How Much Should You Spend on Agency Biz Dev?

Sei-Wook Kim (00:05.44) On today's episode, we're talking about how much you should spend on business development. Almost every founder asks us some version of this, and the first answer is always the same: it depends on your gross margins. But that's the easy half. The harder question is where the money goes once you have it, because the five functions of BizDev don't cost the same and don't pay back the same. We'll walk through all five and how much each one is worth funding. Peter Kang (00:31.457) All right. So this question of how much should we spend on agency biz dev is actually two questions hiding inside one. When an agency founder asks, "Hey, how much should I spend?" it's actually not a single number we're talking about. It's more about, hey, how big should the budget be and where specifically within BizDev should it go? The first part, the budget question, is all driven by gross margin. We did a whole episode on it — episode 27 — so maybe we can talk a little about gross margin as a refresher. But beyond that, it's the allocation part that I think is really important and what we'll spend most of today talking about: where within BizDev does the money go, where does it get wasted a lot, and where can you get good bang for your buck. One way to think about this is: are founders putting dollars into something that's super expensive and inefficient with their spend, versus where can they be more efficient and effective — maybe something lower cost that can have a high impact? Sei-Wook Kim (01:48.992) Yeah. And we'll get deeper into the different ones. But an expensive dollar, as an example, could be outbound — something cold from scratch where you're hiring a new person or hiring an outbound shop — versus a lower cost option, which is growing the clients you already have. But when founders ask us what a budget should be, they often just want a percentage. Like, should I do 10% of revenue? Is that the right number? But it's oftentimes not about the number. It's really skipping the real decision on what needs to happen. Two agencies could spend the same amount — say 15% on BizDev — and get completely different results, because if one agency invests in growing accounts and the other is all in on an outbound agency, they can have varying results. The mix on how they spend the money really matters more than that specific percentage. Peter Kang (02:40.969) Yeah, so let's dive in. Maybe we could talk about gross margin first as a refresher. Sei-Wook Kim (02:51.625) Yeah. Gross margin as a refresher: it's revenue minus delivery costs — that's gross profit — and gross margin is the percentage of that. When we think about how much money you have for business development, gross profit is really the funding source for everything. If you have a high gross margin, you have room to invest without eating all the profit and being left with nothing at the end. We talked about this in episode 27. As rough guidelines, agencies should target 50-plus percent gross margin. Let's say 15 to 20 percent goes to sales and marketing, 5 to 10 goes to G&A — you still land with around 20 to 30 percent EBITDA, and that's a pretty healthy place to be. Peter Kang (03:40.712) Yeah. One way to think about this is: good margins buy you the room to invest in growth while still keeping profit at the end of the year. But as we well know from experience, if your gross margin is under 40 percent, you're basically out of runway, because once you pay for delivery and then SG&A on top of that, it's really tough to squeeze margin unless you decide to forego paying yourself as well. And there's a statement a lot of agency founders make — "we had a down year because we invested in growth" — and we take that with a grain of salt. There's a bit of a myth behind it where, nine times out of ten, your gross margins probably slipped and as a result you had to eat into the profits when you invested in growth. And even then, it's likely you didn't invest as much as you wanted into growth. Sei-Wook Kim (04:38.64) Yeah. And we'll come back to this, but margin doesn't set how much you can spend — it defines what you can actually afford to do as an agency. It all starts with gross margin. Peter Kang (04:53.744) Yeah. Okay. So before we dive into each of the five BizDev functions, one thing to establish is that each BizDev function buys you revenue — it delivers growth — but at very different cost structures. A couple things vary. First, what it costs to make a dollar. Second, the time — how long does it take for that dollar to show up? If you think about marketing 101, you spend X dollars on ads and you get some kind of return on ad spend. We don't have as clear a transactional measure in agency land, but you can think about it in a much larger picture. From that lens, account growth — which we'll get into — wins on both counts: it's low cost and the results come pretty quick. And then outbound, which we'll get to at the end, typically loses for a lot of agencies because it's expensive and slow. Of course there are caveats, and it's not a blanket statement for every single agency. But this mirrors a lot of what we talked about in episode 32 about scaling business development beyond the founder. So the five functions are: account growth, partnerships, marketing, sales, and outbound. Let's dive in. Sei-Wook Kim (06:43.791) Great. The first function is account growth. This is what we're saying is the lowest cost dollar. It's really about expanding your existing engagements with your existing clients — more projects, expanded scope, or a retainer added on to your initial engagement. This is the lowest cost and highest margin dollar in business development, and we consider it the lowest hanging fruit. Founders and teams often underinvest in this the most, but there's a real playbook for how to make this a more impactful part of your new biz efforts. Peter Kang (07:31.656) Yeah. One inspiration we pull from is David Maister, who wrote Managing the Professional Service Firm — a book we reference a lot over the years. He has a whole section on why it's so important to market to existing clients, and it's really about account growth. There are really four reasons why this is so important. Number one: existing clients are higher probability prospects. They already know and trust you. Number two: the marketing cost to win them is lower because they're not a cold contact and you don't have to have this long running courtship to win that relationship. Number three: a lot of times the follow-on work with these clients is more profitable than the first engagement because you already know how to work with them and you have a good process going. And then lastly, as you work more with the same client, you develop process and efficiency in the delivery. You might be able to bring in lower cost personnel, or these days you could put automations and AI in place, which raises your leverage and increases your margins. Sei-Wook Kim (08:40.406) Yeah. Maister also talks about being disciplined about this because it's not about trying to win anything from any of your clients. It's really targeting the accounts where a couple of things are true. The first is there's real additional need that you can serve and you can actually provide more value. And the relationship has to be strong enough so that any effort you're putting into growing that account actually pays off and you can actually convert. Peter Kang (09:09.696) Yeah. The cool thing about the book — and everyone should grab a copy if you haven't — is he actually lists a lot of tactical stuff. One of the things he suggests is that you spend a little bit of your new business budget inside your current engagement. Go the extra mile, maybe offer an extra analysis or make the turnaround a little bit faster. This is a little bit tricky because you have to be disciplined about it — you are in effect sacrificing a little bit of gross margin, but you're treating that delivery cost as a marketing investment for your client. Going above and beyond for that client as a way to build the relationship and grow the account. Just think about that as an interesting mental model for how marketing dollars or account growth dollars could be spent. And then he also suggests things like doing a lunch and learn with your clients, putting together some research for them. You can do all these little things to really bring value to your clients. Sei-Wook Kim (10:26.74) Yeah. And this is an area where agencies typically underinvest. Part of the reason is it's unglamorous — you're servicing your existing clients, there's no cool new logo, no big announcement saying "we won a new account." And usually there's no owner around it, so it just sits with nobody. It's somewhere between delivery and sales. Without that owner, it gets underinvested. It's almost a comp thing: if you have account managers who are comped purely on keeping clients happy, that's gonna be their job — they'll keep clients happy but not think about growth. But imagine a variable comp structure where account growth is what account managers are incentivized on. Their behavior will change and you can actually see some expansion that moves the needle for the business. Peter Kang (11:29.961) Yeah. To bring this back to the agency founder trying to figure out how to spend on business development: account growth is an excellent place to start. It's low-hanging fruit, you're gonna get a lot of bang for your buck. The activities where dollars can actually go include some of the things Maister suggested — going the extra mile on engagements — but also on the account management front: having really good QBRs where you're showcasing the work you did for the client, the results you delivered, and then talking about the future, mapping out what future engagements could look like and different expansion paths within that client. Maybe some training and education you could offer as well. It's very low lift — you don't need to bring on a bunch of new resources. If you do this right and think about all the ways you could go deeper with your existing clients, this is an excellent place to start. Sei-Wook Kim (12:41.645) Right. Let's move on to the next function: partnerships and referrals. Again, something that is lower cost but slow to build. We're talking about building relationships with other companies in your ecosystem who could refer you business — other agencies with supplemental services, tech partners, industry organizations — people you probably have a relationship with now, but being intentional about it and making that a meaningful part of your business dev efforts. Peter Kang (13:19.086) Yeah. These have generally a lower direct cost — in many respects it's somebody's time plus maybe a little co-marketing budget at the most basic level. It's more about building high trust, because that warm intro you get from somebody can go much further and convert at a higher rate than something that is a cold lead. While it's relatively lower cost, it does take a lot of discipline and a system. We talked about this in a couple of episodes — episode 12 we did a whole thing on lightweight partnership programs, and episode 18 we talked about treating referrals as a system. The hard work here is not so much the dollar investment but building that system so you're not just operating off a great partnership vibe. It's about: can you identify the right partners, can you have a real give-and-take going, and can you follow up consistently? Sei-Wook Kim (14:34.447) Yeah. And we've seen this all the time — founders who have great relationships, go to all these dinners, meet a ton of people, and are visible, but there's no real cadence of following up. There's no system that turns all those conversations and relationships into actual pipeline. We've been guilty of this. We've gone to all these events and let things fizzle from there. The fix is giving this function a real owner. A couple of our Barrel Holdings agencies have brought on dedicated partnership managers who know everyone in that ecosystem and are actually incentivized based on partnership-driven revenue. Now there's a person who's doing co-marketing, bringing leads back to the team and knowledge from all these partners back to the team. It's a very structured, intentional process. Peter Kang (15:30.785) Yeah. If we break down what the actual spend might look like on this function: it might be somebody who owns partnerships outside of the founder — maybe even someone working part time — and then on top of that a co-marketing budget to start. So it could be someone you're paying a few thousand bucks a month part time and then maybe a couple thousand a quarter to do different co-marketing activities. And as you see success with this and want to invest further, you could scale this up, build a partnerships team, and really blow out that budget to be five or six figures a quarter. One thing to add: certain ecosystems you might be part of have partners who are more than willing — well-funded, VC-backed high-growth companies — who are happy to foot the co-marketing costs for a private dinner or an event, as long as you play your part in showing up, maybe helping with the programming, and definitely bringing prospects to that event. So much opportunity. It takes time though, so get to this early, give it the time, and bring patience as you invest. Sei-Wook Kim (16:58.571) Right. The next function is marketing and awareness. We'll call this a medium cost and slow payback. Marketing is obviously about getting in front of your ICP and doing activities to grab their attention, stay top of mind, and make them think about you when the time is right — just reminding them that you exist. The goal is for this marketing activity to spur them into taking action when the time is right, reaching out to you and engaging in a sales conversation that could lead to new business. Peter Kang (17:35.08) Yeah. Marketing is generally the slowest to pay back, which is why founders often see it as the first thing to cut when gross margin suffers and they need to reduce costs. How many times have we heard of founders laying off their marketing personnel the moment things get a little tight? But here's the other thing to realize: marketing done well is the investment that makes all the other BizDev investments cheaper. It makes the inbound warmer, it makes the referrals easier, it helps the outbound be more effective — because this is all about raising the awareness of your brand as an agency, getting your name out there, and being top of mind to potential prospects. Sei-Wook Kim (18:38.857) Yeah. And this is something we see happen a lot when founders haven't spent the time to build out this function. It's usually the founder doing the marketing themselves, and they do it here and there. When they have a free week they'll do a lot of marketing activity, then they'll go silent, get busy, and stay quiet for a couple months. It's really inconsistent. We've done this too when we haven't really thought about the systems around it. If you think about marketing — and if you do this for your clients — it's a lot about consistency. What are the things you continually do to stay top of mind? Those stop-and-start activities don't lend themselves well to having a strong function. Peter Kang (19:25.731) Yeah. One way to think about this as a mental model: there's really what we call a habits layer, where you're being consistent with certain things — creating case studies, posting on social, sending newsletters to your list. Build a system so you don't even have to think about it. It just happens. And then there's the more experimental part of marketing — campaigns, one-off ideas, maybe pitching a story for earned media, hosting some kind of event, doing something different to stand out — and then using those signals to continue doing more experiments. A lot of them are gonna fail, but every now and then a marketing experiment really takes off and gives you a lot of attention. You want to combo those things — habits and experiments — because they play with each other. Sei-Wook Kim (20:34.502) Yeah. Another aspect of all of this is AI search and just being visible and discoverable there, which is obviously very important. The more inputs you give it — all these ongoing habits and experiments — helps AI have information it can use to generate its answers. If all the activities can result in top ten lists, if you're mentioned in industry publications, if your own website has landing pages and case studies and accurate information on who you are and who you serve, all these things can contribute positively to SEO or AI search that can ultimately bring you leads. Peter Kang (21:22.863) Yeah. When it comes to the investment on the marketing side, it's about building that system. Part of that might be personnel. It could start with the founder being very disciplined and allocating their own time, but then it's bringing other folks who can help create content assets, or someone to coordinate events, campaigns, and other activities. Once you understand that this is a long term investment, you start to realize — whether it's in a part-time capacity or you're building a full-on marketing team — there's a lot you can do in between and see what works and what doesn't. Sei-Wook Kim (22:09.796) Yeah. Different marketing efforts can take a varying amount of time to pay off. Let's say you have a webinar as part of your marketing activity — you could immediately get someone reaching out right after it, and that could lead to an opportunity. Or you might have a private dinner, meet a bunch of people, and a prospect you meet there could be ready to purchase years down the line. It's one of those things where you have to put in the effort and be consistent, but the payoff could come at a much later date. Peter Kang (22:43.694) Yeah. We'll leave you with this: marketing really greases the wheels for all the other BizDev activities. That's the important takeaway for this. Sei-Wook Kim (22:55.055) All right. The next function is sales, which is the conversion layer. Sales is about taking the opportunities you've generated through all the different activities that come through your funnel and converting them into deals that you close. Peter Kang (23:14.326) Yeah. Sales is often treated as — if revenue isn't growing, I need to invest more in sales. But one way to think about it: the way we think about business development, sales isn't really a "can we buy more dollars" kind of function. It's about converting the demand that the other four functions create. You're not really talking about the volume of opportunities — it's about conversion and the capacity to convert. Spending big on sales, especially when your top of funnel is weak, is very wasteful. In many respects you've hired a closer who has nothing to close. Sei-Wook Kim (24:08.397) Yeah. And we find this is also one of the hardest functions for founders to hand off. At an agency, sales is a lot about trust building with key stakeholders and talking about your experience. It's usually the founder who's the best at doing it — they have all the credibility from doing the work over the years. So handing over that function feels riskier than handing over the other ones we described. And it isn't about stepping away cold. It's about building the systems and transferring the trust to another person or a team of people over time. Peter Kang (24:53.366) Yeah. If you're in a position to really invest in sales, that's a good place to be, because it means you have all these leads and you're at capacity — you have so much momentum on the demand side but limited capacity to convert it. Then it's the right time to really spend. Maybe it's bringing on another account exec or somebody who can do the closing alongside you as a founder. Maybe it's cleaning up the CRM, having better stuff there, proposal support — making sure you're getting those proposals out in an efficient way. Maybe it's also scoping help, getting better solutions architects or strategists involved. And it's about building the systems so that beyond the founder, you have that trust transfer that can happen, so eventually the founder can step out of the sales process entirely and depend on the team to take it through. Sei-Wook Kim (25:52.467) Yeah. The important thing is you have to have the demand — you have to have the leads to convert. Be cautious about scaling your spend on sales and building all these systems before you have the demand to actually convert. You have to match it with the pipeline you have. Peter Kang (26:10.888) Yeah. Awesome. Okay. The last one: outbound. We're calling this the most expensive dollar. Outbound is when the agency is looking to generate opportunities by targeting potential prospects, usually through cold channels — cold email, cold calling, LinkedIn messages. We say this is expensive because it also has the slowest payback: high cost per meeting, very low conversions. And what do we typically hear? Pipeline is weak, let's go hire an outbound shop. We've talked about this in the past — it's a bit of a misconception. Outbound really only works if you have great positioning, you have proof, you have a real offer. Without those, the message is gonna be generic and just not gonna land. This goes back to something we've harped on many times: you need a strong foundation — positioning dialed in, ICP, service offering, understanding what ecosystems you play in — and only then does outbound really make sense. Sei-Wook Kim (27:27.65) Yeah. We see this all the time with outbound: it feels like if you hire someone, you set them up to fail. You get outbound in place but you don't have positioning done, so you hire an agency, give them a three-month contract, they get no meetings, nothing closed, and you say, outbound doesn't work for us, and then you give up and never do it again for years. But if you take a step back, outbound was never the problem. You took this channel without having the foundation ready — a clear message to send to an audience, or you probably didn't even know who you were targeting. Outbound has to be a supplement to an engine that is already running, a foundation that's strong — not the engine itself. Peter Kang (28:19.345) Yeah. When you're ready for it and you've checked all the other boxes, then it's about spending time on RevOps or go-to-market engineering type things — maybe getting some kind of software for better segmentation and enrichment, like Clay, building really strong lists, making sure deliverability and sending infrastructure is all set, and then getting actual people to run this stuff, whether that's internally or through an outsourced agency. This is definitely the last dollar we think you should fund in most cases. It's when the lower-cost functions are hitting their marks and you have that engine humming where you can then layer on outbound. Sei-Wook Kim (29:15.066) Yeah. The one caveat here is there are certain types of agencies — let's say if you sell truly productized or one-off services where account growth isn't part of your business model and it's really about selling these engagements and getting new logos, and you have a really easy-to-buy offer — outbound could be a primary driver of your business dev, and account growth really isn't part of the story. For those agencies, positioning is still important, and knowing that this is your business strategy is important — not making excuses and saying "we only sell one-off" without having really thought about whether account growth could be part of it. Just make sure this is the type of agency you are before investing heavily in outbound. Peter Kang (30:03.939) Yeah. Definitely. Okay. So we just went through all the different functions, so let's put it all together. Just to recap: there are really two rules to this question of how you should spend on BizDev. The first is that gross margin sets the ceiling — without that, none of this really makes sense. And then the cost and payback of the BizDev functions usually set the order. You really want to fund from the lowest cost BizDev functions to the most expensive and slowest. Our recommendation: start with account growth, then partnerships and referrals, marketing, sales capacity, and then outbound. A few things to avoid: a lot of founders ignore account growth, so make sure you have somebody to own that. New logos aren't the only thing that drives new business success — business development happens with existing clients. Make sure marketing is funded well, even though the payoff is slow. Remember, it's greasing the wheels of the other functions. And make sure to avoid overfunding outbound. It feels like it should work because you're hitting new contacts and getting new leads, but it's a costly mistake that a lot of folks make. Think about the order in a way that makes sense. Sei-Wook Kim (31:43.222) Yeah. And again on the point of gross margins: gross margin defines what you can afford as a business. If you're under 40 percent gross margin, realistically you may only be able to afford the things that are the lowest cost — things like account growth and partnerships — and there may not be room in your budget for the things that are slow or expensive, like doing an experiment with marketing or bringing on an outbound team. And if your outbound isn't working and your margins are thin, outbound may not be your problem — it's your margin. So think upstream: really understand your pricing, your specialization, do you have scoping discipline? Having the fundamentals of the business dialed in first gives you the flexibility and the room to invest in business development. Peter Kang (32:41.589) Yeah, that's good. Okay. Let's close this out. There's a good homework exercise we'd recommend: pull your last twelve months of BD spend — not just the dollar amounts you can see as line items in expenses, but how much time you as a founder, or your different team members, spent on any kind of BD-related activities. Then bucket all of that across the five functions we talked about. What was the percentage that went to each? How much did you actually spend on account growth? How much on partnerships? How much actually went into outbound? Map all those things out, and from there you can see where you're at and think about the order we suggested and what changes need to be made. And one more plug for our Foundation app at foundation.agencyhabits.com — go and test your current positioning. It'll give you some insights on where you're at and where there could be opportunities to improve. Thanks for joining us. Till next time. Take care. Sei-Wook Kim (34:03.082) Thanks.