According to an analysis I conducted on the LinkedIn platform, about 76% of all digital agencies have no more than 50 employees. This is a significant percentage. Such competition presents specific challenges these minor companies must face to stand out in the market. Based on years of experience working with agencies, I’ve compiled the most important problems that small agencies face. All of this is to better understand how to solve them.
1. New client acquisition and retention
In conversations with digital agencies, I’ve often heard that one of the most severe problems is “winning” new clients against more extensive, well-known agencies that handle diverse projects. On the one hand, standing out from the competition is crucial; on the other, it requires a lot of work and resources. A small agency has a limited marketing budget, which already puts it at a disadvantage at the start of the race for a client. It cannot afford expensive advertising campaigns or expanding the marketing department.
As a consequence, projects are carried out with existing clients or smaller projects within the technological competencies of the current team. Starting work on larger projects (e.g., lasting over a thousand hours) without similar experience thus becomes exceptionally difficult.
Retaining a client is also a challenge. Building long-term trust is harder because small agencies rarely carry out long-running projects. It’s also difficult to deliver results that would satisfy customers (a smaller team means limited technological capabilities). A small team may also encounter difficulties ensuring smooth, long-lasting communication and adequate support. All this leads to a high client turnover rate, and the lack of permanent clients limits the ability to plan development in the long run.
2. Dependency on key clients
“What good is it that I have a few main clients if any of them can leave at any time?.” Such statements are often made by owners of small — employing up to 50 people — interactive agencies. Referring to the previous paragraph, the lack of permanent clients is a problem, but excessive reliance on a key client also doesn’t guarantee stable and safe development.
Acquiring and excessively retaining one or two customers creates a kind of vicious circle. A small agency will use most of its resources to continue these projects, thus not leaving enough means to undertake new ventures. The agency is focused on ensuring financial liquidity thanks to the key client while being aware that they “can leave at any time.”
3. Uncertainty over the economic crisis
The world is struggling with an economic crisis, which is another serious problem for small agencies. In such conditions, the scenario is as follows: contractors first end cooperation with external service providers and only later reduce employment in their companies.
It also happens that before the contractor terminates the mentioned cooperation, they may not meet payment deadlines. Moreover, the agency is forced to review its service pricing because the competition lowers rates, and it becomes even more challenging to acquire a new client.
At the end of this chain is the decision to reduce employment, which additionally excludes the agency from the active race for new projects.
4. Increasing competition regardless of location
The world map of digital agencies is dotted with many pins. Competition is growing regardless of location, with a relatively low entry threshold to the industry. New companies offer a wide range of services and specializations, requiring small agencies to develop a unique proposition to stand out.
I mentioned price pressure in the context of the economic crisis, but I have to say that it’s an issue here as well. Expanded competition and geographic diversity sometimes lead to price wars. As a result, a small agency may even be forced to lower its rates while simultaneously having to raise the quality of services to meet consumer expectations. Providing the same service may cost significantly less in the Eastern Hemisphere than in the Western Hemisphere.
And how to invest in the latest technologies and trends in such a situation? A small agency must balance the need for innovation with budget constraints. It’s necessary to define a new strategy to minimize the importance of location in business conversations with future clients so that they see, for example, that the company specializes in a niche or offers unique value (e.g., a specific service, implementation method, and communication tools).
5. Keeping up with technology
As I mentioned about innovation, I must elaborate on new technologies (such as artificial intelligence) that increasingly interest clients. Keeping up with technological development is a significant problem: how do you find space for implementations if you haven’t solved the previous four problems yet?
The pace at which technology is developing can be overwhelming. It’s challenging to keep up with constantly emerging tools or platforms. This also applies to marketing — new software offers possibilities but requires time, human resources, or a change in the current strategy to use it more effectively than the competition.
As technology progresses, the skills of the agency’s team must also grow, and providing training involves high costs. Clients expect results for their businesses, and they’re convinced that the latest solutions will have a positive impact. However, can a small agency team guarantee this? Is it worth considering hiring specialists who are well-versed in a given technology? Informing potential clients that the agency can provide a team proven in similar projects adds value, which I wrote about earlier, thus becoming a strong sales argument.
6. Difficulties with process scalability
Scaling processes in small agencies often pose a significant challenge. The critical problem is the inability to replicate solutions created for one client when implementing projects for others. Each new assignment requires an individual approach, generating major adaptation and change costs.
Although delivering custom solutions may seem like an asset, over time, it starts to become a problem. The small agency faces the necessity of increasing its processing capacity and expanding the project team. Its owner must answer the question: how many new clients can we handle with the current level of resources? If the result of such a calculation is unsatisfactory, it’s already known that handling large projects or a bigger number of clients simultaneously will be extremely difficult.
Without external support or a change in operational strategy, problem number “6” may prove impossible to solve.
7. Lack of defined scope of services and client profiles
On the other hand, a small agency shouldn’t (and cannot) take on all possible projects. One of the critical challenges it faces is the need to determine not only what projects it wants to undertake but, more importantly — what projects to avoid.
We recommend clearly defining the range of services the agency will not undertake and the client profiles it will not serve. Such a conscious choice will avoid scattering resources and focus on areas where the agency can offer the most outstanding value. Otherwise, there is no chance that the services will be well executed.
Acquiring clients shouldn’t involve generating the largest possible number of diverse leads (it is simply a waste of time and energy to handle inquiries, e.g., in the context of technologies the agency doesn’t offer). It’s worth focusing on attracting inquiries that fit a strictly defined profile. Such selectivity and specialization prevent disappointments on both the agency’s and the client’s sides.
Consequences of the lack of defined services and profiles can include, among others:
- inconsistent service delivery leading to reputational damage,
- scope creep — expanding the scope of services by taking on additional tasks beyond the initial agreement with the client,
- poor management — teams work on tasks they aren’t specialized in,
- difficulty in determining client project expectations,
- inefficient work of marketing and sales departments — team members don’t know what type of clients to look for,
- client mismatch,
- lack of specialization (niche) — hindered competition in the industry,
- difficulty measuring results — without a clear definition of services and profiles, it’s hard to set clear goals and key performance indicators (KPIs).
8. Talent recruitment and retention
A small agency often encounters difficulties in offering employees competitive salaries, benefits, and development opportunities compared to large enterprises. This is a severe problem in the digital agency growth.
The demand for qualified digital marketing specialists, designers, developers, QA testers, or data analysts is high. Competing with larger companies can, however, stop a small agency at the starting blocks.
We’ve noticed that rapid technological development also creates a gap between required skills and those available in the labor market. Finding candidates with the latest skills and knowledge can be complex.
A small agency should have well-prepared employee onboarding and training. The lack of structured employee induction and training programs can lead to lower productivity of hired people and greater team turnover.
I think that at some point, a small agency may run out of arguments to retain the best employees. It goes without saying that the departure of a specialist has a direct negative impact on the uninterrupted continuation of the client’s project.
9. Work time management
Suppose the agency’s management doesn’t develop appropriate time management processes and good tools to streamline projects. In that case, I’m convinced that sooner or later, one project or another will suffer.
In the dynamic digital industry, the work itself is also dynamic. It’s then easy to rush too much, which can lead to stress, burnout, and a decrease in team productivity.
I notice that in small agencies, employees often have to handle various projects simultaneously and sometimes fail to keep up with tasks or get lost in the flood of activities.
Client expectations are also high and variable, which can disrupt the previously established schedule.
The lack of defined priorities and, thus, the order of tasks to be performed is another reason why employees can lose motivation. This leads to procrastination, wasted time, or delays.
I see how balancing numerous client projects, internal tasks, and business development activities without compromising the quality of work is a significant problem in many agencies.
10. Approach to project management
Going further along this path, what immediately comes to mind is the approach to project management.
I mentioned scope creep earlier, which also appears to be a problem in this aspect — the project scope must be clearly and specifically defined. Otherwise, any additional changes requested by the client can disrupt the execution of the project for another contractor.
Poorly chosen management tools and improper use of them are also problematic. The project manager should be someone who practically knows these tools and can close subsequent stages of the project using them. This affects not only the team’s work but also communication with the client.
Sometimes a small agency also skips the step of risk management, which also causes problems. If potential risks aren’t identified at an early stage of the project, this can lead to unexpected complications during implementation.
Thus, when writing about the approach to project management, I mean the major challenge facing the agency’s management in aligning a business strategy based on previously defined service scopes with tools.
11. Clients taking services in-house
I perceive the eleventh problem as particularly important. To some extent, it’s a result of the economic crisis — clients give up agency services in favor of developing their internal teams, e.g., marketing or development teams, to handle tasks previously outsourced to digital agencies.
Unfortunately, such clients often don’t realize that this is a short-term saving that will be offset over time by the need to invest in new employees, training, technology, and tools required for internal operations.
In such a situation, a small agency shouldn’t so much compete with the client’s internal capabilities as demonstrate its own value. It can do this by showing that its employees are specialists in specific areas (e.g., SEO, PPC specialists, or Drupal developers), while the internal team may have more general qualifications or lack the necessary technological experience.
The agency is ready to scale up or down its operations depending on the client’s needs. Internal teams may lack such flexibility.
There are many counterarguments, but it must be acknowledged that this is a significant challenge facing a small agency.
12. Lack of marketing knowledge and training
Even if a small agency focuses on a specific field of activity, such as web development or product design, there is a risk that it’ll skip the step of acquiring comprehensive marketing knowledge. This gap can hinder them from offering digital marketing solutions.
This generates many negative consequences, including:
- limited revenue and growth — reducing the chance of acquiring clients who expect comprehensive solutions,
- market perception — in the eyes of clients, the agency may be seen as less innovative, which affects its reputation,
- inconsistency in offered services — the client’s project may not be fully realized and thus will not correspond with the overall assumptions or needs,
- problem with employee retention — a limited service offer may lead to narrow specialization, preventing employees from professional development.
In my opinion, it’s crucial that marketing knowledge among the employees of this department is being expanded — it’s also necessary in promoting the company’s services.
13. Cash flow management
Here is the last problem, which doesn’t mean it’s the least important.
Having observed the functioning of various digital agencies for many years, I notice that maintaining cash flow is a considerable challenge for them. It primarily results from the nature of the business, which involves revenue fluctuations based on projects and variable expenses.
Below, I’ve collected several main elements:
- irregular income — agencies usually work on a project basis, leading to unpredictable income streams and thus making it difficult to maintain steady cash flow and plan expenditures;
- delayed payments — clients often don’t pay on time due to financial problems or administrative issues;
- high overhead costs — these include, among others, software licenses, system updates, and specialist salaries; managing these costs requires budgeting and forecasting;
- seasonal fluctuations — some agencies may experience seasonal workload and revenue fluctuations;
- dependence on clients — relying on a few key clients can be risky — at the least expected moment, one of them may delay payment, reduce their budget, or even withdraw from the project;
- currency exchange rate fluctuations — due to the global nature of the industry, variable exchange rates also pose a risk factor;
- inefficient invoicing — lack of actions regarding unpaid invoices and inadequate financial tracking systems.
An additional problem is maintaining healthy profit margins while offering competitive prices and effectively managing operating costs. We must mention the inflationary and demand pressure on service prices and the margin pressure resulting from historically high wage changes. The growing competition mentioned in the text also affects the need to lower margins.
Digital agency problems — summary
Every problem can be solved. By acting early, it’s possible to protect the agency from dramatic consequences. Being aware of the challenges mentioned in the text, we work with small digital agencies to help mitigate these threats, increase growth opportunities, and support companies in implementing new and larger projects. With a team of experts and developers, we can fill the gap between the agency’s creative approach and the necessary technical expertise.
Originally published at https://www.droptica.com.
