My approach to productization

Today I want to talk about a simple concept that I’m working on with today with a reputable agency. We’ve calculated it will add ~30% to their margins.

Note: I don’t mean improve their margins by 30%. I mean literally take them from 20% profitability to 50%. Increasing their net income by 2.5X!

Productization is one of the highest-ROI things you can do to crush it in the agency space, and it synergizes wonderfully with automation. Let’s dive in.

What is productization?

Here’s the simple explanation:

Most agencies struggle with scope creep and variable COGS which eats up their margins.
Projects can also get bloated and take much longer than anticipated, leading to poor client experience.
Productization is when you provide the same, or very similar, deliverables every time you work with someone.
This solves a thousand problems you have right now—and another million you didn’t even know about!

Why productize?

Because it lets you reverse engineer your costs. You can determine your COGS ahead of time with reasonable accuracy.
This lets you staff easily and manage resources (software subscriptions, processes) based on output. I.e you know that for every X deliverables you need Y people and Z licenses.
Which ultimately lets you invest into streamlined systems that, once they ramp up, deliver the exact same client experience every time and thus let your business grow autonomously.

Step-by-step guide to productizing your agency

First, is your service one-time (i.e a template, a download, an info product) or ongoing (i.e a recurring service, a monthly call, a weekly ad campaign)? If it’s one-time: you’re going to do everything below just once. If ongoing, you’re going to define a time interval—say, weekly—where this repeats.

Figure out your deliverables. For instance:
1. If you’re a lead gen agency, you might think your deliverable is “leads”. But it’s more nuanced than that. How do you deliver those leads? A daily email? A weekly report? A new entry into the client CRM? That’s your deliverable—something the client can see, feel, touch.
2. If you’re an advertising agency, you might think your deliverable is “ads”. But again, what is the client seeing? They’re getting calls, maybe, but what is your agency actually giving them on a week by week basis? Probably a report of some kind, and maybe a weekly call. Those are your deliverables.
3. If you’re an automation agency, you might think your deliverable is “systems”. But consider what that means to the client. What is a “system”? Realistically it’s probably a flow in Zapier, or Make.com, or some other no code tool. It’s also the video you record going over your system, the monthly call you have with them where you go over what you’ve built, and perhaps the emails that you send summarizing statistics.
Once you have your deliverables, ask yourself what needs to happen in order to create them. List all of the tasks that go into them. In order to deliver a report, for example, you need to generate one. In order to generate one, you need data on ad campaign performance. In order to get data on ad campaign performance, you need an ad campaign. In order to build an ad campaign, you need to create a keyword list, and write copy, and get creative. In order to do that.. etc etc.
Once you have your list of tasks, group them based on “job role”. If one job role can do all of them, that’s great. If you need multiple positions to cover all of them (more likely), then identify what those roles are.
Now calculate how much it would cost you to have someone with that job role do that job. You could pay them a flat rate to do them, or perhaps figure out how many hours it might take each person and estimate hourly compensation through Google.
At this point you have a list of deliverables, the tasks that go into each deliverable, the job roles required to do each task, and how much time/energy/money each job role would spend in order to complete their duties. We’re almost done.
As a last step, estimate the internal cost of your “product”. Add up the flat fees and hourly rates you calculated earlier—you’ll get a number, say $1,000. All you do at this point is you divide this number by 1 - (whatever you want your gross profit margin to be) to get your price. For instance, if you wanted a gross profit margin of 80%, you’d divide $1,000 by (1-0.8), which would give you $5,000.

Unless you’ve severely under-or-overestimated the cost to create your product, or chose a silly gross margin that’s unrealistic for agencies (say 95%), your resulting product price is probably somewhere in the middle of your competitors. Nice work!

A real example: world-renowned PR company I work with

I recently started working with a great PR company. They’ve worked with dozens of celebrities, huge companies, names you’ve heard of, but are currently struggling. Think ~1/4th of their all time high, and it’s all because of project bloat and the inevitable scope creep that comes with bespoke agencies.

One of their main deliverables is “earned media” spots—basically, they pitch journalists on exciting client projects and, if they ask the right way, a certain % of those journalists will take a story and write a full piece about it in a popular magazine.

How would you productize this PR service? Easy. Just follow the steps above.

How many earned media spots do we want per month? Let’s say 5.
What’s a typical conversion rate? Let’s say 0.5% to be conservative.
How much outreach do we need in order to achieve 5, then? 1000 emails * 0.5% = 5 spots.
What do we need in order to email 1,000 journalists per month?
- An email platform ($100/mo)
- A lead source ($100/mo)
- A system to scrape them ($100/mo)
- Someone to set up, write, and manage responses to the campaign (let’s call them a PR Specialist)
How much time and money would it cost for our PR Specialist to do this?
- Publicly available data shows this role at ~$30/hour.
- Estimating 5 hours to build the list: $30 x 5 = $150.
- Estimating 0.5 hours per day to manage responses, 20 days per month: $30 x 0.5 x 20 = $300.
Total internal cost to deliver our “product” is thus $300 + $150 = $450/month.
Desired profit margins are 80%. $450/(1-0.80) = $2,250/month.
We’ll charge $2,250/month for our “Earned Media” product!

There’s more nuance than that, obviously. We have several services we provide alongside the placements—a weekly report, a weekly call, etc—and I left them out to keep this example straightforward. But the idea is the same: just define the deliverables, define the tasks that go into each, group them by job role, and figure out how much money they’ll cost you.

Voila!