Learn how to run a profitable WordPress LMS agency with Marcel Petitpas from Parakeeto in this LMScast hosted by Chris Badgett of LifterLMS. Marcel has a background as an agency owner, and he currently helps agencies estimate projects by using data to make better decisions around project outlines and optimizing processes.
Marcel and Chris dive into what many course creators and online business owners in general do wrong that often ends with them getting blindsided from projects that require more work/time/money than they had originally accounted for.
Many people forget about the cost of earning their revenue when they add a service component to their business. Quantifying the cost of the time required is the reason many agency owners end up struggling with cash flow when they start to grow their team.
A lot of traditional business advice comes from product companies and timeboxed service businesses where prices are calculated by the hour. In the freelance and agency space, this cost can become very dramatic with scope creep on projects with fixed rates. A barber isn’t going to experience scope creep in their work as much as a website builder. And someone charging hourly like a lawyer wouldn’t mind scope creep, as their time is scalable with the hourly rate.
There are many people in the website building industry today saying you should be charging value-based pricing or you should have a specific pricing model. But when doing complex development for clients, you probably should be billing by the hour because it might be impossible to scope the work they’re asking you to do and come up with a fixed price and consistently hit good profit margins on that.
The key takeaway from this episode that Marcel emphasizes is that you need to understand your business model. If you run a service company or if you include services in your course business, you’ll need to understand your business model includes earning revenue. And you’ll have to factor in that you don’t have fixed costs.
The reason Marcel started Parakeeto is to help agency owners find the best calculations on what they should be charging for services they offer. Many online business owners don’t know their gross margin off the top of their head. They would need to reference a project management tool or spreadsheets in Google Drive. But Parakeeto shows you how your next project is likely to perform, and you can get all of that data in one place.
At Parakeeto.com you can find out how Marcel’s tool will allow you to easily estimate how projects will go for your agency clients. Marcel has a podcast called The Agency Profit Podcast, so be sure to check that out as well. There are also some free consulting templates you can find to use with your clients at Parakeeto.com/Toolkit that talk about how you can calculate the metrics and benchmarks Marcel talked about today on the podcast.
At LifterLMS.com you can learn more about new developments and how you can use LifterLMS to build online courses and membership sites. If you like this episode of LMScast, you can browse more episodes here. Subscribe to our newsletter for updates, developments, and future episodes of LMScast. Thank you for joining us!
Chris Badgett: You’ve come to the right place, if you’re a course creator looking to build more impact, income, and freedom. LMScast is the number one podcast for course creators, just like you. I’m your guide, Chris Badgett. I’m the co-founder of the most powerful tool for building, selling, and protecting engaging online courses called LifterLMS. Enjoy the show.
Chris Badgett: Hello, and welcome back to another episode of LMScast. My name’s Chris Badgett, and I’m joined by a special guest, Marcel Petitpas. He’s coming at us from just up the road from me. I’m in Maine, Marcel’s in Moncton, New Brunswick. Welcome to show, Marcel.
Marcel Petitpas: Thanks for having me here. It’s great to be here.
Chris Badgett: I’m super excited again, to your background as an agency owner and how you help agencies now, but for the course creators out there, for the membership site builders, for the people who build websites and marketing services and all kinds of services for that industry. When you’re running a business, especially if you didn’t go to business school, what area do people really mess up or get blindsided by, that you see a lot?
Marcel Petitpas: I think a lot of people forget that they have to think about the cost of earning their revenue, when they have any kind of service component to their business. They forget to quantify the cost of that time, and this is the reason that I think a lot of agency owners end up struggling with cashflow when they start to grow their team.
Chris Badgett: That definitely happened to me. There’s something that happens, especially an agency owner or a freelancer, they tend to be pretty empathetic. They tend to be pretty giving, they’re working on somebody’s problems, and it’s easy to discount the amount of time or maybe I don’t know the answer, I can’t charge the client for having to learn this thing or whatever. Can you just tell us more about what you mean about where people get into trouble?
Marcel Petitpas: Yeah, so I think so much of the traditional business advice and traditional business logic comes from product companies, and more very traditional service businesses where everything was kind of timeboxed or everything was based on the billable hour. So if you think about traditional service businesses, you go to your barber, you know you’re going to be there for 30 minutes. Very rarely is there a huge delineation from, your Barbara’s not going to experience an hour of scope creep on your hair cut, that’s just not going to happen, right?
Marcel Petitpas: And your lawyers and your accountants are typically charging by the hour. So with them, the cost of earning the revenue is relatively fixed. And with a product company, you pay for your inventory, you know what that thing costs you, and then you sell it for more money than it costs you. The thing that’s unique about any kind of service component, whether it’s coaching calls that you include in your training program or your online course, or if you’re building websites, you have a variable cost, which is the amount of time that it takes you to complete that task.
Marcel Petitpas: And what’s different about that business model is when you sell revenue, it doesn’t belong to you yet, you have to earn it, and you earn it by working time against it. And a lot of people I think forget about that. They see revenue as revenue, and they forget that when I sell the revenue, the work’s not done, and so what’s misleading about that is you end up in this situation where you can try to sell yourself out of poor cashflow by selling more stuff and temporarily it alleviates the problem.
Marcel Petitpas: But if you don’t have a process in place to profitably earn that revenue, you actually end up making the problem worse. And I’ve seen this happen time and time again where, and I’m sure if you’re sitting at home and you’ve run a service business, you’ve probably had that month where you’re like, I have been so busy this month. It has been crazy, I’ve been working dogs. And you look at your bank account the end of the month, you’re like, why don’t I have any money in here? This doesn’t make any sense. That’s probably what’s going on.
Chris Badgett: I’m just remembering a story. I remember in my agency, I remember one month I had made the most month and this I had grown it up. I had two business partners. And there is 14 contractors that worked with us to fulfill the service. And I remember we had a 70 grand month and we were having a hard time paying ourselves. I’m like, how’s this even possible? But I think it’s a lot of what you said there.
Marcel Petitpas: Yeah, it’s not being clear about what it costs you to earn revenue, and not being clear about, how important it is to optimize your process, to earn that revenue as efficiently as possible. So I think that’s the biggest, if anyone listening can take one thing away from this, it’s that, understand your business model, if you run a service company or if you include services in your course or in your software business or whatever it is that you’re doing, understand that your business model includes earning revenue. That’s something you have to factor in. You don’t have a fixed cost. Revenue is not created equal and you are accountable for managing the process by which you earn that revenue to make sure that it’s a profitable and hopefully profitable at the 50 to 70% gross margin level.
Marcel Petitpas: Those should be your target gross margins on services when you install them in your business, unless they’re a loss leader, for example, maybe a setup or a configuration for your SaaS company that might be an exception or maybe some kind of setup for your training program. But if you’re trying to make money on services, you should be aiming for 50 to 70% gross margin on that service.
Chris Badgett: Do you have any advice around productized service versus just more open coaching, consulting service? How to think about it? I see productized services being pretty popular, there’s these packages, and there’s limited customization and stuff, but I mean, can we get in less trouble with productized services?
Marcel Petitpas: I think what we want to do, is take a step back and think about just the fundamentals of a service business model, and then use our contacts to establish what the best pricing model is for us. There’s a lot of conversation in the industry right now about, you should be doing value based pricing. You should not be billing by the hour. You should be doing this, that the other thing. But the truth is, if you run a software development agency and you’re doing extremely complex bespoke work for enterprise clients, you probably should be billing by the hour, because it might be impossible to scope the work that they’re asking you to do and come up with a fixed price and consistently be hitting margins on that.
Marcel Petitpas: So maybe you should be billing by the hour, but if you do something else, maybe a digital marketing services where there’s a very clearly defined process, then you’re probably in a position there where you want to use a different pricing model. But what you essentially want to come back to is, how can we increase our average billable rate and maximize our average billable rate? And so that is a metric that defines for every hour that my team works, how much revenue does the business earn?
Marcel Petitpas: And we get to that number by taking our revenue and dividing it by the amount of time that we worked to earn that revenue in any given period of time. Could be a week, could be a month, could be a year. Most of the time the easiest thing to do is, take your accounting data at the end of the year, look at what was my revenue minus all of my pass through expenses. So contractors and ad spend in print budgets, whatever, take all that out, how much money belongs to us as a business and then look at your time tracking data and divide those two numbers.
Marcel Petitpas: That’ll tell you what your average bill rate is. And so you should be optimizing your pricing strategy and the way that you package your services, around how to consistently increase that number as much as possible. Because if you can increase your average billable rate, well then that means that if your team can work 10,000 hours in a year, and you’re earning an extra $20 an hour, well guess what? You just made a whole bunch of extra money without having to work any more time, without having to add any more staff, without having to increase your overhead. That’s pure profit. So that’s what you’re trying to optimize your pricing strategy for.
Marcel Petitpas: So, again, once we have that established, once we understand that that’s the goal, then what we want to do is look at what kind of services am I offering. Where am I on that journey of figuring out what my processes are, how predictable is the scope of work on these kinds of things. And often if it’s very predictable, then we want to lean to more of a productized service. And if it’s very unpredictable and there’s a lot of uncertainty then we probably want to go back to more of a billable hour or a more risk averse pricing strategy essentially.
Chris Badgett: That’s awesome. I was talking with you in our pre chat, I’m more of an intuitive qual person, qualitative, and I need serious help on the quantitative, that’s why I have a good business partnership with my business partner, Thomas is more quantitative, but if a freelancer say, like a designer or a website builder, artists type, they’re more qualitative, they’re ready to level up. What are the main metrics to focus on? Because I know in my experience, whenever I come into the world of the quantitative, there’s a lot of metrics, but some are more important than others at different times.
Chris Badgett: Let’s say our agency is a little bit out of control. We realize we’re not managing our cash flow well, what should we focus on? What are the top three to five areas to focus on first to kind of understand where we’re at? And maybe start getting some insights so we can make effective decisions.
Marcel Petitpas: Totally. I’m glad you asked this question, because this is the number one talking point for me, and this the reason that I started my company. It’s very, very hard to figure out what the right numbers to look at are as an agency owner. And it’s also really hard to actually run a report to get insight into those numbers. If you wanted to know, and if you’re sitting at home listening to this and you have a service component in your business, if I asked you, what was the profit margin on your last three clients? You would probably have to go build a spreadsheet to answer that question for me.
Marcel Petitpas: And you’d probably have to pull data from three different places, your accounting tool, maybe your time tracking tool, maybe your project management tool, maybe there’s a spreadsheet in Google drive somewhere with information on what the terms were for that contract and what the scope was. If I asked you what was your average billable rate compared to what you had planned for and budgeted when you scoped out the project originally? That’s probably another spreadsheet, right? So this is the problem that we’re trying to solve. So anyway, that’s a small anecdote, but the question you asked was what are the most important numbers for an agency owner to track?
Marcel Petitpas: And really for me it comes back to the three core metrics for the business model, and the business model is, I’m bulk purchasing somebody’s time, generally if I’m hiring them as an employee or if it’s a freelancer, I’m purchasing their time and we’re making an agreement that I’m going to resell that time to somebody else at a profit. So, that’s essentially what we’re doing.
Marcel Petitpas: So if you have staff that’s kind of in house and full time, then what you want to pay attention to is, number one, your capacity, which is how much work could you accomplish in any given period of time? And that’s defined generally by how many hours you have available to you. So you could look at your staff, you could look at how many hours a day do they come to the office? How many of those hours every day do we expect them to be working on client stuff and not sitting in meetings or eating pizza with the team at lunch or filling out reports for us? What are the holidays that are coming up? How much time off do we give them? So, let’s look at the next quarter. How many working days are there? How many billable hours can we expect? That’s our capacity.
Marcel Petitpas: So, that’s number one. It’s important to know your capacity, because that number allows you to look at your sales pipeline and figure out do we need to hire people? Maybe we’re overstaffed. Are there areas of the business where we need to sell more stuff, because our designers are going to be busy, but our developers are going to be sitting around twiddling their thumbs. So super important metric, that helps you get a whole bunch of insight into the future. The second one is your utilization. So how much of your capacity are you utilizing to do stuff that gets you paid? Right? So again, it doesn’t matter if you bill by hour, if you bill on value, if you build flat rates, if you have a productized service, doesn’t matter. At the end of the day, you have to have your team spending as much time as possible earning revenue, which means you have to have enough revenue coming in for them to effectively earn.
Marcel Petitpas: So there’s a balance there, but utilization rates are super, super key. Some benchmarks around utilization, you should be aiming for a 65% billable utilization for your team on an annual basis. Between 65 and 75%, 75% is where you start to get into that high end of that. Anything below 60, generally it starts to get problematic. You start to struggle a little bit with cashflow unless you have crazy high average billable rates and you can get away with it, which I hope that’s the case for you. For most people, that generally isn’t the case. So 65% for utilization and on a week to week basis, just your weekly targets, most people are asking their billable team to be doing anywhere from 32 to 36 hours a week billable. Unless it’s a specialized position a team leader or a project manager, they’ll generally be a little bit lower, anywhere from 25 to 30 hours a week, because they have other responsibilities within the team.
Marcel Petitpas: So you might be looking at, a 75 to 90% utilization rate on a week to week basis. And then when you net that out and annualize it, including vacation and holiday parties and all that other kind of stuff, you’ll probably end up closer at 65%. So capacity number one, utilization number two, and number three, we already talked about it, average billable rate. For each hour that your team has available that they used to work for clients. How much money does your business make? So that’s adjusted revenue, revenue minus all kinds of costs of goods sold, pass through expenses, divided by the amount of time it took you to earn that revenue, that’s your average billable rate. And that becomes very handy, because you can start to segment that by different clients, different types of projects that you’re doing, maybe we’re building a funnel for this client.
Marcel Petitpas: We’re building websites for that client, and over time you can start to surface insights on what kind of clients and projects do we make the highest average billable rate on? Which ones are we most efficient at earning revenue in? Are there particular areas of a project that we are scoping really poorly or that we’re scoping really well? Right, and once you have those three numbers in front of you and you’re tracking them on a regular basis, you have a bit of historical data. Then the next step is to just sit down with your team, look at this information, and start asking questions about why? The data should never be used to say, hey Chris, you’re doing a really crappy job. You went over budget on that website project. The data is used to say, hey Chris, I noticed that the budget that we had created for this website was not even close to what actually happened.
Marcel Petitpas: Why do we think that is? What assumptions did we make when we were scoping this website that were incorrect? Is there a part of the process that we’re, maybe missing an opportunity to be more efficient in? Facilitating those conversations with the team on a week to week basis, is how we’ll start to surface insight and over time develop processes to be consistently profitable on our services. And that’s ultimately the goal of tracking this information and then reviewing it on a regular basis. So I hope that’s concise for everyone. That is the spark notes on, where to get started in terms of tracking your core metrics and your agency.
Chris Badgett: That’s awesome Marcel, I really appreciate that. I wish you had been around when I got into freelancing agency. I feel I just pulled the trigger and rode the bullet and everything was always learning the hard way. Learning the hard way, learning the hard way. I’m thinking about capacity. I remember when I sat down, and if I sold something that I couldn’t personally deliver, I’d have to go hire somebody real quick. And then here we are, several years later with all these people and then we’re just trying to keep the glue and the duct tape together. And I remember capacity, things would have to become a problem where, we’re overselling or we’re not managing client expectations on timelines, so we had to create a whole spreadsheet to figure out capacity and forecasting and sales pipeline and all this stuff. And it was hugely manual and painful and took a lot of time.
Marcel Petitpas: And that’s still the case today. It’s funny because the story that you just told me is the story I hear every single week, from dozens of different agency owners that I’m talking to, most of them through no fault of their own, were just really good at what they did. They built great websites and people were like, hey, can you build me a website? Fast forward five years, they’re like, Oh shit, I have a business now. Almost by accident you end up with a business. And then you have to work backwards into, okay, well what is my business model? How do I manage this properly? And you go on this really steep learning curve. And so my hope is that, and we’re creating lots of content on our podcasts, on our blog, that if you’re an agency owner in that position today and you’re just kind of realizing, I need to learn a little bit more, how to manage this business that I’m running, that we can make that easier to learn how to do.
Marcel Petitpas: And then also that we’ll have a tool that’ll avoid you having to build a bazillion spreadsheets to try and stay on top of this. Because as you know, when you are inundated with client work, which most agencies are, there’s never not client work to do, for most people. If you have to spend an hour building a spreadsheet to answer a question, you’re just not going to build the spreadsheet. It’s going to happen, maybe once a year at the quarterly offsite, you’re going to run the spreadsheet. You’re going to go, Oh geez, we really mess that stuff up and then you’re just going to move back on to keep doing the same thing. You’re not going to get anything productive out of it. So we’re hoping that we can make that easier so that more people can do it, because it’s important and it makes a huge difference. I’m sure you learned.
Chris Badgett: Well, agency owners are strapped on time and their own capacity and stuff that. Tell us a little bit about Parakeeto. I have a lot more questions for you, but what does your software Parakeeto do?
Marcel Petitpas: Yeah, I mean our software basically helps you track those three core numbers that I just told you about. And do so without meaning to waste a lot of time on spreadsheets. So what we found was that, we needed to go through that process if we wanted to answer simple questions like, what clients and projects are most profitable for us? What parts of a project didn’t go as planned. What is average billable rate and how does it change depending on who we’re working for, what kind of things we’re doing, what is our utilization? How is that changing over time? What is our capacity? How much work do we have booked against our capacity? So all these kinds of things that are super important to help us make better strategic decisions, that help us run our agency in the right way, were too hard to get to.
Marcel Petitpas: So we’re building a platform that makes that a lot easier and does it in a software that allows you to query it and run reports that you otherwise would not really be able to run inside of a spreadsheet, and ultimately just give the power to the small agency owner to have that information in front of them, which generally in the past, only huge agencies with enterprise level software have had access to. So we’re trying to democratize that a little bit and make it easier for the average Joe, to just stay on top of their numbers and run a great agency.
Chris Badgett: I think this is really awesome and it’s really professional. A lot of the talk on the internet around agencies, about sales and marketing and high ticket clients and all this stuff. But the reality is, you still got to deliver on whatever you sold. And to do that professionally, you need to look at the numbers and to be able to forecast. If you have good optics into the data and the health of your agency, what are some things you can see coming that might not be obvious?
Marcel Petitpas: Yeah. So, what I just described earlier was what I would consider your level one. You’re going from your white belt to, I don’t know what the next one is. Your blue belt or yellow belt, maybe it’s yellow, I don’t know. So that’s level one, get those three core metrics in place. But level two is actually not a big stretch from there. And the world of possibilities that it opens up for you is absolutely incredible. So let’s think about this for a second. If we know what our average billable rate is, and we know what it’s been over the last six months, that data is kind of normalized at this point. Then what we can do is look at our sales pipeline and we can look at our wage pipeline and say, okay, we expect to close these three deals.
Marcel Petitpas: It’s $100,000 in revenue. We know that we make $150 an hour. Let’s divide the $100,000, by the 150, that’s how many hours we need available. Then we can look at our capacity and see, do we have that much time available? Oh no, we don’t. Okay, well we probably need to start thinking about hiring somebody, rather than being, sweet, we just sold $100,000 worth of work. Oh shit, we don’t have a designer. We need to hire one yesterday. Then you hire the person and you throw them into the fire and they don’t have a great onboarding and then they turn out of your business in six months or they don’t meet expectations or the client’s not happy. Right? How many times have we been in that situation? So just having a few weeks or a few months of visibility, can make a huge difference. So that kind of stuff becomes possible.
Marcel Petitpas: We can also start to sit back and think about, okay, we’re offering all these services. Which ones should we be really focused on? Who are our best customers? Right? A lot of us are talking in the agency industry about niching down, right? Niching down, figuring out who your perfect customer is, figuring out what your perfect offering is. Well, now you have data to help you actually back that decision up and be, some Quanta, to help you say, okay, this is our best customer because we consistently make great profit margins on them. We have a great process in place that is consistent in scope, our sales metrics are aligning to this. So really once you have that foundation in place and you connect it to your sales pipeline, then you have all kinds of forward visibility.
Marcel Petitpas: You can start to forecast your capacity and what’s coming down the pipeline. If you start to develop really great scopes of work around your work. So, this is another great thing is, you can start to see, hey, we are consistently going over budget on websites. So that allows you as a business owner to say, okay, well let’s evaluate our process around how we build websites. And depending on how you decide to structure your data and how granular you get, you might be able to see, okay, at the development side, that takes us about the same amount of time that we expected. But design takes twice as long. So now you know okay, we need to focus specifically on the design part of this website building process. So your scopes of work get more consistent over time. And when your scopes of work get more consistent, well, your resource planning gets more consistent.
Marcel Petitpas: So now your team doesn’t work on weekends as often anymore, and now you’re not scheduling them for, 40 hours. And then because you didn’t scope the thing properly, well now they’re working 60. So all of those things start to get regulated. So you’ll see that the equilibrium basically in the business becomes a lot more stable, and that’s good for culture. It’s good for your pocketbook, it’s good for everyone. And that’s for me the biggest reason that the software’s important, because I see a lot of agencies that unfortunately everyone’s working themselves to death, because they don’t have control over this stuff, and they don’t really know what the scope is.
Marcel Petitpas: And everyone’s always working weekends and it’s just this crazy rat race. And I want to see people get out of that and get back home and to spend time with their friends and family and recharge and show up, at the agency ready to do great work. Feeling good about it rather than always kind of feeling they’re behind the eight ball.
Chris Badgett: Yeah, there’s a lot of burnout out there, and unfortunately, a lot of clients out there, have had bad experiences where agencies go dark or just disappear, don’t finish the project. And it’s just a tough cycle that goes on out there, with a little bit of better management, everybody would be a lot happier.
Marcel Petitpas: And one thing that I will say, and I just hate seeing this, but I’ve seen it happen so many times, is that, I think there’s a lot of agencies out there that, and traditionally this has been the case, they just let their employees subsidize their poor management. If their team’s working 80 hours a week when they should be working 40 hours a week, because the management team, they don’t have good processes, they’re not scoping properly. So the way to pay for that is to increase your utilization, right? These things are, there’s just two leavers, average billable rate, utilization.
Marcel Petitpas: So if you’re getting $10,000 for a project, but you’re working twice as much time on it, your average billable rate drops, utilization has to go up to compensate for that. So the business owner is still looking at their bottom line every year, and being like, well, this is fine. But what they don’t realize is that, if their business was operating within constraints that are realistic, they wouldn’t be profitable and the whole thing wouldn’t work. So I just hate seeing that. I think it’s really an unfortunate situation that is more pervasive than I’d to see.
Chris Badgett: Yeah. I’ve seen that probably the most on developers where, there’s the whole sales and marketing and discovery and then there’s design process, and then you collect the content and the project management, and then it lands in a developer last in line, and there’s unrealistic expectations on timeline, if the scope wasn’t managed appropriately, things can go pretty rough at that point. What are people doing outside of the 65 to 75% utilization? I remember having an epiphany when I realized, that’s okay to not have a hundred percent utilization, but what’s happening? Why isn’t that every hour billable?
Marcel Petitpas: Well, because people have to take vacation and people have to take weekends off and take their kids to soccer practice, and go to the gym and relax and stuff like that. And internally, you are probably going to have internal meetings. You’re probably going to have office parties, you’re probably going to have team offsites. You’re probably going to give people some time to work on your own website. You’re probably going to give people time to go and learn and develop their skills, so they can stay on top of the latest trends in Facebook marketing or stay on top of the latest technologies and WordPress. So every hour can’t possibly be billable. And if you shoot for a hundred percent utilization, what’s really going to end up happening, is your team’s just going to work 60 hours a week, because none of that stuff goes away.
Marcel Petitpas: You’re just going to be holding them to this crazy utilization target. And another thing that I think is important to talk about, is that, there is no value in holding your team to an arbitrary utilization target, because here’s what ends up happening when you hold them to a utilization target with no other context, when they run out of things to do, when the project is done, they’re just going to sit there and make the logo bigger for an extra three hours, so they can hit their utilization target, instead of coming to you and saying, hey, I’m done with that project. What would you like me to do next? It’s not clear to me what I should be working on right now.
Marcel Petitpas: You’ll learn so much more from that conversation, and you protect the cleanliness of your data, which is the most important thing, because if they sat there and made the logo bigger for three hours just to hit the utilization target, now you think it takes you that long to do this thing, that actually takes you three hours less. And now all of your data about your scope of work and how accurate that is, is muddied up. So I would caution people around utilization targets.
Marcel Petitpas: I don’t love holding teams to utilization targets, unless we’re also putting average billable rates and these other metrics in front of them, so they have full context and they can see the moving pieces. And we’re really in that case, holding them accountable to performance and basically gross profitability or efficiency, rather than just utilization. And instead, I would encourage you to just your team accountable to good time tracking habits, tracking all of their time, tracking it as honestly as possible and leaving context for you on why they’re not doing billable stuff, when they’re not doing billable stuff.
Marcel Petitpas: So letting you know in that note, the project is done and there isn’t another project for me to work on, or I’m blocked in my process, so that you can learn. Because ultimately the point of all of this is to learn the things that are holding you back from becoming more efficient and scaling your business. So that’s my little rant around utilization. I hope that answers your question.
Chris Badgett: Yeah, that was awesome. You were saying that there’s a trend you see where agencies or service providers are niching down. And in this community, of course, creators and membership sites, some people may be adding a service, it’s an add on. It’s a concept I call course plus, you can do course plus coaching, group coaching, masterminds, events, services, prioritize services, other products. And the list goes on and on. But if we are creating a niche service, as either an add on or part of our package, and we have the opportunity to not learn the hard way and we can start from day one by putting some best practices in place. You mentioned time-tracking. If somebody at the fortunate point of being at the beginning and they want to set themselves up for success, what should they do?
Marcel Petitpas: Yeah. So, I would basically think about this, the same way that I would think about validating a startup idea, which is validating my riskiest assumptions. So I would sit back and think of, okay, what’s the service offering that I want to make here? What’s the value that I want to get to the client? And then I would start to list out all of the assumptions that I’m making, when I’m trying to come up with the price. Right? So set a target first of all for the average billable rate that you want to make on this service, right? And that should be based on what’s the cost, if I’m going to end up hiring this out to somebody else, so that I’m not the one doing it all the time, what’s that going to cost me? And then make sure that you’re aiming for a 50 to 70% margin, probably aim for 70 and you’ll end up at 50. That’s generally how it ends up working anyway.
Marcel Petitpas: So start with that, model that out and then go and run some tests. Don’t start selling the service right away. Maybe grab a couple of clients and say, hey, can we do this for you? And then go through the process, track your time and then sit back and analyze, okay, I thought it was going to take me three hours to do this thing, but it actually took me four. So adjust your expectations, go back and do it again and do it enough times that you start to get some consistency in the scope, and that’ll help you figure out how you should be pricing it, how you should be delivering it, what the biggest risks are in that process, what kind of things you can and can’t control, are they going to affect how consistently that thing goes down.
Marcel Petitpas: That is how I would approach adding a new service offering to my business today, knowing what I know. And what that does is that, avoids you getting into a situation, which I think a lot of people have gotten into. Which, I totally get, I’m a big proponent of just go out and sell the thing, and then figure it out later. That’s how most people operate. I think there’s a lot of validity in that exercise as an entrepreneur to get yourself out of your comfort zone and just start moving. But the danger in that of course is that you say, yeah, I’ll do this for you for $1,000 a month, it ends up costing you $2,000 a month to actually get it done on a consistent basis.
Marcel Petitpas: But now you’ve set an expectation and it’s hard to work backwards from that. And unfortunately with services, that is a real possibility. It can actually cost you more money to deliver something than what you sold it for, which nobody wants to be in that situation. There’s no amount of selling that will get you out of that problem.
Chris Badgett: Yeah, that’s a really great point. Do you have any high level things you’re noticing as you look at agencies, in what’s happening in the economy. I just see more and more, it seems there’s a shift in how people are working. There’s a lot more of this freelancer nation gig economy thing going on. What are you seeing just in terms of the agent agency life out in society, and in terms of people who in the past might’ve taken a job, maybe now they’re starting an agency or maybe they’re leaving a job to start an agency or maybe they can’t retire so they start an agency, what’s going on culturally?
Marcel Petitpas: Yeah, I see two big shifts in the market. I think the first is that the micro agency is really a big thing. So this is the idea that, I think the massive agencies, there’s still a place for them, but it’s just going to be basically at the enterprise level. But the days of most agencies being huge and having hundreds of employees, I think those are kind of going away. And the boutique shop is really starting to dominate, and this is the boutique shop that can have five, 10, 20, maybe 30 employees. They’re good at one thing. They’re extremely good at one thing. They have great profit margins, they’ve got their operations and their processes kind of figured out. They just know how to do that one thing extremely well. It generates a great income for the founder and the team, and they’re happy with that and they kind of dominate their niche.
Marcel Petitpas: So I’m seeing that becoming the prevalent model, when we think about scale in an agency, not to say that the other things aren’t happening, but that I’m seeing a lot. I’m also seeing, to your point, the fragmentation of talent. And I’m also seeing the in-housing of talent being more prevalent as well. So it used to be that, if you were a creative, you were a sellout if you went and worked for a brand. But now brands are so cool and they’re doing such great work that, you’re not uncool if you’re a designer and you go work at Airbnb, because Airbnb is doing great creative work, right? Wealthsimple is doing great creative work. And the cool thing Airbnb is, they’ll pay you three times as much as you made at your agency, and you get to go home at five or six every day, and they cater lunch and you get a scooter to drive around campus, it’s crazy.
Marcel Petitpas: So it’s like, why wouldn’t you go do that if you were a designer? And I think it’s putting a lot of pressure on agencies to become better operators and stop just working and exploiting their teams, because their teams don’t have to put up with it anymore. They used to have to put up with it, because that was where you went to cut your teeth as a creative. There’s still a little bit of that around, but that moat is eroding very quickly. And then finally, with the prevalence of freelancer platforms, a lot of people just are going out on their own and they’re just working from project to project. And what’s interesting though about that is, some of them still charge by the hour. And I think as freelancers that’s probably a more common thing. But a lot of work culture as a whole is changing to where, we have as professionals, often the luxury of being able to just go and work on a project.
Marcel Petitpas: And the way that those projects are increasingly becoming structured to mitigate risk, is they’re saying, this is a piece of the project. So maybe it’s the UI for the website, and we want to bring in a freelancer for that, and this is the budget and this is the outcome that we expect. And it’s up to you as a freelancer to say, can I take that amount of money, deliver that outcome and do so in a way that’s efficient enough that I come out being able to put food on my own table. And so even as a freelancer, these problems of managing your utilization and your average billable rate and your capacity, that weren’t really things that you had to worry about before, in some cases are now becoming things that you have to think about, which is a bit of a shift in the way that we think about working, the way that we approach work.
Marcel Petitpas: So, these are some of the trends that I’m seeing. The fragmentation of the workforce and talent, more freelancers kind of popping up, in housing becoming less of a limited thing. It’s happening a lot more often, and I’m seeing the fragmentation of agencies into smaller boutique specialized shops.
Chris Badgett: What about the decision to hire versus contractor? Do you have any thoughts on that?
Marcel Petitpas: Yeah, so the economics on this are really interesting, because it’s so much easier now to arbitrage, basically economies, that are not as strong as ours over here. So, generally in the past, the way that it worked was, if I wanted to hire a freelancer I was going to pay a premium for that, because I’m not purchasing as much of their time in bulk. So I’m going to pay more for each incremental hour. So my margin aren’t going to be lower. Which is okay, depending on what kind of business you run, because if you completely distributed, maybe you have less overhead, so your labor costs can be hired and you can still net out to kind of the same margins.
Marcel Petitpas: But in the past it was, I hire, because if I can keep that person utilized enough, I make much higher margins on their time, because I can hire a designer for, 60, 70, 80, $90,000 a year. I can resell their time at 150, 175, $200 an hour. And if I can sell 65% of their time, I make great margin on that. With the freelancer, I might have to pay $115 an hour for their time and then I might only be able to resell it at 150. So the margin’s a lot smaller, but now I can go find somebody in an economy that’s different than mine, the Ukraine or India or something that.
Marcel Petitpas: I can pay them less than I would actually pay an employee. I can still sell their time at the same rate, because of the way that I’ve priced it out with the clients. I’m selling on value. I’m not selling on hours. So, the decoupling of that has been super helpful for that. And I can make absurd margins, and I can still benefit from the risk aversion that is having a fractional workforce. And so it works out better. So I think for some people, if you’re in a situation where you have a lot of mechanical process, that somebody doesn’t need to have certain skills that somebody onshore, might need to have in order to do something, especially in client facing roles and that kind of stuff, where that stuff becomes more important.
Marcel Petitpas: But if it’s just a question of competency in a certain skill, then the opportunity to actually use a fractional workforce and hire freelancers is pretty big for you. And I would encourage you to look into that. But I’m seeing that become a lot more common, the entrepreneur that basically runs their whole business from a laptop, they don’t have an office, they don’t really have any overhead, maybe a little bit of admin support. They’ve got a fractional workforce, and basically they don’t incur costs when they don’t have work coming in, which is obviously the risk with having a full time workforce. But depending on what you’re doing, the right play in some cases, in a lot of cases, and still if you have the work coming in, to hire the person in house, because the margins will be better, especially if you’re doing stuff that requires a high level of skill or a high level of client facing talents.
Marcel Petitpas: And you’ve got to hire people that’s are expensive as freelancers, like a creative director. It’s going to be hard to find those in an affordable way and still mark them up at a decent rate. So I think there’s a lot of context around this, but freelancers are definitely becoming a more viable option with how easy they are to access, and the level of skill that you can get for the price, if you go in arbitrage in other economies, is pretty crazy in some cases.
Chris Badgett: That’s awesome. What is the name of your podcast Marcel?
Marcel Petitpas: It’s called the Agency Profit Podcast. There’s no mystery there, but what it’s about, straight to the point.
Chris Badgett: That’s cool. And if somebody wants to use Parakeeto, what tools can they get rid of or what’s it to make the transition? Just tell us more how to get into it.
Marcel Petitpas: So, I think one of the challenges that we saw, when we started the company was that, in order to get automated inside, you had to switch all of the stuff that you were using into an all in one platform, or you had to waste a ton of time on spreadsheets. So it wasn’t really anything in between. So, what we’re trying to do that’s different is, allow you to keep the project management tool that your team already knows and likes, because it’s a big ask to get you to change off of that, and keep your time tracking tool and keep your accounting tool. So basically in order to use Parakeeto, all you really need to do is, be tracking your time against your budgets. And as long as you’re doing that and you have relatively clean time tracking data, then you can start using our product.
Marcel Petitpas: And you don’t have to make really any changes to the stuff that you’re already using. And what you can get rid of, is probably a lot of the spreadsheets that you’re building all the time. So we’re not going to try and replace any of those kind of fundamental tools, it’s so hard to find a project management tool that you actually love, right? That’s an ongoing process for most agencies. And for those that it’s not an ongoing process, it probably took them a long time to find the one that felt right. So I’m not going to ask you to change that. Keep it, come and see us. All you really need is a time tracking tool. We’ll have a conversation about how to structure that time tracking data, and then you can start using our platform without really disrupting your team or your workflows.
Chris Badgett: That is awesome. Well, Marcel Petitpas, he’s from parakeeto.com, he’s at the Agency Profit Podcast, is that right?
Marcel Petitpas: The Agency Profit Podcast. Yeah, you can check it out on our website, parakeeto.com/blog. We post all the episodes there, or you can subscribe if you’re an audio person on iTunes, Spotify, all the major podcasts and networks, probably the same place you’re listening to this podcast actually.
Chris Badgett: Cool. And do you have any final words for the course builders and the people that build websites and services for them?
Marcel Petitpas: Yeah, a couple of things. First of all, I can’t believe an hour flew by, that was a great chat. So, if you’re listening to this and you’re interested in learning more about this, and if you’re interested in actually starting to implement this on your own, without having to sign up for our software and pay for anything, we have a bunch of templates that we’ve been using with our consulting clients, because we do do some consulting around this, and you can download those for free on our website. Just go to parakeeto.com/toolkit, and you’ll get templates that’ll help you calculate all of these metrics.
Marcel Petitpas: You also get a cheat sheet, that talks about how to calculate each of these metrics and all the benchmarks that I talked about today. So if you’re interested, go and download that, because basically if there’s one thing I want everyone to take away from this, it’s that, it’s important to look at these numbers, I don’t care how you do it, whether you’re doing it on our platform or you’re doing it in a spreadsheet, I just want to see more people do it, because it leads to a healthier business for you and your employees, and all of the stakeholders attached to them.
Marcel Petitpas: So please take an interest in doing these things. I promise you it’ll benefit you in a big way. And if there’s anything that I can do to be helpful, feel free to reach out. If you download that tool kit, you’ll get access to my email. So that’s my final call to action for all of you.
Chris Badgett: Awesome. Well, Marcel, thank you so much for coming on the show. I really appreciate you sharing your wisdom and insights to help all of us level up.
Marcel Petitpas: Chris, it was a pleasure. Thanks so much for having me.
Chris Badgett: And that’s a wrap for this episode of LMScast. I’m your guide, Chris Badgett. I hope you enjoyed the show. This show was brought to you by LifterLMS, the number one tool for creating, selling, and protecting engaging online courses to help you get more revenue, freedom, and impact in your life. Head on over to lifterlms.com, and get the best gear for your course creator journey. Let’s build the most engaging, results getting courses on the internet.