The Problem With Benchmarking and What to Do Instead

Jan 1, 2025

The discussion highlights the pitfalls of benchmarking in agency performance, revealing how reliance on external metrics can mislead. Marcel emphasizes the inadequacies of comparing rates, particularly with the shift towards value-based pricing. He introduces the average billable rate as a more insightful metric, advocating for a deep understanding of one’s own agency model. The need for agencies to focus on internal metrics rather than external validation is stressed, establishing a path toward enhanced profitability and operational efficiency.

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Intro

00:00 • 15min

Building a Financial Model for Agency Profitability

14:57 • 13min

Understanding Your Business Model for Enhanced Profitability

28:25 • 6min

Points of Interest

00:00 – 00:47 – Intro and Gratitude: Marcel thanks listeners and sets up the episode's focus on benchmarking traps and performance evaluation.
00:47 – 01:33 – The Benchmarking Trap: Marcel introduces the risks of relying on external benchmarks instead of understanding your agency’s internal performance model.
01:33 – 02:53 – Rate Benchmarking Limitations: Marcel explains why comparing rates fails to provide meaningful insights, especially with modern pricing models.
02:53 – 05:00 – Flat Fees and Efficiency: He discusses the rise of value-based and project pricing, and how efficiency affects realized rates.
05:00 – 06:08 – Realized Rates vs. Rate Cards: Marcel highlights that listed rates (rate cards) rarely reflect the actual rates agencies earn.
06:08 – 07:29 – The Power of Average Billable Rate: Marcel introduces average billable rate as a more meaningful metric, blending efficiency and pricing insights.
07:29 – 09:30 – Challenges in Measurement: Marcel explains why few firms measure key metrics like average billable rate and the inconsistencies in benchmarking them.
09:30 – 12:26 – Revenue per FTE Caution: He critiques absolute revenue-per-FTE benchmarks, emphasizing cost structure and geography's role in profitability.
12:26 – 14:00 – Look Inward First: Marcel urges agencies to focus inward on their business models instead of seeking external validation.
14:00 – 17:33 – Understanding Your Agency Model: Marcel explains how to map team structure, capacity, and time allocation to determine delivery and utilization ceilings.
17:33 – 19:48 – Budgets and Cost Breakdown: He emphasizes categorizing hard costs into delivery, sales, admin, and facilities to build a clear financial model.
19:48 – 22:44 – Revenue Potential Example: Marcel demonstrates how capacity, utilization rate, and average billable rate determine an agency's revenue potential.
22:44 – 25:00 – Delivery Margin and Overhead Benchmarks: He shares benchmarks for delivery margin (50–60%) and overhead costs (20–30% of AGI) to evaluate profitability.
25:00 – 28:47 – Operating Profit Targets: Marcel outlines healthy operating profit margins (20–30%) and explains how utilization and billable rates interact within a model.
28:47 – 31:00 – Beta Tool for Agencies: Marcel announces Parakeeto’s beta software for modeling agency performance, offering free access for listeners to analyze and improve their businesses.

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