Don't Hire an Ad Agency for Your Startup
Coming from an ad agency founder, here are the reasons why you should probably not hire an ad agency for your startup unless three conditions are met...
Here’s what I’ve learned from spending close to $40M+ on performance advertising and helping over 100 companies grow.
If you’re a pre-product/market fit startup (or just approaching product/market fit) and don’t have ops figured out - you shouldn’t hire an agency to help you grow.
For simplicity’s sake, let’s say there are two types of growth: Zero-to-1, and scaling up.
Zero-to-1 growth means you have a product and you’re testing its usefulness, desirability, and stickiness. You know there’s a pain you’ve hit on, but you’re not yet sure how severe and frequent that pain is. On top of that, you don’t know how to sell and market your product in a repeatable way.
In this stage, you have yet to figure out how to really grow into the market. You’re likely figuring out what channels you can use to grow in a cost-effective way.
Scaling growth means you know that your product satisfies the needs of many customers. You’ve found a frequent, severe pain, and built a solution that mitigates it. People are telling each other about your product, using it for a long time, and you know how to sell to them.
At this stage, you’re figuring out how to scale up existing channels and make them more cost-effective as you increase your ad-spend or effort on that channel.
Agencies aren’t meant for helping you solve growth problems (unless they’re a small team of 2–3 people) but they can help you reach scale when you’ve already validated a specific channel.
That’s is because…
Agencies Are Bad At Channel Validation
Agencies tend to specialize. They are often staffed with people that have worked in a specific channel, like Facebook, their entire career.
This means that they seldom have experience going through channel validation for an early-stage product.
It’s unlikely that you know where to grow your product in the Zero-to-1 stage. You have to be exploring many different channels, running small but calculated tests, and slowly validating the winning channels.
This exploration requires a generalist. Ad agencies are just not structured to excel at this task.
On the other hand, if you already know that for every $1 you spend on Facebook Ads, you get $3 in revenue, using an agency could lead to you achieving an even higher return on ad spend.
They’ll be great at helping you maximize ROAS (return on ad-spend) because they’re constantly mastering the craft of performing well on the channel they operate in.
How to validate channels
To validate channels and tactics, it’s best to develop a framework for systematically comparing tests and measuring progress towards finding a working campaign.
Let’s use a B2B SaaS product as an example of what framework looks like. We’ll make some assumptions about this business to ground the story:
- Users pay $20/month,
- There’s a short (7 day) trial period
- Sign-ups convert to paying subscribers at a rate of 3%
- The LTV of customers is long enough that you’re willing to spend 6 months of subscription revenue acquiring them (which in this case is $120)
Maximum Customer Acquisition Cost
To be able to judge campaigns, it’s prudent to have a sense of your maximum Customer Acquisition Cost (CAC). This will help you determine if a specific channel or campaign has the potential to be profitable.
Using the sign-ups to subscriber conversion rate, you can work backwards to determine the maximum amount you’re willing to pay for a signup.
Let’s use the following formula to calculate your max CAC:
(Subscription Revenue * Payback Period) * Conversion Rate
Here’s a breakdown of the variables:
Subscription Revenue: the revenue you receive each month from a subscriber. In this example, it’s $20.
Payback Period: the time (usually expressed in months) that you’re willing to wait to break-even for having paid for a given user.
In this example, the payback period is 6 months because that’s how much you’re willing to pay (i.e. 6 months of subscription revenue).
Calculating CAC then looks like this:
($20 subscription * 6 months) * 3% conversion rate = $3.60
This means that we can spend a maximum of $3.60/sign-up for a user to sign-up, assuming the sign-up to subscriber conversion rate stays steady.
Simple Testing Framework
Now that you have a maximum CAC, you can test tactics on channels you believe may have the highest likelihood of acquiring users at or below that cost.
The most common approach is to list all the ideas you can think of in a spreadsheet and use some sorting methodology to pick which ones to try out first.
There are different ways growth marketers sort their experiments, but they all follow the same principles:
- What’s the potential impact of this experiment?
- How much will it cost to run this experiment?
- How easy or hard is it to execute?
You can use this template as a starting off point.
For our purposes, let’s define one test we could run for our B2B SaaS business. Let’s say we ran the following test:
Name: Targeting CMOs on LinkedIn with Sponsored Posts
Goal: <$3.60 CAC
If you acquire users for below $3.60, it would make sense to explore this channel further and scale it.
However, if the cost per sign-up is significantly more than $3.60, you may want to run widely different tests on this channel, or move on to another channel.
As you progress through this process, you’ll find tactics and ideas that work and you can slowly work on scaling them up. Eventually, you’ll want to spend 80% of your time/money on the winning campaigns, and 20% on further experimentation and exploration.
Once you’ve proven to yourself that the channel works, you can work with an agency to maximize the value of the ad-spend.
Agencies optimize for revenue, and because most of them charge based on your ad-spend, they’re effectively optimizing for you to scale up as fast as possible. Product/market fit aside, you may not be ready to scale for different reasons.
In the Zero-to-1 stage, you likely don’t have a deep understanding of your unit economics yet and don’t really know what your Cost of Acquisition limits are.
This unknown can lead you to waste your ad-spend on users you may never make a profit on.
Given that agencies are incentivized to have you increase your ad-spend, they may even encourage you to scale up your budget because they don’t have a clear ceiling for how much you’re able to pay per customer.
Or worse, they may not pay as much attention to your account if they don’t think you’re able to scale up your ad spend.
Agencies Are For Scaling
Another thing to keep in mind is that your operations might not be ready.
Let’s say you have a great product that sells to a few hundred new customers per month. Your sales team brings them in, they’re activated, and they stay with your product for a long time. You’ve spent some money on ads and know that they work.
So you hire an agency.
That agency starts running ads that generate solid leads, at reasonable costs. You’re seeing an uptick in activations, your retention is strong, so you start scaling up your ad spend with the agency.
But your sales team runs out of capacity because they can’t answer emails fast enough. You’ve just burnt through those qualified leads and you have no one to blame. The agency did its job, and your team did theirs.
You just weren’t ready to take on the volume of qualified leads.
When you have a mature product that works, a sales pipeline or operational capacity you’ve tested with a large volume of users, and your unit economics make sense – you’re ready for scaling up.
Agencies can be amazing at helping you do that within a channel you’ve validated. They can also help you launch in adjacent channels when you saturate existing ones.
When Are You Ready For Scaling?
When you have proven success in a specific channel, proven by either yourself or a direct competitor that scaled using that channel, hire an agency to help you scale.
You can hire an agency when:
- You’ve been able to spend money on getting a customer at a reasonable cost in the context of your business.
- Your unit economics work from money going into a paid channel all the way until you make it back
- You’ve already vetted the channel by spending some money there and seeing positive ROI (or know a direct competitor that’s done that)
And if you don’t know how to run ads at all, you should hire individual consultants to help you explore channels. For consultants, make sure that:
- They’re a generalist and have worked across different channels
- They’ve spent hundreds of thousands, if not millions, on ads
- They understand and are aligned on your testing framework
Author: Nima is a repeat startup founder who now runs Pearmill – a tech-powered ad agency that has helped 100s of startups like Codecademy, Sonder, Sunsama, and Unqork scale.