Many startups and entrepreneurs that require the services of an agency (whether that be a marketing agency, public relations agency, media agency, or one of the hybrid forms) could use guidance as to how fees are structured.
Retaining an agency is not like other procurement negotiations. When you’re negotiating to buy office equipment, if you’re dealing with a salesman, you state your requirements and the salesperson quotes a price. Then you negotiate. During this negotiation. You’d never answer a question like “So how much do you have to spend?” and the salesperson would never answer a question like “So what are your margins?” You’re both keeping certain information hidden in order to maintain a better negotiating position.
The sensibilities required to hire an agency are different from the above example. You need to come to the negotiating table armed with either your available budget or your targets. An agency that knows your budget will write a plan to reach the maximum number of people at the budgeted amount. If money is no object (rare in business), you can tell the agency your targets (whether that be product sales, app downloads, charity donations, etc.) and they will write a plan designed to hit those targets and quote you a price. This gets harder to do when branding is involved as branding is difficult to measure unless you spend more money for measurement.
So how do you maintain an advantageous negotiating position when you have to disclose your budget up front? By talking to multiple agencies and seeing 1) How much value each delivers at your stated price point; 2) How well each plan fits your brand concept/story; and 3) which agency you feel the most rapport with.
How much should you spend on marketing/PR?
While there is no one right answer, 5% of sales is a common rule of thumb.
However for digital retailers, the answer is theoretically unlimited, as cost of marketing a product is covered by the sale of that product. For example: Widgets Worldwide sells widgets via their website. They know from past data for every 100 people who see their Facebook ad, four will click through to their website. Worldwide Widgets pays $1 for every click through to their website, and know that one in ten website visitors that came in from a Facebook ad makes a purchase. That means it costs $10 to acquire a customer. The cost of goods sold is $20 and the retail price of the product is $30, so Worldwide Widgets actually makes no profit when it first acquires a new customer. However, their analytics show the average customer returns to buy more widgets, and the Average Lifetime Value (the total amount of money a customer will spend) of a widget buyer is $150, so they make their money on return business and word-of-mouth from satisfied customers. Since spending $10 yields $150 over time, Worldwide Widgets is only limited by its cash flow and the total number of ads it can serve to different people in a day.