.

Who Cares How Many Agencies Exist?

We counted >71,000 North American digital agencies in our latest Digital Agency Industry Report!

The vast majority of the industry is made up of tiny (by comparison) companies. 87% of those 71k agencies had fewer than 50 FTEs.

Neat.

So what?

Well, those dynamics directly impact your strategic options and financials as an agency owner.

If you're a SaaS/PaaS firm, they also determine how easy it is for you to reach your biggest channel. We can chat more about that if you'd like, but we'll stick with how this impacts agency owners for now:

When an industry is mostly small firms (fragmented), it causes a few things to happen:

1. Your prospects have so many agencies to choose from that the biggest challenge for most agencies is differentiating themselves. Agency growth has to come from a niche focus to stand out: local moats (mostly gone since the pandemic), referrals (still driving most of agency growth), and acquisitions.
2. Related to 1, because there are so many participants, quality levels vary drastically. Prospects rely on demonstrated expertise to select an agency, making a niche even more of a necessity.
3. Pricing power is usually weaker because prospects have many alternatives and know more about market rates than the average agency leader. A single project can give them line-item views into pricing across many agencies.
4. Because agency costs are predominantly employee-related, and there's only so much you can optimize salaries and utilization rates, margin comes from differentiation that creates pricing power. Unfortunately, most participants realize this, so real differentiation is harder to achieve.
5. Retaining good employees can be difficult for small firms, as upward mobility is limited because there simply aren't many positions available above "Senior." Average employee turnover for the industry has been around 19-23% for the last four years.
6. M&A can look attractive since fragmented markets can create interesting roll-up opportunities. This is something we've seen play out over the last 6-7 years, but limited (if any) benefits from scale and nonexistent barriers to entry make this tough to pull off successfully.
7. Market share is unimportant, and thus, brand recognition is near impossible for all but a select few agencies. This makes audience building a powerful growth tactic.

This all culminates in an industry where agencies are founder-heavy for much longer than in other industries. The owner-operator model is standard. This can be a good thing when agencies lean into their nimbleness, but it can also hold firms back, as owners are required to be competent across many disciplines.

There are exceptions to every rule, and we've worked with enough agencies at this point to see successful counterexamples to each, but it's always easier to swim with the current.

It's hard enough to run a shop, no sense in making it harder by fighting how the industry's structured.

There's a ton more about how this industry works in this year's Digital Agency Industry Report.

Until next time,