It’s understandable if you’re worried about your agency’s future. While agencies can be an excellent source of cash flow, they are people-centric businesses. To grow your revenue, you’ll need to hire more people, which can be expensive and time-consuming.
Payroll is the biggest overhead at any business, usually amounting to over 50 percent of expenditures¹. Scaling an agency means scaling expenses, which makes it harder to grow profits.
That scaling limitation is why you might want to consider using your agency to create a SaaS business.
Although SaaS apps require a bigger initial investment (you need to hire the technical people to build the product), they can scale far beyond an agency in revenue generated for cost sunk.
Just look at AWS (Amazon Web Services), Amazon’s B2B cloud storage solution. While it’s only a small percentage of Amazon’s operating budget, it brings in over 70 percent of its operating profit every year² (and bankrolls its massive ecommerce arm).
But if you’re kicking yourself for starting an agency and not a SaaS company – don’t. At Bootstrappers, we’ve interviewed dozens of SaaS founders who started as service agencies. Many say their SaaS businesses wouldn’t have been possible without agency experience.
Here are three stories from founders who successfully turned their agency businesses into highly-profitable SaaS tools and some key takeaways you can use too.
Make Your Service Self-Serve Like Disco Labs
Disco Labs founder and ex-lawyer, Gavin Ballard, built a SaaS product called Submarine. It helps Shopify Plus merchants create bespoke payment experiences for their customers.
Before building a SaaS, Gavin’s agency built back-end functions for billion-dollar businesses like HarperCollins, Four Seasons, and JB HiFi. Admittedly, Gavin was in a great place to construct a SaaS because his company specialized in custom applications for Shopify stores.
After building multiple Shopify payment portals for different businesses, Gavin noticed he was repeatedly building the same application. He standardized the process with Submarine, a tokenized payment platform allowing customers to monetize using subscriptions, memberships, pre-sales, crowdfunding, and more. It was more-or-less a self-serve model of his agency.
The best part? Because he already ran an agency with enterprise clients, it was easy for Gavin to market Disco Labs. He just needed to convince his clients to buy a subscription. From there, it was all word of mouth.
Turn Your Contractor Network into a Marketplace Like nDash
But you don’t need to run an app development agency to build a great SaaS product. nDash founder, Michael Brown, is a writer who scaled up his content writing agency into a boutique marketplace where companies can source high-quality content writers.
That’s not to say Michael had zero tech experience. Before starting his agency, he learned about scalable software solutions as a content manager at a crowdsourced software testing company. Later, when he started a SaaS, he applied that knowledge to his own product.
For the first iteration of nDash, Michael worked as a solo freelance writer with five or six clients. He grew the agency to a ten-person contractor team writing content for larger companies before laying the groundwork for his SaaS.
Michael then hired a technical cofounder who built a small internal platform to manage their agency’s customers. This was an easy way for them to see which contracted writers were assigned to which client. Eventually, Michael realized it made sense to let his clients use the platform and select the writers for themselves. They offered a waitlist for new brands and writers to join their service and populated both sides of the marketplace at shocking speeds.
Today nDash serves 7,000 clients and 15,000 freelancers with a team of only eight. It takes a 15 percent fee off every project. Pretty good for cash flow, huh?
Michael’s only regret was ending the agency too soon because they initially lost cash flow. “In this new model, 85 percent of the revenue goes to the freelancer. Looking back, I do think we pivoted off the agency model a bit too soon. We were just so excited about the platform and the community we were building that we wanted to push everybody there.”
Built Better Marketing Tools Like Hiperion Marketing
You have other options besides becoming a self-service business and closing your agency. You could also improve upon a helpful tool and market it to your agency clients.
Jace Thomas, the owner of Hiperion Marketing, became a marketer after five years of working at a call center. He then started a freelancer-centric SEO agency for clients of all types.
Instead of working on a retainer basis, Jace offered individual services with a predefined scope with a minimum commitment of four months. These “SEO sprints” included audit, content, and backlink sprints. It helped establish a base of predictable and repeatable actions for the company and let Jace step back to work on other things.
In his free time, Jace and his team fabricated an analytics tool similar to Google Analytics but with an easier-to-use interface. Agencies could leave comments for clients and internal marketing teams (something his agency had craved for a long time).
He marketed subscriptions to clients and amassed a long waitlist for his product. Now he has a scalable source of passive income on top of a successful SEO and content agency.
What All Three Agencies Have in Common: Productization
You’ll notice that in all three examples the founders first had to solve a common problem for multiple clients. Arguably, standardizing a solution is much easier at productized agencies than generalist agencies.
What’s the difference between a productized agency and a generalized agency?
Generalized agencies:
- Work on any project a client requests.
- Tend to take ongoing contracts with undefined periods.
- Usually work on retainer – a regular payment in return for services.
- Generally rely on highly skilled employees to manage accounts and accomplish tasks.
Productized agencies:
- Charge unit fees on a handful of highly-specific services. For example, an agency offering packages of four SEO blogs for $1,000 or a development agency that only makes payment portals for iOS apps.
- Have a standardized process for completing work. This makes them easier to scale with contractors of different skill levels – a transcription service relying on three layers of people for transcribing and editing transcriptions, for example.
While generalist agencies often secure huge contracts from large enterprises, they can only scale with highly-skilled (and highly-paid) employees and that means low margins. In contrast, productized agencies can generate predictable revenue, scale, and compete with other agencies because their services are clearly defined and priced.
How Running an Agency First Helps With a Future SaaS
Whether generalized or productized, an agency also gives you two more benefits when you finally create a SaaS.
Broad Industry Insights
The agency model gives you a much broader view of industries and businesses and their problems – perspectives you probably could never get working strictly within one company. If you run an agency in a particular industry, you’ve probably seen many issues your business could solve with a SaaS product and don’t even realize it yet.
Easier Marketing
In many ways, agencies are a growth hack for selling SaaS. You already have an established working relationship with your clients. If your network is big enough, you can capitalize on word-of-mouth growth for much of your early stages.
SaaS Businesses are Much Easier to Sell Than Agencies
Finally, if you ever decide to sell your business, you’re in a much better position as a SaaS owner than the head of an agency.
Much of an agency’s value resides in its founders, those who built the connections and oversee and often deliver the work. If you leave your agency in an acquisition, the new owner has to have at least your skill set and be able to continue those relationships in the future.
A SaaS company, on the other hand, runs more or less autonomously. Buyers don’t need as narrow a skill set – even non-technical buyers can Acquire your business without learning to code. You can usually expect a shorter transition period post-acquisition.
And because of their higher profits due to smaller teams, SaaS businesses also offer a much higher revenue multiple on the market (as much as seven times profit). Agencies only offer a two-to-three-times profit multiple because their revenue is tied to staff.
Either way, if you ever decide to exit your SaaS or agency, we hope you’ll consider using Acquire for your acquisition. We’ve helped 100s of founders like you get Acquired, and you won’t find a better platform for deal speed, pricing, and buyer variety.
You can create a free account in just a few minutes and start fielding offers on your business in less than a day. Visit our seller page to get started.
Happy building!
Sources
¹https://www2.deloitte.com/content/dam/Deloitte/us/Documents/human-capital/us-cons-laborwise-core-data-sheet.pdf
²https://www.visualcapitalist.com/aws-powering-the-internet-and-amazons-profits/
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