The high risk and reward of agencies becoming software developers

With the help of Will Critchlow, Russ Jones, and Ryan Evans, Jon Henshaw explores what agencies need to know before they commit to creating and selling commercial software.

As digital marketing agencies evolve, they create efficiencies to solve their client’s problems. Those efficiencies usually take the form of automated processes and custom applications. When those custom applications work well, agencies start to consider turning them into commercial software. If they’re successful, their reward can be exponential revenue growth, but if they fail, as many do, it can mean the demise of their business.

Why are agencies creating software?

As agencies grow and take on more responsibilities, they are forced to refine their processes so their clients can get the best services and the agency can reap the most profit. Many are accomplishing this by leveraging what they’re already good at, web development.

Modern web development shares many of the same methods, tools, services, and languages that are now being used by software engineers to create both native and web-based apps. The Progressive Web App (PWA) is a good example of this convergence.

By combining their skill sets with a desire to more efficiently solve their clients’ problems, agencies are unwittingly transforming themselves into software companies.

I interviewed Will Critchlow, Founder and CEO of Distilled, to find out how and why his agency created their product, DistiledODN. He told me that it was created from a series of technology experiments.

I think what we were looking to do here was actually really solve our clients’ problems, and obviously, those are very closely related things. But specifically, from this decade-plus of consulting work, especially when we were working with bigger organizations, we’d seen these two problems crop up over and over and over again. We’d built our consulting work around trying to solve them, but we thought we could go further with technology.

– Will Critchlow, Interview

How can agencies benefit from building and selling software?

Once an agency creates a software product, it opens up new opportunities for marketing and revenue. Rand Fishkin, in his book Lost and Founder, recounts when he first realized the revenue potential that software could bring to his agency.

The revenue we earned from subscriptions had superior gross margins, far less time investment per dollar earned, and required very little hiring or contracting compared to our consulting work. We discovered through trial and error what financial markets have known for years: the dollars earned from a recurring revenue model are vastly more valuable than dollars earned from services, thanks to scalability and margin.

– Rand Fishkin, Lost and Founder, Ch 2, Pg 38

However, the benefits from software go well beyond the lure of subscription revenue. Critchlow told me that it’s a differentiator for their consulting business in a world where any client service or business that you do with people is hard to differentiate because, at the end of the day, it is just people.

In my interview with Russ Jones, Principal Search Scientist at Moz, he told me that creating your own software is also a way to bring attention to your agency.

…whenever you release software you get attention. For example, I was able to write a lot about Penguin on the Moz blog – this was before I was at Moz – using data that we pulled out of Penguin Analysis. There are all these cool graphs and it became an opportunity to show us off that we otherwise would not have had. If we had contacted Moz and said “We wanna write a blog post about Penguin, we’re an agency” versus “We’ve written a machine learning model that can predict with 90 something odd percent accuracy the likelihood that a site will be hit with Penguin” we’re going to get two very different results.

– Russ Jones, Interview

Russ also said that having their own software helped differentiate them at conferences.

Some of our best publicity came through these tools. For example, if you wanna go to a conference it’s pretty hard to distinguish yourself as just being an agency. What are you going to put up to impress individuals in Expo if you don’t have tools or something just interesting and a quick selling point? It gave us a much better, much stronger selling point when we were at conferences.

– Russ Jones, Interview

To summarize, the main benefits that agencies can get from creating and selling software is subscription revenue, market differentiation, industry attention, and a stronger selling position.

What agencies need to know before they decide to sell software

Creating and selling software is much different from running an agency. It is financially risky and many agencies that try end up failing.

In my interview with Ryan Evans, Co-founder of Tend, he equated agencies that enter the software market as spinning plates. He said, once you start spinning those plates, it’s really tough. Evans also said that you can’t grow the agency and the product simultaneously.

What I have seen work well, and I think this was probably the case with myself, is that you can maintain something and grow something else, but you can’t grow both things at the same time. But you can maintain it if you have people in place and systems in place, and you’re going through the motions. I’m not saying doing a bad job or anything, but going through the motions. I think you can do that and grow something else.

– Ryan Evans, Interview

Russ Jones told me that agencies need to be very cautious before entering the software game. He said, it’s really difficult. It’s much more difficult than agency life in my opinion.

Entering the software game also takes time. Many agencies expect to be profitable within the first year of publicly releasing their software, but it usually takes several years for that to happen, if ever. Will Critchlow said that everything takes longer, is slower, is harder, and costs more money than you think it’s going to be. He cautioned that it will realistically take up to 7 years before a company can reach their profit goals, and if an agency is more concerned about short-term profits, they would be better off sticking to consulting.

How agencies should approach software development

If you’re a risk-tolerant entrepreneur and are determined to have your agency enter the commercial software space, there are (at least) a few things to contemplate.

What to consider when doing competitive analysis

A typical approach to analyzing competitors is to find and analyze companies that have matching or similar features. Then you need to determine if what you’re bringing to market will distinguish your product from theirs. You also have to consider a competitor’s brand loyalty, marketing capabilities, and whether or not you can convince their customers to consider using your product.

Russ Jones told me that agencies need to understand that software competitors in the digital marketing industry are far more mature now than they were five, ten, fifteen years ago. They have a strategy, they have capital, and they have top engineers. He also cautioned that your product needs to be something that can’t be easily copied.

How to avoid employee confusion

Developing and managing a commercial software product is much different from running an agency. Yet most agencies will end up leveraging their current employees to support and grow the software. The consequence is usually role confusion among the affected employees.

Ryan Evans described to me how employee confusion happens and how it can lead to a lower chance of success.

If someone’s bought into the agency, meaning an employee, and they’re excited about working there, and the whole time you’ve been there, you’re like, “This is the future, this is what we’re going to do. It’s going to be awesome. We’re going to do all this stuff.” And then if all of a sudden now you’re starting to work on a side project, and that’s pulling in some of their time, some of their resources, you’re talking about it, it gets tricky. It gets very confusing. They’re like, “Well, wait a minute. Is this the new thing? Is this what I should be excited about and working on?” And when you’re starting out, especially with something like a product, the chances of success are actually low.

– Ryan Evans, Interview

If an agency plans to have their employees work on their product, they should consider establishing clear boundaries and expectations for what they should and shouldn’t focus on. Regardless, the best way to avoid confusion is to have employees only work on one or the other, full-time.

Choosing to bootstrap or take VC funding

Launching a software product requires a lot of money and it either needs to come directly from the agency or investors. Many agencies will take the bootstrapping route because it’s the same way they started their agency and they want to maintain complete control of their product.

When an agency chooses to bootstrap its software, it will almost always adversely affect the consulting part of their business. Will Critchlow told me that the time they spent focused on their software resulted in them under-investing in new business for the agency.

…a lot of our new business effort went into the software side, and if we hadn’t been doing that, we would have invested much more heavily in the sales and marketing side of the agency’s consulting business…that’s definitely an area where we didn’t, where there was some kind of compromise.

– Will Critchlow, Interview

The difficulty of bootstrapping is one of the reasons why many agencies consider pursuing venture capital (VC) funding. VCs can infuse a lot of cash which can help speed up the development and marketing of a product. VCs can also leverage their existing relationships to help get media coverage and sign up large customers.

Like bootstrapping, there are also downsides to getting VC funding. The biggest downside is what that funding will mean to the agency. Ryan Evans told me that agencies have to be all-in on their product.

If people are going to raise money, I think they just have to be all-in. I don’t think that that model really allows for any other avenue at all anyway. It’s going to be hard to raise money and say, “Hey, I have this agency but I also have these products and I want to do both at the same time.” Investors will very rarely go for that.

– Ryan Evans, Interview

Final thoughts on agencies becoming software developers

I’m someone who had an agency that ultimately became a full-time software company. From my experience, there’s no one right way to go about it, and from everyone I’ve talked to, there’s also no easy way to do it.

Agency owners need to seriously consider all of the potential risks and rewards before they commit their time and resources to a commercial software product. They need to know that it will change their agency’s business, and the change is usually negative. That doesn’t mean they shouldn’t do it though. Especially if they’re confident in their plan and they think the rewards outweigh the risks.

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Jon is the founder of Coywolf and the EIC and the primary author reporting for Coywolf News. He is an industry veteran with over 25 years of digital marketing and internet technologies experience. Follow @henshaw