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There are a number of different pricing models for agencies running paid search campaigns in the UK and it is just possible that Google's cost-per-action (CPA)adverts could bring about changes.

Let's recap on some of the current pricing structures agencies offer:

  • A CPA model – the agency itself charges its client x amount for every successful action/sale/conversion the campaign creates.
  • A flat fee – the agency charges a static x amount to run the campaign but is likely to charge extra for additional reports or keyword maximisations.
  • A percentage management fee – the agency takes a percentage of the total spend and this percentage is likely to drop as the spend increases.
Significantly, there is an important variant that is applied to each of the above models:
  • Transparency – the agency will let its client see which keywords are being bid on and at which search engines.
  • No transparency – the agency considers its keyword list to be intellectual property and will share neither keywords nor costs with its client.

For this discussion, let us assume that Google's CPA test (currently restricted to a few global SEM agencies) is successful and becomes widespread.

Google's CPA offering is one where the advertiser only pays when a visitor to the site actually does something. Rather than paying "per click" the advertiser could pay "per sale".

In the limelight first will be an agency's own CPA model. If an agency can drive enough conversions through Google's CPA offering, then charging its clients a mark up on every conversion becomes an attractive option.

Marketers will want to make sure that their agency is not getting a way with too large a mark up for every conversion they drive. The tighter the mark up on each conversion, the more conversions the agency will have to create in order to earn a significantly better fee.

In order for web marketers to make this strategic decision, their agency will need to operate on a fully transparent level. It is unlikely that any marketer will let their paid search agency withhold what a conversion actually costs.

Let's have a look at the fee based models. Once again, we find full transparency is a must. Marketers will need to know which actions on their site (newsletter sign ups, leads, conversions, etc) advertisers are being encouraged to promote. Website owners will need to know how the potential bounty on those actions.

One of the differences between the flat fee model and the percentage spend model is how the agency copes with keyword price inflation. This remains true if Google's CPA offering becomes widely spread, but the possible issue of CPA inflation (or deflation) joins the frame.

In some ways, the percentage based fee becomes more attractive to marketers. Increasing the keyword tail is one way in which an agency can spend more on keywords but as volume increases ROI can often decrease. The traffic becomes slightly less targeted and fewer visitors convert. This coupling is less tight when conversions are on a CPA basis – as volume increases, the ROI stays the same. However, if the agency is on a decreasing percentage of spend then the ROI for the client marketer actually increases – you'll find yourself paying a smaller overhead for an increased number of successes on the site.

Transparency is the key. As Google becomes more precise, it is likely that marketers will want to see that their agencies are passing on this accuracy.

The importance of transparency has been on the rise for some time though. Web site owners and marketers are increasingly keen to coordinate their organic search with their paid search and that is not possible if their agency will not share the appropriate keyword lists.

Even on a cost-per-click basis there is also the fear among some marketers that their not-transparent agency is creaming off a mark up on each click. That risk may be acceptable when the mark up may only be a few pence but if Google's cost-per-action becomes widespread, then site owners will want to know that their agency is not making pounds per action in addition to their fee.

Google's CPA offering may challenge those agencies who consider their keyword lists to be their intellectual property.

Andrew Girdwood is the head of search at Bigmouthmedia .

Andrew Girdwood

Published 17 May, 2007 by Andrew Girdwood

Andrew Girdwood is Head of Media Technologies at Signal and a guest blogger for Econsultancy. He can be found on Twitter here.

41 more posts from this author

Comments (1)

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Peter Slevin

I like the idea of Google going CPA, but I am thinking that all of the big affiliate companies are going to be less than impressed! Interesting times, methinks....

about 9 years ago

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