How is the Internet agency market developing?

I have been “preaching” for some time that medium-sized and small full-service web agencies should think about the future because this sector will come under greater pressure. This has indeed happened in the last 3 years, but the effects are not yet as serious as the overall market is still growing.

(Reading time 3 minutes – english version here)

What are small and medium-sized full-service web agencies?

By small and medium-sized full-service web agencies, I mean agencies that meet the following criteria:

1. employ 10 to 70 FTEs
2. are active in the field of CMS, eCommerce, etc. and also provide complementary services, e.g. SEO/SEA or e-mail marketing
3. primarily serve medium-sized companies
4. see themselves primarily as the sole point of contact for their customers when it comes to the web

In the last 10 years, such companies have sprung up like mushrooms. In the period from 2003 to 2010, the quality of company websites has increased considerably. Where in 2003 many companies used a simple website (created with Frontpage), today a CMS-supported, comprehensive web presence (I love that word) is online. This general overhaul on a broad front has generated an incredible momentum in the market. It was correspondingly easy to gain a foothold in the market as a service provider and set up a company. A few entrepreneurs took advantage of this opportunity and grew significantly, ultimately outgrowing the model and presenting themselves today as a large company in the full-service sector (300 to 500 people) or as a major provider in a niche segment. The majority of agencies have also grown considerably, but have not been able to break the barrier of 50-60 people. However, most of them are still sticking to the full-service model, which is precisely why they have come under increasing pressure in the last three years and will continue to feel the effects.

I see the following reasons for this:

Increasing professionalization on the customer side

Knowledge and expertise on the customer side has grown considerably. Whereas in 2003 it was still necessary to explain the importance of a website, for example, to a number of decision-makers, today those responsible are often on an equal technical footing. These customers are much more demanding, recognize errors and inconsistencies much more often and generally demand a higher level of service.

Full service has become much broader

Today, full service means much more than it did 10 years ago. The range of services is so broad that it can no longer be provided de facto by a 50-person company. Developments in the respective fields are progressing rapidly and it is essential that a great deal of time is spent on further training. Those who structure this process, as can be done in large agencies, achieve very concrete cost advantages, because not every employee has to inform himself somehow, but because the further training is organized. This results in better training with less effort.

If too many fields are tackled with too few employees, the result is mediocre performance. As soon as a customer has to deal with a specialized provider, the weak points are revealed and the full-service agency comes under fire. A common example of this is SEO. I bet every full-service agency with fewer than 200 employees has had this experience.

Not all advertising agencies are dying

The relationship between advertising agencies and internet agencies has always been tense. While most advertising agencies have lost importance and have been left behind by time, there are some that have made the transition into the digital age. These have a very good position with customers and can generate a lot of business, especially in the area of online marketing. Today, this is usually at the expense of medium-sized full-service agencies.

Specialization

With the broadening of the range of services, more and more specialized service providers are also emerging. Due to the greater professionalization on the customer side, it is therefore already possible for relatively small customers to implement a project with 2 or 3 different specialized partners instead of a full-service agency.

From development to configuration

Development work has been and is gradually being replaced by configuration work. Online business know-how is central to a full-service agency. Whereas the decision-makers in 2005 were mainly CIOs, today they are mostly marketing people or the CEOs themselves. However, as billing is still based on time, the average revenue per deliverable is falling. This can be partially offset by higher prices. In the medium term, however, the time saved through configuration will have a significant impact on an agency’s billable time.

And pure consultants…

There aren’t that many yet, but I think we will see more and more of them. The trend towards configuration in particular plays into the hands of consultants in the long term. If they understand the business and the customer well, are multidisciplinary and flexible, they can help the customer achieve their goals without being product-oriented.

The agencies don’t notice much yet

The fact that this consolidation effect is not having a stronger impact is due to the fact that the overall market is still rising. But the first signs are visible in many places. I have had various conversations with European agencies over the past year and almost all of them complain about a business that is getting tougher.

What needs to be done?

I think it is now time to think about an internal structural change. Of course, not all customers will replace their solutions overnight and go completely different ways. Excessive haste would therefore be out of place, but movement on this issue is certainly not. I consider the following two ways out of the dilemma to be realistic:

Becoming a large full-service agency

There will probably always be customers who want to obtain as many services as possible from a single source. However, in order to be able to provide these services in good quality and with sufficient resources, you need around 2 to 300 employees today, if not more. The market still allows for this kind of company development for a full-service provider, but it is now quite difficult.

Become a niche service provider

The alternative is to specialize in a particular area. In most cases, this specialization already exists to some extent. A simple question to a group of employees: “What are we particularly good at?” usually provides surprisingly clear answers. To be successful as a niche service provider, you need three things: partnerships, inbound marketing and a good reputation. All three. You can actively tackle the first and second, but the third only comes with good work.

Opportunities?

This market change offers great opportunities for full-service agencies. If you want to change. You don’t necessarily have to specialize in just one area; you can also distinguish yourself with different units (and market presences). And let’s compare it with other sectors that are a little older. It is quite normal for there to be a trend towards specialization. This was and is the case in every industry. What was initially provided on an interdisciplinary basis is now offered on a highly specialized basis. After all, the tradesman who repairs your heating system is not the same person who carries out plumbing work.