The Uncomfortable Truth About Marketing & Incentives

Your marketing agency just pitched you a complete rebrand. They're excited about the creative possibilities, the chance to make ripples in their industry, and the year’s worth of steady work coming.

You're thinking about revenue, customer acquisition, and whether it’s going to grow your company.

And your marketing budget? Well, it might just become a casualty of the principal-agent problem—even if everyone involved means well.

Yes, the principal-agent problem sounds academic. But you need to understand it so that you can manage the risks associated with it—no matter which side you’re on.

You’ll save a lot of money if you do.

The principal-agent problem occurs when one person (the agent) makes decisions on behalf of another person (the principal), but their interests don't perfectly align. In 1976, two American economists by the names of Michael Jensen and William Meckling coined the term and described what was going on.

Lawyers and defendants. Real estate agents and homebuyers. Voters and politicians. Shareholders and managers. This problem is everywhere.

That doesn’t mean the world is full of sharks who just want to eat you for breakfast. Sharks exist, but they’re far from the only ocean life out there.

But I do believe the old Upton Sinclair quote that “it is difficult to get a man to understand something when his salary depends upon his not understanding it.”

That is to say, a perfectly friendly agent acting on your behalf, employing staff who genuinely want to see you succeed, who pour their heart and soul into their work, and who like you on a personal level might still offer up more than you need. And they may genuinely believe they’re doing the right thing in the process.

In any agency/business relationship, the business owner is the principal. The agent is whoever you hire to handle your marketing: agencies, consultants, or even your own marketing employees.

The marketer’s definition of success, however, probably isn’t the same as yours. Here are three ways this problem manifests in reality, though I’m sure you can imagine many more.

Agencies are (generally) paid for the amount of work they complete. That means they have a strong financial incentive to come in with complex, expensive marketing services.

Bigger budgets mean bigger retainers. More platforms mean more billable hours. Additional services mean expanded relationships and job security.

And by all means, don’t half-step your way into marketing. It really does require hands-on effort and a proper budget. But if profitable growth is your goal, it’s far better to test first and scale later (cheap until proven, then expensive when worth it) than to slam spaghetti at the wall and hope something sticks (expensive and messy).

Metrics are useful, but they can lead you astray. Businesses have learned that metrics are a great way to hold their staff accountable for performance. And that’s a requirement to stay in business.

But at the same time, marketing agents—and really anyone whose performance is measured quantitatively—will inevitably focus on metrics that make them look busy and successful, regardless of business impact. That can lead to excessive focus on impressions, reach, and engagement—numbers that almost always trend upward and are hard to directly blame when revenue doesn't follow.

Say an expensive lead gen effort produces zero qualified prospects. If you’re running that campaign, what do you tell people?

For a lot of marketers, the answer is to point out that the campaign is generating millions of impressions. But if you’re running the business, you probably don’t care about impressions for their own sake. You care about revenue.

"While we're updating your website, we should also refresh your brand guidelines, optimize your social strategy, and set up marketing automation."

Maybe this is true. Maybe it does all need to be done.

But 90% of marketing is scope control in disguise. And it’s often not a good idea to take on too many projects at once.

In the example above, the business might be better off getting the website fixed first, assuming there are issues with it. And I’m talking specific issues like load time issues, out-of-date copy, a bad conversion rate, or a design that’s truly messy (and not just merely so-so).

If the website needs fixing and the brand guidelines are more than a few years out of date, that can come first just to make cleaning up the website easier.

And then after putting out immediate fires? Maybe then get to the marketing automation or the social strategy.

This is a better path for both the principal and the agent here, since the principal has a chance to decline additional tasks that aren’t needed and the agent is likely to keep their client happy and still win revenue over the long run.

But understanding the surface problem is only half the battle. The deeper, scarier problem is this mismatch of incentives, so let’s talk about…

Misaligned incentives will cause problems for everyone if given enough time. Count on it.

If an agency upsells a client on Service A, B, C, D, E, and F, and the client accepts everything, then there are one of two ways it could go:

And the latter is not sustainable—at all. It’ll show up in bad reviews, or clients that churn with little notice, or whispers to connected friends in connected circles.

Someone has to be the one to stop it, and in my seven years running a marketing agency, I think it is 10x better for the agency to be the first one to move. Even when it’s scary. Even when it leads to lost revenue in the short run.

I’d even go so far as to say that 60% of my regrets in business come down to a) taking on work I shouldn’t have and b) keeping work going that should’ve ended.

In the short run, principal-agent conflicts benefit the agent. But the long run is a strange game, and the only winning move is not to play.

Don’t let my writing scare you. No one is powerless here. But everyone has to be vigilant.

Everyone involved needs to be asking questions like:

Even taking a few minutes to play devil’s advocate can save literal fortunes in the long run.

I have some more tailored advice for business owners and agencies below, but the basic questions above should be a north star for everyone.

You want every single dollar of yours to be put to good use. But you still want to give specialists the room they need to do their jobs well.

So here’s what I would advise:

You want to make sure you get paid well for your work and that your client relationships are stable enough for the agency to keep running. But you have to make sure your clients are truly taken care of, or your agency is on thin ice.

Here’s what I do to handle the principal-agent problem in my own agency:

The principal-agent problem is eternal. Principals can’t know everything about how the agent will behave, and agents will always have different incentives than principals—at least to some degree.

But it doesn't have to destroy your marketing results or make every relationship tense.

In fact, the best marketing relationships acknowledge this tension exists and work actively to minimize it. Smart business owners create incentive structures that line up everyone’s interests. And on their side, ethical marketers can suss out conflicts of interest and focus on client outcomes over agency revenue.

You don't need perfect alignment. That's impossible.

All you need is just honest recognition of where interests don’t line up. And systems to keep everyone focused on what matters: profitable growth for the business.