The Agency Problem
Core Argument: Traditional agency fee structures guarantee misaligned incentives. Agencies profit from your spend, not your success. This structural misalignment explains why most agency relationships fail.
The Incentive Structure
Every business relationship is shaped by its incentive structure. When incentives align, both parties succeed together. When incentives diverge, conflict is inevitable.
The traditional marketing agency model has structurally misaligned incentives.
The three dominant fee models in B2B marketing agencies are:
- Percentage of Media Spend (most common for paid media)
- Monthly Retainer (most common for strategy and content)
- Project-Based Fees (most common for campaigns and launches)
Each model creates specific misalignment between what benefits the agency and what benefits the client.
The Percentage Problem
The percentage-of-media-spend model is dominant for paid media management. Agencies charge 10-20% of the media budget as their fee. Spend $100,000 on LinkedIn Ads, pay the agency $10,000-$20,000.
The math creates perverse incentives.
Incentive 1: More Spend, Not Better Spend
If the agency earns 15% of media spend, their revenue from a $100,000 budget is $15,000. Their revenue from a $200,000 budget is $30,000.
The agency's financial incentive is to increase your budget, not your results.
Consider the scenario: Your demand gen is producing customers at acceptable CAC. An efficiency improvement could reduce spend by 30% while maintaining results. The agency's revenue would drop 30%.
The agency will never recommend this. Not because they are malicious, but because the incentive structure makes efficiency reduction irrational from their perspective.
Incentive 2: High-Spend Channels Over Efficient Channels
Not all channels require the same spend to be effective. LinkedIn Ads might require $50,000/month. A focused outbound email program might require $10,000/month and produce similar results.
The agency earns $7,500/month from LinkedIn. They earn $1,500/month from email.
The agency will recommend LinkedIn. They will have sophisticated rationales: "scale potential," "brand building," "comprehensive coverage." The underlying driver is fee revenue.
Incentive 3: Complexity Over Simplicity
Simple demand programs require less management and less spend. Complex programs with multiple channels, multiple campaigns, and multiple creative variations require more spend and more agency hours.
The agency will recommend complexity. They will call it "integrated demand architecture" or "full-funnel strategy." The underlying driver is fee expansion.
The Percentage Math
Let us examine the math of a percentage-based agency relationship:
Year 1:
- Media spend: $600,000
- Agency fee (15%): $90,000
- Total cost: $690,000
- Results: 50 customers
- Cost per customer: $13,800
The client asks: "Can we be more efficient?"
Year 2 (if efficiency-focused):
- Improved targeting and creative reduces spend 25%
- Media spend: $450,000
- Agency fee (15%): $67,500
- Total cost: $517,500
- Results: Same 50 customers
- Cost per customer: $10,350
- Agency revenue loss: $22,500
Year 2 (if growth-focused):
- Agency recommends expansion to new channels
- Media spend: $850,000
- Agency fee (15%): $127,500
- Total cost: $977,500
- Results: 60 customers (diminishing returns)
- Cost per customer: $16,292
- Agency revenue gain: $37,500
The agency's financial interest points toward expansion, not efficiency. The client's interest points toward efficiency. The conflict is structural.
The Retainer Problem
Monthly retainer models are common for strategy, content, and creative agencies. The client pays a fixed monthly fee for a defined scope of work.
The incentive structure creates different but equally problematic misalignment.
Incentive 1: Continuation Over Results
The retainer model rewards continuation of the relationship, not results from the work. An agency earning $20,000/month has incentive to maintain the relationship for as long as possible, regardless of whether the work is producing outcomes.
Results are nice but not necessary. The fee flows whether results appear or not.
This creates the "perpetual engagement" pattern: Agencies recommend never-ending programs of content, optimization, and iteration that justify ongoing retainers without demonstrating clear ROI.
Incentive 2: Deliverables Over Outcomes
Retainer agreements typically specify deliverables: blog posts, social content, email campaigns, landing pages. The agency fulfills deliverables. Whether those deliverables produce pipeline is often unmeasured.
Four blog posts delivered = contract fulfilled. Whether those posts generated a single lead is beside the point contractually.
The agency optimizes for deliverable completion, not outcome production. They become content factories, not demand engines.
Incentive 3: Scope Creep Acceptance
Retainer relationships often involve scope creep. The client asks for work outside the agreement. The agency says yes because refusing might threaten the retainer.
Scope creep benefits the agency in the short term (client is happy) while harming outcomes (focus is diluted). The agency accepts the creep rather than pushing back with "that is not what will produce results."
The Project Problem
Project-based fees seem aligned: agency delivers a defined project for a defined fee. Success is project completion.
The misalignment is subtler but real.
Incentive 1: Scope Expansion
Project fees are based on scope. Larger scope means larger fees. Agencies have incentive to define projects broadly.
"Campaign launch" becomes "comprehensive campaign launch including strategy, creative development, technical implementation, and optimization framework." The scope expanded. The fee expanded. The core need was still "campaign launch."
Incentive 2: Change Order Dependency
Projects generate revenue twice: the initial fee and the change orders. Agencies learn that change orders are profit centers.
The incentive is to scope projects too tightly so that inevitable adjustments become change orders. Or to recommend "strategic pivots" mid-project that require additional scope.
A well-scoped project with room for iteration is less profitable than a tightly-scoped project with five change orders.
Incentive 3: Project Proliferation
One project generates one fee. Ten projects generate ten fees. Agencies have incentive to recommend more projects.
"You need a website refresh" is followed by "You need a content audit" is followed by "You need an email nurture rebuild" is followed by "You need a brand refresh." Each is a new project. Each is a new fee.
Whether you need all these projects is secondary to whether the agency needs the revenue.
The Agency Playbook
Understanding how agencies operate reveals patterns that clients can recognize and resist.
Play 1: The Complexity Sale
Agencies make simple things complex because complexity justifies fees.
"Run LinkedIn Ads" becomes "Build an integrated demand architecture with multi-channel orchestration, dynamic audience segmentation, personalized content journeys, and AI-powered optimization."
The work might be the same. The description is more impressive and more expensive.
Defense: Ask "What specifically would be different?" Strip away jargon to find the actual work.
Play 2: The Data Obfuscation
Agencies control data. They produce dashboards that show activity metrics (impressions, clicks, leads) rather than outcome metrics (customers, CAC, DER).
The dashboards look impressive and reveal nothing. Lots of numbers, charts, and trends. No connection to revenue.
Defense: Require revenue-connected reporting. If the agency cannot show impact on pipeline and customers, they are hiding something.
Play 3: The Attribution Claim
When results are good, agencies claim credit. When results are bad, agencies blame external factors.
Pipeline up 20%? "Our campaigns are performing." Pipeline down 20%? "Market conditions," "sales follow-up issues," "budget constraints."
Attribution is claimed when favorable and denied when unfavorable.
Defense: Implement independent measurement. Define attribution methodology before campaigns launch, not after.
Play 4: The Expertise Rotation
Agencies sell senior expertise and deliver junior execution.
The proposal includes impressive senior strategists. The pitch meeting features charismatic partners. The actual work is performed by account coordinators and junior specialists.
This is the agency business model. Senior talent sells. Junior talent executes. The margin is the difference.
Defense: Contractually specify who performs the work. Require senior involvement in strategy decisions, not just sales meetings.
Play 5: The Relationship Defense
When clients question results, agencies pivot to relationship.
"We have been partners for three years." "We understand your business." "Switching would set you back." "The next agency will have the same learning curve."
Relationship becomes the defense when results cannot be.
Defense: Value is demonstrated, not asserted. Demand results evidence. Relationship without results is just habit.
The Agency Incentive Gap
The Agency Incentive Gap quantifies the divergence between what benefits the agency and what benefits the client.
Calculating the Gap
For any agency recommendation, calculate:
Agency Financial Benefit:
- How does this recommendation affect agency revenue?
- Does it increase fees, hours, or scope?
- Does it extend the engagement duration?
Client Outcome Benefit:
- How does this recommendation affect client pipeline?
- Does it reduce CAC?
- Does it improve DER?
The Gap = Agency Benefit vs. Client Benefit
When Agency Benefit is high and Client Benefit is low or uncertain, you have identified the Gap.
Gap Examples
"Let us expand to a new channel"
- Agency Benefit: Higher media spend = higher fees
- Client Benefit: Uncertain; new channel may or may not work
- Gap: High
"Let us reduce spend on underperforming campaigns"
- Agency Benefit: Lower fees
- Client Benefit: Improved CAC
- Gap: Negative (agency recommends against their interest)
"Let us add a reporting dashboard"
- Agency Benefit: More hours billed
- Client Benefit: More data, possibly useful
- Gap: Moderate
When agencies recommend things against their financial interest, pay attention. Those recommendations are likely in your genuine interest. When recommendations align with agency revenue expansion, apply skepticism.
The Alternative: Aligned Incentives
The agency problem is structural. It can only be solved by restructuring incentives.
Alignment Model 1: Performance-Based Fees
Agency compensation tied to results, not spend or hours.
- Fee based on pipeline generated
- Fee based on customers acquired
- Fee based on CAC improvement
When the agency earns more when you acquire customers, their incentive aligns with yours.
Challenges: Attribution complexity, client-side variables (sales effectiveness), and lengthy B2B cycles make pure performance models difficult.
Alignment Model 2: Hybrid Models
Base retainer plus performance bonus.
- Base retainer covers operating costs
- Performance bonus based on results
- Bonus substantial enough to drive behavior
The base provides stability. The bonus provides alignment.
Alignment Model 3: Efficiency-Based Models
Fees based on efficiency improvement, not spend level.
- Fee increases when CAC decreases
- Fee based on DER improvement
- Rewards efficiency over volume
The agency earns more when you spend less but get better results.
Alignment Model 4: Equity or Revenue Share
Agency takes equity or revenue share instead of fees.
- Complete alignment: agency only wins when client wins
- Long-term orientation
- Genuine partnership
Reserved for agencies willing to bet on client success.
Case Study: The Agency Extraction
A Remotir client (Series A SaaS, $4M ARR) had been working with a performance marketing agency for 18 months. Monthly spend: $70,000 on media, $10,500 on agency fees (15%).
The Presenting Problem:
CAC had increased 40% over 18 months while results plateaued. Leadership blamed "market conditions." The agency blamed "platform changes."
The Diagnosis:
We audited the agency relationship:
| Category | Finding |
|---|---|
| Media allocation | 85% to LinkedIn (highest agency margin channel) |
| Creative | Same creative for 8 months (no refresh) |
| Targeting | Broad targeting (higher spend, simpler management) |
| Reporting | Activity metrics only; no revenue connection |
| Recommendations | All recommendations increased spend |
The Incentive Analysis:
Over 18 months, the agency had:
- Recommended increasing budget 3 times (all accepted)
- Never recommended decreasing budget
- Recommended adding channels twice (added spend)
- Never recommended removing underperforming campaigns
Every single recommendation benefited agency revenue. Zero recommendations prioritized client efficiency.
The Math:
- 18-month media spend: $1,260,000
- 18-month agency fees: $189,000
- 18-month pipeline generated: $2,100,000
- DER: 1.5x (marginal)
- Agency capture rate: 15% of spend, 0% of performance
The Intervention:
We replaced the agency with an aligned model:
- Lower base retainer ($5,000/month)
- Performance component tied to pipeline contribution
- Efficiency bonus for CAC reduction
The Results (12 months later):
- Media spend: $55,000/month (reduced 21%)
- Agency cost: $7,500/month (reduced 29%)
- Pipeline: Increased 35%
- DER: 3.2x (vs. 1.5x previously)
- CAC: Reduced 42%
The insight: The agency was optimizing for their revenue, not client results. Aligned incentives produced dramatically better outcomes with lower spend.
Selecting Agencies (When Necessary)
If you must work with agencies, structure the relationship for alignment.
Pre-Engagement Questions
"How is your fee calculated?"
- Understand the incentive structure before engaging
- Prefer models with performance components
"What happens to your revenue if my spend decreases?"
- Tests whether they have aligned incentives
- Watch for defensive answers
"How do you measure success?"
- Demand revenue-connected metrics
- Reject activity-only measurement
"Who specifically will do the work?"
- Avoid senior-sell, junior-deliver
- Get names and commitments
Contract Protections
Performance gates: Right to reduce scope if performance thresholds are not met.
Transparent reporting: Access to raw data, not just agency dashboards.
Attribution agreement: Define how results will be measured before work begins.
Exit provisions: Reasonable termination clauses; avoid long lock-ins.
Ongoing Management
Regular audits: Independent review of agency recommendations against your interests.
Competitive pressure: Periodic RFP processes to maintain accountability.
Direct platform access: Never let agencies own your ad accounts.
Conclusion: The Model Is Broken
The traditional agency model is not fixable with better agencies. The model itself creates misalignment.
Percentage of spend incentivizes more spend. Retainers incentivize continuation regardless of results. Project fees incentivize scope expansion and project proliferation.
These are not bad actors. These are rational actors responding to incentive structures.
The agency problem is solved by changing the structure, not changing the agency. Aligned incentives produce aligned behavior. Misaligned incentives guarantee conflict.
The companies that succeed at demand generation either build internal capability or partner with agencies whose incentives are genuinely aligned. There is no third option.
Your agency wins when you spend. Make sure they also win when you win.