How to think about service expansion

Should you double down, or should you expand the types of services you offer?

Something I’ve been surprised about over the last 15 months with the Covid pandemic is how well businesses owned by friends of mine have done during one of the quickest flash crashes of the economy ever (the worst since the Great Depression, if my memory serves me right). I mentioned here on the IndieHackers podcast about my own business, but I have also heard from many friends and customers that their businesses have done amazingly well over the last 15 months and they’re sitting on a big pile of cash that they are wanting to invest well.

A quick note before I continue: I want to caveat the above with the recognition that the Covid pandemic has also been an incredibly challenging time for so many worldwide and in America. The recovery is K-shaped, with the rich and privileged bouncing back incredibly fast and doing better than before while the most vulnerable are not seeing that recovery and have also been the most at risk through the whole pandemic. My wife and I have challenged ourselves to give more generously to non-profits who target things like hunger. If you have also done well over the last year, I encourage you to consider giving more generously now than you have in the past.

The pandemic has been a wake up call to everyone and especially business owners. A lot of us saw a drop in revenue in March/April 2020. Many of us then took a hard look at our books, cut the extra spending that wasn’t necessary, and have kept a very close eye on our numbers and profitability. Because of this, many of us are sitting on that aforementioned pile of cash.

Just this past week, I was catching up on a quarterly call with one of Credo’s agencies. When I asked this agency owner how their company was doing, they said “Honestly, we’ve done really well in the last year and I’m sitting on about 14 months of payroll and expenses in the bank right now.”

They then mentioned that they’re trying to figure out how to best invest that cash to grow their business.

It was fortuitous timing, because I had literally asked my own coach that exact same question the day before.

I asked him this question because I’ve never taken a business class before (I used to think this was a good thing, but now I actually see it as making my life harder) and I don’t have a good framework for thinking about growth past a certain point. Because we’ve done well over the last year we have gone from ~2 months of cash in the bank to ~10, and from my reading of Simple Numbers, Straight Talk, Big Profits I have been thinking a lot more about what it means to run a profitable business.

I’ll be talking about that in some upcoming posts, but today I want to show you the framework I’ve been taught and explained to the agency owner above.

The decision basically comes down to “Do you double down on what you’re already doing, or do you invest in parallel areas?”

Here’s how I visualized it to the agency owner.

First build out your offer ladder

A lot of agencies have one offer. For most marketing/development/design agencies, it goes even further into the mode of every pitch is custom.

A new lead comes in, and you follow the same sales process regardless of their budget or needs. Regardless of if they have $10k or $1k per month to spend, you custom quote the project.

First step to thinking about agency expansion is to layer offers above and below this:

Let’s say Level 2 is your regular custom quoting. You should still keep that (after all, it’s gotten you to where you are now).

But you also need to think about offers above that that are MUCH more expensive but also deliver a ton more value. Think about it with this question: “I have no problem selling a $2.5k SEO retainer. What would I need to offer in order to sell a $25k/mo SEO retainer?”

Likewise, think about downsells. If you usually sell marketing retainers for $5k and turn away anything below that, what would it takes to sell them for $2.5k and be able to deliver them at the same profitability and not require more from you personally?

You’re not going to be able to do this overnight and doing it will involve changes to your company, but it’s how you build out your product ladder and will make you think creatively about how you’d do it even if you don’t end up wanting to do it.

Now expand horizontally

So now you have your offer ladder built out around your main core competency. You’ve gone up market and down market and your business has grown while also maintaining profitability.

At this point, the right move is likely to expand horizontally instead of doubling down by doing something like acquiring another agency in the same space as you. That approach might work if you’re acquiring your way into a downsell or an upsell, but to buy companies doing the exact same thing as you at the same price point doesn’t make sense because you’re not expanding your footprint.

Once you have offers working, it’s much cheaper and more profitable to expand those existing clients rather than getting new ones. It is always cheaper to expand an existing client than to acquire a new one, and much less risky as well.

If you offer marketing services right now, what are some areas that might make sense for you? The obvious ones are development and design. Clients who need Facebook Ads likely also need creatives for those ads, and may not have those capabilities inhouse. Pay attention to what you’re currently saying no to, then think about how you could offer that. Maybe you hire a designer. Maybe you acquire a small design firm with a few clients already and then cross-sell those services into your existing clients.

Here’s a visual:

This is how you take a $2,500/mo marketing client and turn them into a $5k a month client with minimal increase in expense to deliver. Profit margins go through the roof.

Now do it again

Now that you’ve done it once, you’re starting to establish a playbook for how to do it again. You expanded into design from just marketing and your business became better and more profitable and your clients are getting better results.

Now do it with something else in parallel, such as development.

Why not double down on what’s working?

This framework blew the agency owner’s mind because they had been thinking about doubling down by acquiring another agency that does exactly the same thing they do.

Why not do this? Because you’re already acquiring clients fine on your own! You’re going to reach a local maximum and continue paying for getting the exact same clients. You’re probably already feeling the challenge of “if I could only clone myself, my business would be awesome”, and doing this will only exacerbate that.

By going horizontally, you’re able to keep hiring people who are great at things that you are not instead of building out a big organization of junior individual contributors (ICs) who require a lot of training and stick around for 12-18 months (approximately 6-12 months after you’re done training them) before they move onto something else because you can’t pay them more because of your margins in your existing business.

I also believe in continuing to add more value to existing clients while also expanding the number of potentials you can serve.

If you’re offering SEO services for example, you have one entry point - companies who need SEO. When they need PPC or Facebook ads, you can’t help them.

BUT, if you offer SEO and PPC services, you now have 2 points of entry for clients thus expanding your pool of prospects dramatically. If you also offer Facebook ads, you have 3 points of entry. And if you offer creative design for Facebook ads, you now have 4. If you offer landing page design and development, you now have 6.

You’re expanding your ability to bring on new clients for cheaper and then you also have more chances to expand the client with you because of the additional services you offer.

🤯

What about “diluting my brand”?

Right now you’re probably thinking “That’s all well and good John, but won’t that dilute my brand?”

I know you’re probably thinking this because it’s the question I asked my coach Chris and that my agency customer asked me.

It all comes back to your company story.

If you’re an SEO agency, it’s perfectly natural to layer on PPC and/or Facebook ads. Think about it. “Agency, a leader in the Search Engine Optimization space, has acquired AgencyB, a leader in the Pay Per Click advertising industry, to expand their service offering.”

It’s natural. It just makes sense. People will look at it and go “Yep, makes sense.”

But what if Agency acquired a restaurant? Unless you’re a restaurant-focused SEO/PPC agency, it wouldn’t make any sense at all. “Agency, a leader in the enterprise ecommerce SEO industry, has acquired ThaiRestaurant in Cincinnati.”

It doesn’t make sense at all. So, you shouldn’t do it. Or at least, it shouldn’t be your agency acquiring the restaurant. If you’re the owner of the agency and have always wanted to own a Thai restaurant in your hometown of Cincinnati, I say go for it. Just don’t do it as part of the agency.

What do you think?

I’m curious what you think about this framework for growth. I’d love to hear it (reply to this email and let me know! I’ll share a few next week).

Speak with you soon,

John

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