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This time last year I scrutinised a number of SEO agency payment models, concluding that many of the pricing structures and commercial arrangements offered by agencies are outdated in the context of today’s organic search landscape.

PPC is generally accepted as an ‘easier buy’ compared to SEO. However, you need only do a search on Google for ‘PPC services’ to be confronted with a baffling array of offers:

  • ‘PPC without risk or fees’.
  • ‘Professional Adwords Management from £129 per month’
  • ‘Try the new way of buying services!’
  • ‘Try our sophisticated pay-per-click (PPC) advertising & management service’

Like SEO, for the uneducated or inexperienced buyer, it looks like a bit of a minefield to me.

So with this in mind, I’m going to dissect three of the most common PPC payment models, which I hope will lead to some healthy (and much needed) debate amongst buyers and sellers alike, those models being:

  • Percentage of spend.
  • Performance related.
  • Flat fee.

Bear in mind that some agency models may include a combination of the above but for simplicity I’ll look at each of these in isolation. These models are touched on in Econsultancy’s excellent ‘Paid Search Buyers Guide’.

However, I want to dig a little deeper so that buyers can make a more informed decision on the model that is right for their business.

Before looking at each of these in detail, a disclaimer. I work (and have always worked) agency side. I have therefore not bought PPC services from agencies employing these models.

Instead, my personal experience comes from over ten years of speaking with prospects and clients who have worked directly with other agencies and in talking with members of our team who have been employed by other agencies. 

In the spirit of openness, our agency applies a fixed price model which I will scrutinise in the same way in a future post. In the meantime, for the first of a three part series, I’m going to look at perhaps the most commonly used model in the industry: percentage of spend.

Overview

This model is fairly simple to understand. The agency charges a ‘mark-up’ on media spend.

So for example, if you spend £5000 per month on Google Adwords and the agency applies a 10% of media spend model, your total monthly investment will be £5500. The percentage will vary depending on a range of factors, most notably the level of media spend.

The higher the media spend, the more bargaining power you have as a buyer to drive down the percentage.

Is this model right for me? Start by working the numbers

If presented with this model as a buyer, the first thing to consider is whether the numbers stack up, especially if you are a small business with a media budget to match.

To cite the example above, on the face of it, the model appears attractive. The agency is charging just £500 per month to look after your PPC campaign.

But how much time do you think will be spent on your account for that relatively small fee? At a guess, the average hourly rate for a mid-level PPC Executive is around £100.

Therefore, with this particular example, you might be looking at five hours per month spent on the campaign (some of which will probably need to cover account management).

Ask yourself, does this feel like enough time to maximise the return on your ad spend, especially if this is your first go at PPC and therefore you have little historical data to work from? In my experience, it isn’t.

Ah, but what about technology? If the agency is employing some nifty software to automate elements of campaign management, that’s great.

But software doesn’t replace human know-how, it complements it. You can’t create a campaign and simply allow it to run itself, software or no software. It’s just not that straightforward.

And finally, what about the time required upfront to work out the strategy and set up the campaign?

An agency should be looking to interrogate a new client on commercial objectives, competition, positioning, products, pricing, margin, key messages, marketing plans, promotions, and so on. Without some form of set-up fee, how much of this essential analysis and planning is bypassed, which ultimately impacts campaign performance later on?

When faced with a percentage of spend model, especially one where there is ‘zero set up fee’, question the agency on exactly what they will be doing upfront and on an ongoing basis.  There should be total transparency from the outset.

Three ways the agency may benefit from this model…at your expense

Again, I reiterate that I can only talk from my personal experience but in taking over campaigns from incumbent agencies (applying a pure percentage of spend model), we have all-too-often seen practices that seem to be working in the agency’s interest rather than the client, those being: 

Inefficiencies and waste

Inefficiency in PPC can be driven by account structure, the keywords being targeted (for example, bidding on generic and costly keywords where these is zero evidence they covert either on a first or assisted click basis), messaging and any number of campaign settings.

The result? Lots of money being spent for very little in return. 

Why is this? Well if you think about, with a percentage of spend model it is in the agency’s interest that a client spends more money on PPC. Ultimately, the more the client spends on media, the more the agency earns.

Now, I am not accusing agencies of running campaigns in such a way as to effectively ‘waste’ a client’s money purely for their financial gain…but neither am I saying this doesn’t happen.

The alternative view of course is that the agency (or individual within that agency) just isn’t very good at PPC. Waste is created due to lack of experience and know-how rather than a somewhat unscrupulous commercial policy employed by the agency.

Excessive or unnecessary brand term bidding

If you’re a company that attracts a high volume of searches for your brand name (and variations of it), be careful that your media budget is not being spent unnecessarily on brand terms.

This may not be the most appropriate PPC strategy if those sales (or a decent proportion of them) would have been accrued organically, and therefore at no cost.

Bidding on brand terms in larger accounts can also ‘inflate’ or ‘mask’ ROI figures, meaning a greater number of non-brand search terms can be targeted even if they don’t perform as well.

As such, this further increases click spend and in turn the agency fees. This is why brand and non-brand should always be reported separately, along with appropriate attribution modelling to understand the impact of non-brand on brand conversions, for example.

Set it and forget it

The third thing we tend to see, especially for clients investing relatively small amounts on media, is a lack of appropriate time invested on the account.

We recently took on a client where the agency was charging just £200 per month to manage the campaign, based on a percentage of spend model. Did this show in how the account was set up, managed and ultimately the results it delivered? Of course it did.

The change history effectively told us that the account was set up and left to run itself with the agency simply creaming £200 per month for very little, if any work at all. You don’t set up a PPC and leave it to run itself. PPC requires regular analysis, optimising, tweaking, testing and reporting (and lots of other ‘ings’!).

This is where a percentage of spend model fails in my opinion. It’s not just commercially viable for the agency to invest the actual amount of time required unless they are looking at the long game. Even then, investment upfront presents commercial risk, unless a set-up fee is being charged.

When does this model work best?

With a percentage of spend model there is a point at which the numbers work for both parties – the client is receiving an appropriate amount of skill and resource on the account to maximise the impact of their investment.

Conversely, the agency is receiving enough in fee to be profitable on the staff looking after the account, whilst delivering against agreed targets.

Perhaps most importantly, I think there needs to be flexibility in media spend.

Let’s say you agree an initial budget of £10K per month. You also agree a cost per acquisition target for the first quarter (or a similar KPI). The agency meets that target but the market opportunity (i.e. demand) means there is further room for growth; Increase the media spend and you will see a relative increase in customer acquisition and sales.

At the outset, the agency therefore needs to assess the market opportunity and see room for growth. This keeps the agency motivated. They are earning fairly for the investment made in growing the account.

It doesn’t work so well if the client has a fixed media budget that is not flexible regardless of whether additional market demand exists. This is an important consideration for both the agency and client.

Just because the market opportunity is there, it doesn’t mean the client has the budget to go after it. Sometimes, the budget is the budget.

Therefore, to make this model work there must be very clear, revenue focused objectives agreed from the outset, for example cost per acquisition. As with any client / agency relationship, transparency is key, from mapping out the strategy right the way through to reporting.

Until next time…

Next time around, I’ll take a look at performance based models.

Until then, I’d welcome feedback from agencies and those client-side who have worked with agencies on a percentage of spend model.

Have I missed anything?

Has this model worked well for your business?

Or if not, why not?

Image courtesy of Leo Reynolds

Ben Potter

Published 29 October, 2013 by Ben Potter

Ben Potter is Commercial Director at Leapfrogg Digital Marketing and a contributor to Econsultancy. You can follow Ben on Twitter and Google+.

18 more posts from this author

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Arianne Donoghue

Arianne Donoghue, SEM & Social Marketing Manager at Mamas & Papas

Great post. Having worked agency side and run PPC teams alongside selling our services to potential clients, I'd agree that from an agency perspective it's hard to put the right amount of time in vs income for a lower spending client on this billing model.

It's not sustainable as you inevitably end up doing more than you're being paid for in order to drive the results providing you want to do right by the client. However to win business, a lot of agencies seem to be doing a "race to the bottom" and cutting the fee back and back to make the sale. Combined with not charging a set-up fee, the client will only ever make a loss for the agency and never really get the love it deserves. Nine times out of ten client services/account managers hours suck up that monthly management fee before the PPCer has even started work.

I think the industry has moved on from percentage spend (or should have done) and that hybrid models comprising a flat fee and performance based element being appropriate in most cases.

Looking forward to your future posts!

almost 3 years ago

Alexander Lund

Alexander Lund, Digital Marketing Manager at Study Group

I don't see the pay as a percentage feasible for large brands that have huge PPC marketing spend. Apart from the issues you mentioned with unnecessary spend, the fees would be huge for brands spending millions on paid search.

almost 3 years ago

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Garry Davis

Ben i agree with your comments regarding the problems with a percentage of spend model.

When i started working agency side we thought long and hard about pricing structures.

At the time Google was still providing a 15% "kick back". Agencies absorbed this but also risked of being left high and dry if the client didn't pay. Agencies "owned" client accounts rather than the other way around.

This struck us as a commercial risk if Google removed the kick back (ahem). A commercial risk buying clients media based on the potential removal of the kick back (ahem) and finally an unethical approach to business.

As a result we have found over the last 8 years that the best approach is for clients to own and pay funds into their accounts. This has been very successful and removed so much risk from our model.

Our approach has been to charge a fixed fee based upon the amount of time we believe a typical account will take to manage on a monthly basis. Our goal is then very simple, deliver against a number of agreed KPI targets

The beauty of the model is its focus on the client rather than the agencies desire for higher spend. This may sound strange coming from an agency but we see PPC management as both a service and consultancy.

We get paid for our time not how much of our clients money we spend. As a result we have often seen client spend reduce by high double digit percentages yest still maintaining a consistent CPA.

The beauty is this model works great for B2B clients who often don't spend significant budgets each month and also for large brand were a significant amount of spend is on brand related key phrases.

From a client perspective the feedback is very positive, they pay us to do a good job and we get paid for doing it.

over 2 years ago

Heledd Jones

Heledd Jones, Head of Search Marketing at Confused.com

I've recently been through a PPC agency pitch so this was an interesting read - the one thing I definitely agree is brand terms - it's such a waste of money to pay an agency to manage these if you are bidding on them, it's an easy way for them to make money without having to do any work on them if you are in a position 1 strategy!

over 2 years ago

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Ben Potter

Hi Guys,

Thank you for taking the time to read this article and for your comments.

Taking one or two of your points in turn...

@Arianne. I completely agree with your 'race to the bottom' analogy. In pitch situations, I am always amazed to hear that a competing agency is offering to set the campaign up for free. On a relatively small media budget (therefore offering limited, ongoing kick back to the agency), I fail to see how they can make this work commercially without cutting corners. As I say above, this ultimately impacts campaign performance. The client feels let down and doubt is cast on whether paid search is the right investment. It often is but when things don't work out first time round, the client is understandably reluctant to try again.

@Alexander. Agreed, although if a client is spending millions, it does put them in a position of strength where negotiating on the % is concerned.

@Garry. At Leapfrogg, we employ exactly the same model as you describe above, for the exact same reasons. Whilst we might be running the account, the clients 'own' it. They pay funds direct to Google. It's all about transparency.

I think there is some ambiguity around ownership of paid search accounts. For example, we recently won a new client but the incumbent agency refused to pass over the Google Adwords account, citing that it was their intellectual property! Madness.

@Heledd. I agree that there are instances where the agency is simply 'creaming' revenue on brand campaigns, especially for larger, well-known businesses that attract high volumes of brand searches. However, there are instances where the brand campaign needs dedicated resource / expertise (and therefore the agency is adding real value), for example if a retail brand 'competes' in search results with their stockists. In this scenario, brand campaign strategies need careful planning and execution.

over 2 years ago

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Modeling Agency Software

A good comment can be written only after going through the content written in the blog. This is highly required to know what the blog belongs to and what is it telling. Comment should be relevant to the blog content or can also be some other information related to the topic illustrated in the blog. It should not be like starting a new discussion there in the middle of the topic related discussion.

over 2 years ago

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Modeling Agency Software

I like Your Article I like Your Thoughts thanks For Share This Amazing Article :-)

over 2 years ago

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