The truth about performance-based agencies

Let’s align incentives. We win when clients win.

We tried it.

It does seem like a great idea, doesn’t it?

However, we quickly learned that it’s not so easy.

Running a performance-based agency is a completely different game and frankly not one I enjoyed playing.

The first step to make a performance-based agency work is that you sign a ton of clients.

This is easy.

You only charge a setup fee to cover infrastructure costs and that’s the only objection you have to overcome.

Then once a client signs up you do the absolute bare minimum for them.

As a result, you will generate absolutely no results for most clients.

But, hey, the setup fee covers your costs.

For a small number of companies however, you can actually generate results by doing the absolute bare minimum.

Then you write a fat invoice for these companies. That’s where your profits are coming from.

You are clearly overcharging them since you did very little to achieve these results.

Many of them will be shocked to see the number on the invoice.

They will start haggling.

“Yes, a call was booked, but the deal hasn’t closed yet.”

“This prospect did not show up.”

“This lead wasn’t 100% qualified even though it seemed like it from the outside.”

You will have to get attorneys involved.

All of that is far from the win-win that was initially promised.

The real crux of the matter is a performance-based agency will never do what’s necessary to get results for most companies.

After all, they are not paid anything.

They cannot invest in their client’s success.

If they did, they’d be operating at a loss.

Running cold email campaigns does cost real money.

Having smart people checking campaigns every day, coming up with new ideas, iterating, tweaking, and communicating with clients, is not cheap

Sure, the client eventually might pay. But there’s always uncertainty. Will they actually pay? And will they pay enough to cover all the costs + some?

Or maybe they cancel the contract before we had enough time to find a winning campaign? For many businesses, it takes several months of dedicated iterations before real results start to materialize. Few businesses have the patience it takes.

That kind of uncertainty is simply too big of a financial risk.

So performance-based agencies always only do the bare minimum. They always take the lowest-hanging fruit and ignore everything else.

And that’s not the kind of business I want to run.

In contrast, with a “boring” retainer model, we are paid fairly for the work we do.

We can hire top talent since we have a stable cash flow.

We can go above and beyond to iterate and experiment since there is money to invest in our clients’ success.

And that is the kind of business I want to run.

Written on March 7, 2024

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