Ad Agencies Are Struggling More Than You Think — Andrew Foxwell Has The Data transcript

Hello, Andrew. Hello, Andrew. Welcome to this joint podcast. I think many years ago you tweeted something that we needed to start a podcast together called Ferris and the Fox. Mhm. And >> It's it's already a hit. I know and I always thought that it stuck with me. It was a simple tweet a long time ago, a friendly gesture and outreach. And I remember it because I thought that's got a nice ring, Ferris and the Fox. Could be good.

So, listen, you ditch Brad, I'll ditch Patrick and we'll just go start our own Ferris and [laughter] you know, Brad Yeah, exactly. Let's go. Co- co- co-released episode with Scalability School and the Ferris podcast together. >> at us doing marketing while we're talking about marketing. Unbelievable. Yeah. Okay, I called I called this meeting. Uh >> Yes, you did. because I loved your tweet thread about your state of agencies report.

And then your state of agencies report information in general. Uh and I thought it was relevant to people way beyond the agency space. This is my this is my theory. I said can we please talk about this on a podcast because I was thinking like what agencies are doing matters a lot for what brands are doing. It matters a whole lot for them because it just changes changes how money gets made and how money gets spent and all that kind of stuff.

So, um I don't how should we Do we need to introduce this anymore? Do people need to know I think people know who you are and who I am probably in our audiences. Do you want to say how you >> Fine. Why don't you tell people who >> Don't need to do an intro. Okay, great. I'm a marketer. I grow businesses. You are a found- you run founder a founder community and that's how you got into >> Yes. agency report, right? That's it.

Yeah, and so we have the we have a lot of folks in our group. It's about 600 people and in the group about 65% of our folks are people that run agencies or are in-house at agencies. And so we took in we had hundreds of people take the survey. Then I collaborated as well to get Motion to give a little bit of send it to their list as well and but predominantly this is like 90% really our data. Um and it's great. I mean, it's it's crazy really.

Um the stuff that's come out of this. If you haven't seen it um this is the FoxWell Digital Motion State of Agencies Report 2026. Um and we'll include it in the show notes of course for you to grab if you if you haven't grabbed it. But you know, a lot of really interesting data in here and some that you I really didn't expect to be totally honest with So, yeah. >> Uh what did you not expect? What did you not expect? Should we start there?

That's interesting. That's a good hook. >> Sure. Totally. I mean what I didn't expect out of the gates was one, I was really surprised at how many people sort of saw AI as the opportunity but also the threat. I think I I would really saw it I I hear more about it as an opportunity because we're all sort of building in this phase of building stuff now. And I know that it's a threat but um the percentage of people to which it's like I haven't told anyone this but I'm really worried about this um is is big.

I hear it in private coaching that I do but that's one thing. I'd say another one that I that that was really interesting was you know, just the percentage of of of labor costs and really how slim a lot of margins are for folks in their agencies. A lot of folks are not paying themselves enough. And the biggest one I would say that I found interesting is how many founders are still involved in the day-to-day delivery.

Um you know, how many people are still in the trenches which I'm not saying that's necessarily bad and I think that's a good thing to a degree but it also can hinder growth for a lot of agencies. Um if that person is is in there and and really involved in the day-to-day of pulling the levers. Um and so that's an interesting one that I that I found. So, I mean there's a ton of other things we can talk about but those are some good starters.

Okay, Andrew, you said three things there that were interesting to you. I think we should go through each of them cuz I will tell you my experience of every single one of them uh was to relate to the finding of them. So, I too feel that AI is an opportunity and a threat. Uh I too am involved in the day-to-day of delivering work though I act very actively pursuing not doing that anymore. And you're absolutely right that it is a is a hindrance to our growth.

But who Uh and I actually and critically, I think it is not the best way for me to serve clients. I I think my clients will be much better served by me working on the machine because of what an agency is. Um so, it's just a matter of getting to the financial place where that works. Totally. And then labor costs I think was the other one. Uh >> Labor Labor costs is is is the is the second one, yeah. Yeah, I mean also a concern for us uh and and for our agency because probably partly because it's a concern for other agencies.

What I mean is like that drives them If that's true across agencies, it means it's driving the market the market price for services down relative to labor costs, right? Like if the labor costs are high relative to the service pricing everywhere, then it means that when I go out to pitch a client that the the brand the client is comparing my costs to others and So, yeah, it's it's a sort of like you know, if it's true that your margin is my opportunity then if my labor costs were very low relative to my service costs, then I would just get competed away.

So, my so you have to you can't have your margins be that that that fat. So, let's do them all one by one. So, let's talk about the AI. Let's give me the give me the stats. So, this is not just like your reflections. Give me the give me the AI stats here. I'll play interviewer here a little bit. Tell me what what what people said about AI and its place in agency work. Absolutely. So, uh you know, AI let's talk about AI generally and we'll talk about AI AI creative.

So, AI is simultaneously number one risk and number one growth opportunity, people said. The duality is the story. Um so, 23 20 excuse me, almost 26% say AI-powered services is their biggest growth opportunity. The single top answer beating out creative differentiation and owning strategy and vertical specialization. Only 6.3% are not yet using AI for research and ideation. Um everyone else is uh which is interesting.

So, a lot of people are using it and a lot of folks are doing it for generating ad messaging and angles, analyzing customer reviews for insights. These are all 67%, 64% respectively. And competitor analysis 50%. So, agencies are shifting hiring philosophy away from volume toward upskilling teams. And then some ad creative stats. Uh 46% say that the number one challenge in AI ad really ad creative right now is maximizing speed, efficiency, and quality um in ad production.

So, it's interesting. So, anyway, there's a bunch of to say there. I guess the overarching piece is we're all sort of figuring it out. People are using it a ton for ad creative right now. That's predominantly where it's been used which is obvious, it's the biggest lever. I think from my standpoint and talking to other founders the big one that has seemingly come out even since we did this data which was literally in January and February.

That was in March of 26. is that now people are utilizing it for optimization on agency processes and and standardizations on SOPs and agency organizational frameworks and things like that. So, it's started shift from we have this you know, process established now it's over here. Um I think one thing I'll say on the threat side on the threat piece of it is that it's become so exponentially powerful that we just don't know what's going to happen with it next.

Like you know, there's sort of the manace out there. There's these other pieces out there that we just don't know what they look like. We don't know how they're going to manifest. And that is what brings fear because it's obviously just fear of the unknown of what it looks like. Um and we can talk about what you can do about that as a agency owner or brand owner. But that's kind of where that stands. Have you gotten any subjective feedback about sort of what people are trying to how they're handling the threat?

Like what are they thinking about it? And or even from the or from the brand side? I'm curious like like did have have you heard brands weigh in on and say like the AI creative that we're getting is bad or good? Like you know, I'm just curious for the sort of different perspectives that you're getting in terms of what agencies are doing about it. You mentioned one thing which is they're building more standardization of process which is absolutely what the last couple months of our agency efforts have been uh in with AI.

But then and I think that will be a lot of it going forward. But then I think the there's this interesting question of like what are we doing about the threat? And then also I'm I'm also really curious if any if you've heard any operators weigh in on sort of how they're perceiving this from the client side from the customer side. Sort of like you know, what they're expecting and seeing agencies in this. Yeah, so I would say on the you know, on the threat side, you know, what are people doing about it and what can they do about it?

You know, I think it's never been um a greater time to understand what your true differentiators are as an agency of understanding, you know, is it the service? Is it that you're going to do a different selection of services? Is it that you're going to help your clients integrate AI in what they're doing? Um is it you know, is it a is it a whole bunch of those different pieces, right? I think that we've gone from this phase of being an agency where you're running the ads and that you're pulling the levers to now, you know, in the last couple years you've become the creative arm and the creative strategy arm that's pushing things forward.

Um and you're helping people on that. Then it's you know, also simultaneously become a true business partner. You're looking at the numbers. You're looking at their financials. You're understanding what the contribution margins are, what the net new customer percentages are, right? You're really involved in that. And I think now it's the next phase of this. So, everybody's thinking about AI and are you going to be an agency that helps them do that?

And I think that's and and that can mean a lot of different pieces. Um so, that's one. Are you going to add different services? And what's the value proposition that you're bringing to them? And you know, not just pulling levers. Sometimes that that proposition can just be that you're freeing up a lot more of their time, which is great and that's something they're willing to pay for, but it's also, you know, what else are you going to offer them that's different and unique.

That could be that could be an extension onto creative services, that could be competitor competitor analysis, that could be deeper reporting that you're able to provide them than you were able to provide them before, that you're building them dashboards and bots and things like that that they can talk to. You know, there's a lot of pieces in this where it's like, what am I really good at with these folks and how can I offer it as an agency that makes it sticky?

To your second question around what are operators seeing, yeah, I would say it's it's a mixture. I would say that people have said, I feel that my agency is definitely producing a lot more and that's awesome and we're able to do with that a lot with that. I've also heard the reaction to that, which is, you know, it's a mess. We're testing 200 creatives and there's no system. I don't feel like there's a system. So, I think when you start to ramp up AI efforts, it's really important that you build systems into it.

You understand what the frameworks are and how you're measuring it with the client. Um, so that as you start to increase creative production, you know, to help this person grow, that they are that there's a why behind it. I think you also agencies don't do a great job in in large part. I think I try to really push this in the founders community, but those that are outside of it that I haven't heard me say this, you know, I think it's really a matter of how well are you listening to the client in terms of what they what their concerns are and what you can do to make them successful.

So, whether that's their stakeholder is themselves or whether that's their spouse or whether that's their boss, if they're the the in-house marketing person, it's like, what are they nervous about? I always ask people have a conversation. What are you nervous about that you're going to need to get answers on, um, you know, that keep you up at night and how can I help solve those things because that's ultimately what's going to make it really sticky.

I've also heard from from other brand owners that they're like, I can do a lot of this stuff myself now and um, Amy, let's just talk about CRO. I'm building, you know, with Claude Code, I'm building my my stuff. I talked to a guy yesterday who was doing this. Building all my own landers, I'm launching them, they're crushing and my ad people are running and it's doing great, um, and I'm just making sure that these two things match.

I just look at the top creatives they're running. We have our persona maps and we're just making sure that they match to the creatives that I'm building. So, I was able to fire my CRO agency. So, unfortunately, there there I mean, there is like some cutting that happens. I think it depends on how technically enabled that operator is, right? And the way that they're thinking about it, but I think that there certainly is a bullish feeling from those that are, you know, really leaning forward like you think about somebody on X like Ronnie Kam, who's technically enabled, very smart, young, scrappy, can can get it done.

I talked to a brand owner in the group, um, who is, let's see, I think she's 45 and she loves that her agency is moving a lot faster. She's not has no intention of firing her agency. She's going to keep him around, but she loves that there's like a lot more happening and there's systems and frameworks and they're doing AEO and GEO, the agency is now as well, right? And they're like pushing that with LLMs and she feels more confident in that.

And so, the activity is a function of making you feel more safe in that relationship. So, there's a whole bunch of stuff that puts everybody's kind of interpreting it different and she doesn't have the time nor does she want to make the time to become the marketing person. And so, I think, you know, you kind of always have to look at it through that lens, but, um, those operators that are listening to this podcast, you know, that are listening, I mean, probably they're going to you're going to be the people that are building stuff on your own and if that's the case, then I would just encourage you to to work with your agency as it stands now to let them know what you're building and how and why, um, because you want to try to keep that stuff close to the vest sometimes, but I think if you have a true growth partner, the more that you tell them, it can become that yes and stand up type of relationship.

I mean, where they're just building on what you're building and it becomes an incredibly powerful growth engine for for both for everybody involved. Just last week, I promoted a team member of mine. Proactively gave this team member a raise, told him about his path to his next promotion because he's making an enormous impact on the business. One of the most important people in my business and he came to me from More Staffing.

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I bet you'll be surprised at how [music] good it is, what the cost is for you and how much of an impact you can make on that person's life in the Philippines by paying them at or above market. There you'll get great talent there. They will be loyal to you. They will be happy with you and you'll end up having a great relationship. morestaffing.co/af morestaffing.co/af get started today. A couple thoughts on that. One of them is that probably part of the the reason that the technically enabled founders building themselves because they're the kind of founder who started their business like like me launching a brand or something like that where it's like somebody who is like coming from a digital ads background.

This is this is definitely a an archetype of found of founders. It's like absolutely. It's it's a digital marketer who sees an opportunity to build a brand and so that's their core skills that they come in with and that that founder probably ought to hold that skill set close to that because if that's the thing you're really good at. I mean, I've gone through this where I've sort of like come into running brands as a digital marketer and then was asked to move into other parts of the business where I was actually much less equipped to do it.

It's not really the reason I got there and and, you know, by the by the investors and all that kind of stuff and it was a mistake. Like I should have just spent my time in in that and not used agencies and other people in that instead like hired smart people who were enabled with the best tools to do the other parts of the business and report to me on those things. So, there's a certain kind of founder who's that person who's like the digitally like savvy performance marketer founder.

Those founders very often have a really hard time scaling past some threshold or another because as good as they are like that unless they are truly elite tier and I actually think most people are not, they're going to run into a cap and that cap is represented by things like product development, marketing calendar, brands, all of that kind of stuff. So, they're going to get to 15 million or something like that, you know, and it's a good business.

It's nothing to sneeze at at all. They're going to be spending a few hundred thousand dollars a month, but they're going to hit some spot where given all the AI tools and everything, it's not it doesn't matter. Like they they can't get through that that next thing because they haven't been able to do the rest of what is required for brand, engineer their cash flow, think financially about their business, think about their supply chain, all that kind of stuff.

Um, and and so, on the other hand, I think there's a other there's a group of founders who are going to benefit from this whole thing who are exactly the kind of person that you described second, that 45-year-old woman who is like and speaking as a 42-year-old man who's not like it's like going to stretch for me to generate to get better with AI and stuff, right? Like that woman like I would say she actually might be some of one of the best suited people to to to to win from this whole thing because Right.

Um, she's [snorts] if she can actually if her agency is good and it sounds like they are, right? She's happy with them, then they are going to generate a bunch of benefits from this that they're going to actually get leverage from across all of their views, right? Like nobody has more incentive to to have their COO spend two months building out an operating system that collects all of the client's assets and data and build a lander launching machine and create a machine and all that kind of stuff than an agency, which is exactly what my COO Patrick just did, right?

Like uh, because we have to deploy that against a a bunch of different brands and that's the only way we exist, right? So, we're going to spend all of our time on that. That founder you're describing needs to go to China at some point and talk to her uh, her manufacturer, you know, and if she want you whatever. So, the point is I think there's a way in which there's a sneaky way in which I think in some ways the services that the the AI win for that person is going to be the increased productivity of really talented people who are part of your organization who are not you where you do the thing you're great at.

Uh, and in that respect, it's no different than a traditional agency relationship. A good agency would have been providing that kind of value all along the way while you provide unique value in your brand in different ways. And I think I think getting that right is super important, uh, because I think I think it's the pathway to to being successful on both sides of the fence there. I completely agree with you. You know, one of the pieces that becomes abundantly clear when people hit a growth ceiling, and this could be in an agency relationship or or in an agency or a business, like a e-commerce business, is when the founder starts to uniquely understand and operate on the why and operate from that point of like this is really what I know I can do well.

And, you know, I think AI makes it so accessible, so it's very difficult to, you know, like if you lived on on the beach and you thought you were going to surf every day and then you just assumed by living on the beach you were a surfer, like this doesn't work like that. Like it takes time, it takes attention, and it takes energy. And if you're giving it, you know, you're going to surf every 2 weeks, you're not going to build up the understanding of what to do, the timing, the muscle memory.

And so, I think I've seen that happen a lot where people are hurt hurting themselves in that growth. And so, the more that you can push forward on that and say, "Look, this is what I'm going to do. Operation supply chain, you know, this is really where I shine." Um, the better off you're going to be because I think you're the one that had the unique idea as the founder, you know, I mean, in agency relationships, like going with the vision, trying to push it forward.

And I think so many people are bogged down in the day-to-day that they don't give themselves that time. And it feels uh selfish. I mean, when I do I do, you know, a lot of coaching, like I said, and I always have people list out zero to 10. I learned this from a from my coach many years ago. Zero to 10, what are the things that you love to do and you feel like you're great at, and you list them out, and then anything under a seven out of 10, you just start to try to eliminate.

Because the goal with that person is to try to free up what they are uniquely adding to the business while you're giving other people who are great at what they do the operational independence to say like go and run with this and make it great. Um, so yeah. But I mean, obviously there's financial constraints and all that, too, but I think it's one of those that feels like a it it feels like I don't know, that feels too much, I can't do that yet, but actually it might be one of the most powerful things that you can do for your business.

That's right. Yeah. Um, let's talk while we're on the AI subject, let's talk about one thing in particular that came up in your report that I think is really interesting. Uh, you said on AI-generated ads, only 11% of agencies say they've produced clear top-performing winners. 35% say results are mixed or inconsistent. 21% aren't using AI-generated ads at all yet. Uh, now I think there's a question about what is AI-generated ads actually mean.

Like, uh, does that mean fully done creative? Does that mean copy? Like, what, you know, it's a little tricky, but but that top number, 11% say they produced clear top-performing winners. One of my concerns in AI right now is that it I had somebody email me this after an episode that Patrick and I put out about about sort of our investment in AI. And basically, his his email said in so many words, "Convince me convince me that this is actually benefiting your clients." Um, and the idea was like it looks really cool that what you guys are doing, and I see that, but are you sure this is actually benefiting the kind of work that you're doing?

Now, I I have a lot of thoughts about that, but specifically with AI-generated ads, I'm really curious about this. Like, I I have a little theory right now that um that AI voiceover is like is materially less str- like uh like performs materially worse than a human voiceover. Uh, and I have a theory that that will only get worse uh over the next bunch of years because um even if AI VO gets better, if it's detectable at all, customers will take that as a sign of inauthenticity.

This is an interesting factor in the AI thing, which is that um Americans I I heard this stat recently from uh the AI Daily Brief, great great podcast about this kind of stuff that I don't listen to every day, but it has some really helpful episodes. Uh, he would the host of that show was saying that it's like 60 to 70% of Americans uh are are have are mostly have negative feelings about AI. And so, if they are predisposed negatively against AI, and particularly, my guess is generative AI, um you know, visually generative AI, it seems to me that there's a real possibility here that that like AI stills I think will probably work as well as stills can work because they will just be good enough and they'll just look like any other still, but but particularly AI video, I'm really curious.

I mean, it's getting really good, I know, but like I'm really curious if there's going to be like a thing here where it turns out that you actually really have to pick up a camera and shoot still. And like, do you know what I mean? Um, so I I don't know. Reflect on that however you want. That was a little bit rambling, but like that that stat is interesting to me. 11% say they produced clear top-performing winners. That's a low number.

Totally. You know, I think the I think some of it is timing. I think some of it is with this report was done in January and February of '26, and that's a little bit different than March. We're we're mid-March of '26 where we are now. I think that's one. I think the second one is a lot of what was happening with AI in the early part is just what what happens when you get excited about this type of generation, which is "Oh, I can do this.

I'm going to make a bunch of this." >> [laughter] >> And you just and it you were you replaced you sort of volume is the goal over quality because you're like, "Can it do all this? I'm curious." And you launch them into accounts, and you know, it's not working, and you know, generally you're like, "Hmm, that's interesting. It didn't work for me." And I think I've heard from a lot of people in the founders community that "Look, I tried I tried it, it didn't work." All right?

And okay, that's fine. And I think that's a function of maybe that you tried it a while ago. It could be a function of the inputs, obviously, that were given to it. So, it's like they're not necessarily the format that's converting. They're not the type of ad that they, you know, you didn't you weren't able to give it "Hey, these are winning ads, make more things similar to this" like you are able to with more sophistication now, even a few mon- a month later or a few weeks later.

Um, and so, you know, I think that's part of it. I I do think that AI creative will start to be more, you know, top top-performing, and you'll see that happen. Uh on your theory about AI video and or about AI voiceover specifically, I completely agree with you. And And this is totally detectable, and I think one of the things that um will keep you know, those of us that are doing creative stuff or, you know, people like in our Hive House community for creators, that's definitely a question we get a lot, and I think Meta's going to detect that.

And Meta is is is able to see that. What you're going to have to do is declare it. You're going to have to declare it. >> Yes, 100%. >> in some way. >> Legally, I think you already have to. Yeah, right. And but they're going to keep doing that. And And the thing is, the enforcement's not going to happen at the federal level or whatever it is. Like, there'll probably be some big big high profile cases that do this just to like sort of send the scares out, but there's no way that like you know, just like the FDA doesn't actually crack down on all the supplement brands right now, even though they probably should, like the at the for making all kinds of crazy claims about, you know, what their supplements can do.

But uh but they'll do it sometimes, and they'll do that enough to scare people. Where I think the actual onus is going to be on the social networks, uh and that and that sort of people will just demand this of them. That they that they are the ones who are going to have to say, "Yes, you must declare that this is this is the case." And the social networks are going to want to get ahead of that to some degree, I think.

I think that Look, what do I don't have a crystal ball, but that's my theory about what will happen what will happen next because I think yeah. Anyway, so you're right. And they And And they're also going to be able to detect it, like you said. And they're they're going to do whatever their users respond to positively. If it creates a bunch of really negative sentiment from cus- from their users, they're they're going to penalize it in the algorithm.

Yeah, I would say that, you know, where AI sits now, obviously, in the creative workflow, being the most powerful arm for those of, you know, for those of us in growth, like the biggest it's helpful, you know, the biggest place where it moves a lot the pulls the lever is on research. I mean, you know, you're able to discover different pieces you weren't able to discover before. You're able to discover new avatars to go after personas to go after.

You know, you're able to look at competitive research more effec- effectively and efficiently. Um, you're able to come up with maybe some new language you didn't necessarily think about through frameworks you know you had wanted to do. And so, it gives that part of it in terms of the briefing, in terms of the creation, and in terms of, you know, the effectiveness and efficacy of that is is is going up and is getting better, which is good.

And that makes our lives easier, and that does save time. And I think that side's great. I think the idea of it going from, you know, here's what it is to all the way to creating a banger ad that's going to really win, you know, I think we're getting there, but I don't know that it's necessarily there at this point in time, and I don't know that it will ever be there because I think there's going to be theory out to disclose, like you said, and, you know, Meta will know, and um so will Google for that matter.

Like, >> Yeah. you I'm not saying it's necessarily going to be frowned upon. I think that they're going to want the core input, though, to be human-created, especially if it's video. Yeah. >> Um, and a person talking about it, and that's going to be an important weight on the creative. Um, and obviously, they're going to screw with it as it goes on, and, you know, put the headline on your forehead and whatever. But like, the input core is going to be something that's human-related, and I think that will continue to be weighted and maintained that way because I if if Meta doesn't do that, they know it's going to be a problem moving forward, you know, that it's going to be overrun with all these people saying stuff, even if there's disclosures that aren't necessarily true or aren't necessarily real.

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Go to richpanel.com or follow the link in the show notes to get started with Richpanel today. One of my little theories is that the reason that some AI creative does work so well when it does work even if it's not as not as much as people might think is just that a lot of creative is really bad to begin with and and so the reason that there will be a place for winning creative along the way is just that it's really hard it's really really really hard to produce consistently really good quality creative that actually sells product.

It's it's very difficult. And so so a machine that can just do it at volume probably is going to get some things right and and it's going to beat the beat the average. And it does still reinforce to me that that the real magic in a lot of this stuff is in the is in the context basically. It's it's in it's in your ability as an agency to have real point of view. Have real real point of view that is right about what makes good creative and to to actually be able to to use AI to to amplify that.

That's that's where I think it's going to win. The thing that's easy to forget is that AI amplifies slop just as well as it amplifies really good things, right? So so it's so and that they often present actually kind of similarly. It's it's hard to tell the difference at times. And so so it'll amplify anything that you want to amplify and and so you better get good ideas, you know? Let's let's go to let's go to another thing that you brought up in this which is labor costs and margins.

And I I want to talk about this because I kind of think that like this is an interesting topic for operators to think a little bit about actually. Agencies certainly, but for operators as well. Think about this question of what kind of margins is my agency agency making and why? And let me let me let me tell you my perspective on this and then I'll be curious what the data actually says here, okay? My perspective on this is is partly informed by things I've talked about with other founders over time, but just that like standard agency gross margin by which I mean the people and software directly connected to doing the actual work itself is between 40 and 60%.

Okay? And that that's kind of the range that it ought to be at basically. Gross margin on the work itself. That's before any sort of layer of op-ex on top of that which is a real thing in agencies. And and that in the end the net margin of agencies can get up to like 30% maybe even 35% at the very very best, but but really if you push either of those numbers much above that the net or gross margins you're just creating risk for yourself as an agency.

And so it actually isn't you actually don't want to go any higher than that. It's better to actually apply more services that create cost rather than maintain the super high margins especially in the AI world cuz people will just come for those margins. Again, your margin is my opportunity. So if that's true that that's the case, there's another factor though which is that it's very hard to scale revenue fast like it is in an e-commerce business, right?

Like agencies don't go to $10 million in year two in revenue. They just can't. And so agencies must operate at a higher percentage margin on a lower revenue number whereas an e-commerce business might look and go like oh 20% margins for an agency or something like that. That's pretty good even 15% right? That's better than a lot of brands are doing except it's of a of a much smaller pie. And so like the reason an e-commerce business can exist at 10 to 15% margins while being extremely cash intensive is because scale is the way you win in a lot of ways and you need to get your revenue number up and that's where you create op-ex leverage and some of that.

And so so yeah. So there's there's like it's just a very different kind of model. And my take here is that brands actually ought to be okay with their agencies making a higher margin on a lower revenue amount and then what they should expect them to do is expect them to make pretty good margin on the services, but apply really really good quality services. And that's basically the way they ought to measure things and that trying to sort of re-inhouse that work or go shop for just cheaper is actually the wrong way to do it.

The agencies are are controlling often your largest single line item in your business. You want to give them a strong incentive to do a great job on that. And yeah. And so that's that's like my approach to thinking through agency for us versus our versus our brand partners etc. So I'm like yep. I'm going to exist at a higher percentage margin than you which we're not at the numbers I just quoted by the way. So we're we're working towards it, but we're not there yet.

And so that's the case for us, right? Is that we we want to be there, but we're going to grow slower than than the brand. Our top line is not going to push up nearly as fast and we're going to do that in part because that's all if we try to push that top line up too fast, that's the fastest way for us to do really bad work is because we tried to grow too fast etc. And so you should actually want us to make if we start trying to go do that because you're going to squeeze my margin if you're if you're a partner, all you're going to do is just make it you're just going to give me a really strong incentive to do crappy work for you.

So that's the way I approach it. What is it actually what is actually happening in the agency world? I mean I think you know everybody's a little bit different. You know we we in the founders community a lot of our folks we certainly have a percentage of people that are in the solo practitioner world and they might have a couple contractors. I would say you know that's probably you know we we represent as well 30 countries.

We have members in 30 countries. And so this is mostly in the western world. So you know I think that's caveat to put that in there, but a lot of folks are have seen seen the other colleagues of theirs grow um and try to grow too quickly and they have said I want to stay small and keep it small and their margins are high and it's a small pie like you said and I think that works really well. Um you know I think where we see people that have really high margins is the their entire team is outsourced or offshore.

And I don't you know think there's necessarily anything wrong with that if you do it the right way and if you take care of those people the right way and you know pay them a livable wage and things like that. I think where you know I I guess I would jump back and and say to the margin thing is interesting just because I believe people think and you would if you were on X as an operator you would look at this and be like look at these freaking agency people.

They're buying cars. They're always making a lot of money. You know and I think it's less than you think it is one. And I think most people are having a really hard time and I think those that are having in terms of growth and I think those that are having the hardest time that have the smallest amount of margin are those that are in this phase of trying to grow their agency and there's a lot of unintentional agency growth that takes place because they're just growing because they want to get bigger and want to be seen by their colleagues as a bigger agency.

That's a very that's a more common thing when I get on calls with members than I than I would have ever imagined I would hear. I want to be at the big kids table is always I want David Herman to know who I am. That's what I hear. Never underestimate the human desire to to be part of something. To be part of something and to look more successful than you are. It is it is a fundamental motivating factor particularly when there is algorithmic and financial incentive to doing that.

You're you're you're just taking that desire for humans and algorithmically shoving it right back in their face. Yeah. So that's really interesting. So I think if you depending on where you are in this, you know you're an agency, let's just talk to agencies first and you're in this I would say Wait actually I want to go back and clarify something. I'm sorry to interrupt you. You just said you got on calls and are you saying that on those calls what you're discovering when you talk to people is they're actually not making very much money and they're struggling?

So there are a certain group of people that join the founders community and their why to join the founders community is because they need a place for support and they sort of feel like I'm doing all this work. We're not making any more money and I don't know what I'm doing wrong. And we do you know intro calls with every new member and in those conversations and in getting to know these people a lot of it is that. They're they are like man I'm really struggling.

I'm trying to grow and I'm just not really happy. Um and so yes. So yes. There there's a lot of that internal struggle that takes place. And it's you know it's it's led by like we talked about. It's led by imposter syndrome. Wanting to be cool. Wanting to appear a different way. It's wanting you know when I ask people why do you want to grow? You know they have one or two answers. One is is it's like an ego one or one is is that I want to aim for a sale.

Okay. Well that's a different that's completely different type of a thing. I want to grow it so that I can get above a certain number so that my multiple when I sell is higher. Okay. Totally legitimate. I understand that. And so by pushing on the I'm going to hire. I'm going to go out and you know find more clients. I'm going to crank up a pipeline. You know this type of stuff. By pushing on that without first establishing the why of what you're doing this for is like the craziest thing because it's sort of like going in if you do therapy and you're like trying to do therapy because all this stuff in your family bothers you but you yourself haven't done that work to understand what you need.

You know, like this is this is the same thing. Like you have to fix yourself and put your own mask on first before the before you assist others. And that's really what this comes down to. I think a lot of people they just they grow for the sake of growing. >> Look, as an entrepreneur, I get it. I am 100% in this and have done this where I love I love selling. I love pulling out and then I'm like the more I focus actually on making pure money, the less money I make.

And the more that I go back to the why am I building this founders community or why am I coaching these people is because I care and I want to help people be successful and you know, it's other stuff around that that personally motivates me and that's a very different thing. And so I think the more that you do that work, the better off it goes. Um and I think generally when you get on, yes, margins are a lot smaller.

Um and there's a lot of different things that you can think about with that, but it it's interesting and surprising to see uh certainly because it outwardly it looks a lot different. Yeah. I mean, it's interesting because what you're describing is some individual experiences that in some ways are a little bit different than the data. Said 42% of agencies are running margins above 30%. Uh and and of agencies of 6 to 15 employees, 36% are at 40 to 50%. 16 to 30 employees is the same. 40 to 50% on gross margins.

Gross margins. Um that's not net. So net margins 41 42% above 30%. And then of the 6 to 30 group, the gross margin is 40 to 50. That fits very well with basically what I just laid out, right? Which is like that kind of thing. But then you're saying at the same time there's people who are really struggling somewhere along the way. Now, I'll say the solo agency kind of thing, I mean, it's just like put in a different bucket.

That's I that's a freelancer, not an agency. It's a really different job and I I don't I did it for a while. Like I used to I don't I'm not saying that in any kind of context anyway. It's just I understand like it's actually it's so hard to build an agency. It's it's diff- it's enough so that I think yeah, you can just make a lot of money being a solo founder and save yourself the headache of trying to build the whole whatever.

But it's like um yeah, anyway, it's interesting though that there's that there's there's there's the mix between what you're hearing subjectively on calls and then what the subjective data is showing. Yeah, totally. I mean, the data the reason I say that is because I think the data does show that there's a group of people that are in the founders community that we have assisted and helped, you know, it'll be 5 years that we've had this thing in June that like obviously we didn't we played a small role in their success, but like there are people that are running higher margins because we've worked on this together in terms of like how do we run organizations?

And then there's the new thing. So the reason I say this is because if you're listening to this and you're getting advice, I think people listen to the scalability school podcast are tend to be on the smaller end of a founder and they're growing and they're figuring it out. So if you're one of those people, I just want to validate for you always that like you're not alone in that, right? Like there's not I think and that's important to to point out.

But yes, it does it some of the data does go contrary to what I was saying previously. >> Yeah, yeah. Yeah, but it's interesting cuz I mean, I think both are real, you know, is is the point, you know. Both are real stories. Anything else you want to say about labor costs? No. Okay. Churn, did you want to talk about churn? We didn't I didn't bring that one up. Uh yeah, let's do let's do talk about churn. >> In- in-housing.

In-housing. >> In-housing. Yeah. >> Number one reason agencies lose clients. Um did you get anything subjective about that or do you have any things things about that? So you said Yeah, go ahead. 30%. Number one in-housing at 30%. Um Yeah. The Yeah. Yeah. Well, I I think it's the I think it's the worst move that many brands make. I think it's like uh I think it's it sounds so good. Uh Yeah, but I just I just I just like see it work out badly as often as it works out.

Like if you particularly to do it for the sake of getting more hours or more time. And I guess maybe what I would say is that a lot of in-housing in fact is is like, you know, you you have 17% of churn happens from perceived lack of performance. 30 30% is in-housing. I would say those are actually kind of the same thing. That like that the reason somebody in-houses is not really because they just want to save on the cost of their agency or they just want to bring something in-house.

It's because they feel like their agency can't get them to the next stage. And my theory about this is that uh is that actually it's not really the solution. It's not about more hours or being closer or something like that. It's it's about the fact that it's really hard to get past certain thresholds of revenue and requires a different set of muscles and it's not really about your agency, it's about you spending your time on other things, you know.

So uh that's that's all. It's so it's such it's such a a a good idea to people. I mean, what I also don't have a problem with in-housing a priori. Like I think there's often a good reason to do it, which is that you find incredible talent that you can bring in-house. If that's the case, do it. Great, you know, like you should get the best talent you can working on your business. But um but it's it's sort of a the approach the the idea that in-housing is going to solve your problems I think is often ill-conceived.

That's the point. Um anyway. Yes, I mean, I agree with you about uh that on that last point especially. I think a lot of it in with in-housing is, you know, there's a lack of resourcing people properly uh in in one of the main things that is a value prop for an agency is that they're seeing a lot of different things on a daily basis and are able to react generally quicker um because they've seen it and have been there and with another thing and oh yeah, I'm going to try that over here.

As it relates to in-house folks, many of them just aren't resourced as well as they could be and they're sort of brought in um I think a little bit sometimes as an ego move for that particular person and that person then goes and says what I says go. Or what I say goes and it becomes like no, I'm the expert. I was the one that got brought in as the head of growth and the learning sort of shuts the door at that point and it's rare to find somebody that's a true in-house growth director or whatever you want to call this person.

Um you know, that is comes into it and says, you know, I know that I don't know and I'm going to keep learning and that's part of this position. Usually they come in and say, well, look, I've done all this stuff. I've grown all this and the person hires them because of that because of that ego. Um you know, I do recruiting as well and I hired I think last year it was like seven or eight heads of growth and that's a big conversation we have with our clients.

I know I just had a guy that we're hiring for a head of growth for for their company now and they're doing really well and he he said, you know, look, I want a killer. I want somebody to come in and I'm like, I understand >> [laughter] >> that, but you also want somebody that's curious and is really hungry to be like continuing to make sure that they understand cuz, you know, even for me, I mean, it's crazy the amount of of of tactical as much as stuff as even automated, the amount of tactical media buying stuff that changes, I mean, that you know, min value or min ROAS or value bidding.

Like one week you're like, oh yeah, it's like that stuff changes so fast, you know, that you want to be able to have somebody that's hungry to bring that in. So I think that's always really important. Um And and in the in-housing thing, it's generally I agree with you uh born from a a place without the right framework in terms of what it looks like to be successful in that role. Um yeah. I think people ask me sometimes like is is AI going to take away your media buying job?

And I just can't see it yet. And there's a lot of reasons for that, but it it it's to your point. There's things are changing so fast all the time on these platforms and uh and at the same time, what is it partly required to win is point of view on what works. Like it just it just actually matters. Like I don't know. There's there's like a debate I think out there of like is there a playbook versus there's like the playbook versus no playbook people.

Like there's the there's the run the playbook team and then there's like every brand is different team. Uh I'm definitely on team playbook. Uh and I um I and I think that the playbook, the problem is that it is like it first of all matters that you master it and secondly, the reason the reason people think there's no playbook is because somebody did a bad job delivering something they called a playbook or because they have the wrong playbook or something like that.

But uh it's not actually cuz their brand is different. It's because it was delivered poorly. But then secondly, uh I think it's there you know, there's just thing where where people um people are disconnected from knowledge as it comes in all the time. And so exactly to the point that you're making, it's much harder as an in-house person to stay current on those things because you just don't see as many reps. You just don't and it's not anybody's fault.

It's just you just don't. And so you just sort of get stuck in your lane and it's really hard to do things well. Now, I've seen this work out very well for some brands where actually they sort of people who willingly say, I'm going to ignore all that noise cuz a lot of that stuff is actually shiny objects. I'm just going to do the thing that I know works and I don't really care if it's not fully optimized because I know it will I know it will accomplish the big goal.

And I I actually have seen that work decently as well. Um and that person in that case the person maybe actually admitting that they know that like it's not the most optimized way to do it, but they don't care because they're able to deliver the thing that they want over a lot, you know, and I I think there's actually some wisdom there. But uh but yeah, it's it is interesting to see. I I just think I think the real the real shiny object of in-housing is this idea that I'm going to save money and have a fully dedicated team myself and I just think that that's kind of not true.

Like it's just you're going to lose money, but it's just in different places or you're going to end up paying that person so much money that it who's who's really good that it's going to be more expensive than you think or or something like that, you know. So yeah. So. Um Yeah, I think if I think it can I think it can be successful if if the the well, let me say this. The places I've seen it be the most successful are where the founder has an understanding of of growth marketing in terms of that playbook and understands this is what we do.

This is hey, you know, I can see this over here that you're doing and we need to adjust that that that flow or that lander or you know, whatever um and and that person the growth person says totally let's do that and revamps it. That's where I've seen it where it becomes a real issue is when the founder hires the expert in house before they've hired an agency sometimes and they don't have that in-house knowledge and they look at this person and say, "Why isn't it growing?

Why isn't it growing? Why isn't it growing?" And that growth director sits there and feels that they're under pressure all the time. And then, you know, that their boss doesn't get it and that just becomes this area where, you know, the average tenure of a growth director I haven't done a study on this but I should. I mean, it's got to be like a year and a half. Like it's not long because there there usually is just so much miscommunication between those two in terms of not miscommunica- there's general miscommunication but then there's also a general um misunderstanding of each other's motivations, desires, and and like what you're what it takes to get there.

And I think that has to be there needs to be a lot more time spent there to make sure that they truly understand one another. You should get this data for us for a future thing. Like Yeah, I will. I'm doing a I'm I'm doing an an outs- like a sort of a general employment one now um with uh we're working out with Leandro from uh Propel which you probably know Leandro Cabrero. Um so, we're working on that now. It's a little bit kind of in there I but nothing on this that particular topic.

We could we could we could maybe weave that in. It's a really interesting thought because I think I think what it reflects is a sort of short-termism in general in D2C. And I think part of that is because like sometimes that path from zero to 10 can be really fast for brands. So, then they sort of expect everything to work that way. Um and those are the brands I think that are the ones set up for for the possibility that uh you're going to bring in a director of growth and expect them to like make everything like the good old days and it just doesn't go as fast as you want, you know.

So, um yeah. Uh All right, man. Did we leave anything out? What tell me tell me anything else that jumped out to you? Yeah, people are going to have to go and check out the whole thing. But but but we read the report, all right? Yeah, yeah, [laughter] yeah. I think it is interesting. I it's a really good conversation. You're you're I'm I'm enjoying how much when I'm talking to you about this uh how much I hear all of the conversations you're having with founders in your answers.

You know, you're able like it's just obvious that you're seeing and hearing real things in the space that are really insightful. So, it's it's really good. Yeah. Yeah, I mean, you know, that's really what my job is now and what I live to do and I wake up every day I have like 30 to 40 direct messages from people around the world that are bringing me questions that are everything from personnel to margins to everything media buying related um diagnosing issues and and I love that work.

I mean, it's it's like totally I'm in the EK guy of my life doing this. So, uh it's fun and it's interesting and I think it's not just my opinion, you know, it's it's like yeah, this is generally what we see and this is kind of where people struggle and um hopefully this report as well can illuminate I've heard from a lot of people, "Oh, that makes me feel less alone or makes me feel better." And that's like totally why we put it out.

But honestly, it's kind of put it out there to see benchmarks and we're going to try to do a lot more benchmarking work because I think we all kind of there's just we just wonder about different pieces like do you do you see that? What does that look like? Um and so, that's always really important to go on to tell people understand what they can do to improve and what other people are seeing. What should people do if they want to join FoxWell Founders?

Yeah, at FoxWell Founders uh just check it out foxwellfounders.com um and you you apply and we read all the applications uh and we yeah, I'd love to see see your application. Um otherwise, you know, you can always check out the FoxWell Digital blog. We've really cranked up our content um this year. We're really trying to put out a lot of great content. So, um check some of that out. Trying to keep it really relevant uh and really out there with good stuff uh that can be really useful to you in your day-to-day.

Um so, yeah. I look forward to hearing from you. Any- anybody can always email me andrew@foxwelldigital.com. I'm happy to hear from you. Links for all of that in the show notes, of course. And if you want to work with uh AJF Growth for your agency, you go to ajfgrowth.com and uh fill out the little intake form that's on the website there. So, that I can learn a little bit about your business. Uh We've got a just a little bit of client space right now as we are growing like I said, not too fast cuz I I want to keep the work high.

So, but tell me a little tell me a little bit about uh tell me a little bit about your brand there. I'll get back to you. That email goes straight to me and then we'll talk about if I can be any help. Even if I can't be any help, I might know somebody like Andrew who knows somebody who can be some help or I know somebody directly who can be some help. So, So, beautiful. >> So, reach out when that happens. This was very fun.

Thanks for doing this joint episode, Andrew. Appreciate it. Thank you. See you. Yeah. Big thanks to Andrew for joining me for that episode and the Scalability School guys for co-hosting across both of our podcasts. Uh do subscribe wherever you're watching or listening so that you can get more content from me. I've got a bunch of great stuff coming up as usual including Sherina Alber coming up talking about offers. Got a really cool story about a brand called Bushbalm that is a unlocks revenue in a way that is really surprising.

You're not going to want to miss it. Really, really cool stuff. Thanks uh especially to my sponsors which for this episode are More Staffing, [music] morestaffing.co/af to get connected with them. Uh and also who else? Oh, Rich Panel. Rich Panel. Links for both of those are in the show notes. And email me podcast@ajfgrowth.com. Leave a comment. I read all of those. Interact with all of those. Would love to hear from you in the comments.

Thanks again so much for watching and listening. I'll see you next time.