My Thoughts About Agency Pricing Models

By jameszol
Published on August 15, 2008

eVisibility wrote about their new ppc management price model this morning…and I walked away shaking my head a little bit because I felt like they were attacking a majority of agencies out there (not us, thank you eVisibility). :)

It seems that there are three typical pricing models for ppc agencies out there: percentage of ad spend, performance based (% of net or gross profits, flat fee for sales/units sold, lead volume, etc) and hourly (eVisibility’s new pricing model). There can be hybrids too…so technically, there are quite a few ways to twist all the models into what you think is best for your agency or your company.

This is my personal opinion and view on each of the pricing models. But, I’m going to give away my bottom line first:

EVERY pricing model can work for the company that is outsourcing the function if the ppc management company is ethical, hard working and willing to manage based on their client’s key performance indicators regardless of the agency’s pricing model. I believe, without a doubt, that most agencies really care about their client’s bottom line, regardless of the pricing model. You build trust and authority with your client base, and deliver fantastic results then the natural course of action is for them to spend more and spending more leads to more sales at an acceptable fee – and if there is ROI, then the client will continue growing…and the agency will too.

Percentage of Ad Spend

This is definitely a tried and true model – and it fits for the traditional ad agency. If a traditional agency is expanding, then they can offer this function as part of their regular services and it would simply make sense to the client that paying this is like paying their traditional media company to do their media buys. It’s normal, it’s trusted and I’m confident this model will stick around for a long time.

Most agencies will not abuse their client’s budgets so for me, the idea that a percentage based model forces an agency to drive a client’s budget up so the agency can make more money is bogus for the majority of agencies out there. Sure, there are snake agencies in any pricing model and in any industry…ppc management isn’t an exception to the rule!

A lot of software and tools follow this model too. It’s an easy way to monetize ppc management services and it makes sense.

You can’t really deny that ad spend gives a company and an agency a hard figure to build a price from whereas the other models are a bit more abstract in nature while still highly competitive and viable.

Performance Based

I developed a thirst for thriving based on my performance which is why semvironment is performance based. I like to think of this model as a commission based sales agency – we’re in it to win it and the better we do, the better the client does…our pay check is directly tied to the client’s pay check.

This is another tried, tested and true model. How long have commission based sales people been around? It’s ancient history…longer than the % of ad spend model. ;)

The key to success in this model is to identify the point at which the client is in complete control of the process and the agency loses control – or, the agency controls the process to what point before the client takes over? If the agency has a strong creative say in the entire shopping cart process, then perhaps the performance based pay should be transaction based or revenue based. Or, in the lead gen business, that point of control for the client is at the lead level – the agency does not control the sale of the service while they control the point at which a lead is generated…therefore, the lead could be considered the key fee point for the agency.

In any case, the performance based model is for those that can honor the system, are insanely hard working, and the client is willing to develop a “partnership”, in a sense, with their agency.

Hourly

Hourly is another model that is tried, tested and true. (Yes, every model is tried, tested and true…lol)

eVisibility has the explanation of this model right, I think. For me, the hourly model is like hiring an accountant or a lawyer. You might have the newest one on the block working on your account, but there is solid evidence that the firm is good at what they do so you essentially get what you pay for in terms of hours. It doesn’t appear to be tied to ROI or anything really…kind of like a regular employee. I’m really quite unfamiliar with this model, but it appears to work for several agencies out there and some clients are going to be happy with it.

Some might say it’s like hiring a consultant. I have only had positive experiences with consultants while others would joke about the ’snake’ consultants that are out there. Again, every pricing model is going to be riddled with snakes.

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7 Responses to “My Thoughts About Agency Pricing Models”

  1. Miguel Salcido (2 comments.) says:

    Thank you for the kind words and we are glad that you took in what we had to say. Our new model was born out of experience and client feedback. I wish it were scalable and efficient to run a performance based model. We would love to form “partnerships” with our clients but that gets really dangerous too. Tracking can be tough for anything but ecommerce and not having total control over landing pages and creative hurts you there too.

    Our model came from the challenge that there are clients that spend only $7k/month but that require a TON of work to keep their campaigns running at an optimal level with many changes each month. And then there are clients that spend $25k/month but that do not require much work to manage. When you manage a large number of campaigns like we do things dont always balance out on our books for the amount of work that we do.

    We really feel like we have developed a great model and that it will really help us with the larger clients. We appreciate you post, great work.

  2. jameszol says:

    Hi Miguel!

    Thanks for stopping by to comment.

    I didn’t mean to challenge your model – I was somewhat challenging the derogatory tone of the post…I felt that while reading the introduction to your new model that all other agencies were wrong but you were right and that isn’t the case.

    I’m really glad you came by to state that hourly let’s you manage a wider target market as far as clients go. I didn’t think of that. There are clear agency benefits to each pricing model. :)

    My post is simply meant to say that I really don’t care what an agency’s pricing model is, as long as they have the client’s objectives in mind and they can profit from working towards those objectives. No attack here on what another agency’s model is like vs ours.

    BTW – performance based model isn’t ‘partnership’ based but it certainly feels like it is. Essentially, like you stated in your comment, you have to find the point where agency control is lost and price from there…it is a little overzealous for a client to demand you base your profitability and business on something that they have control over. And I think that makes sense to them. Clients want you to do the absolute best you can with what you can control or with whatever they are willing to give you control over in any pricing scenario.

  3. Miguel Salcido (2 comments.) says:

    Thanks for the response jameszol. We definitely appreciate everyone’s opinion and I feel that the performance model, which you employ, is a great model. We just cannot scale that model. I do believe that the industry standard 15% is not a good way to charge in almost all instances. Yes there is the argument that the 15% model incentivizes the agency to do well. But there are many more reasons for the agency to not do as well as they should be doing.

    Plus the situations I posed where a client that only requires like an hour or two of management each month but that spends upwards of $25k/month is definitely not in the client’s best interest.

  4. jeff (4 comments.) says:

    Hi James,

    I think that the hourly model sounds as if it works well for Miguel and his team, and it sounds as if semvironment is working well within the pay for performance model. I think it comes down to what works best for each individual/client/agency. You can certainly make a case for and against each one.

    For example, you can say 15% incentivizes the agency to spend as much as possible, but would the client continue the campaign if the numbers weren’t working for them? Incentivizing the agency to perform at the highest level so the client wants to spend more money seems to be a good basis to start from.

    Pay for performance is great for the client as well, the risk is low, and it can be very profitable for everyone involved, but can be challenging for the agency to track.

    Hourly work has its advantages as well, but you could argue that the agency is only incentivized to work more hours, right?

    Bottom line, it doesn’t matter how you charge. If you don’t perform well it doesn’t work for anyone. I’m glad that there is more discussion of late with these different models. The more options we all have on the table the better!

  5. jameszol says:

    Jeff! Thanks for dropping a note on the blog. Sorry I am out of town so I missed the comment until now.

    I didn’t mean to imply that Miguel’s model is wrong. The title of his post or the picture in the post simply said something like “Everybody is getting ripped off by all other agencies but ours” and that is what I meant to say was wrong. Not their pricing…

    I concur with your statement, and I believe I said it multiple times in different ways throughout the post:

    “…it doesn’t matter how you charge. If you don’t perform well it doesn’t work for anyone.” :)

    Nice way to say it simply – and I believe it, without any doubt! :)

  6. Why We Don’t Charge Based on PPC Media Spend - KoMarketing Associates says:

    [...] going any further, I want to point you to a recent post by James Zolman of semvironment. James discusses some of the PPC pricing models out there, and his [...]

  7. art (1 comments.) says:

    I have worked using both models and have used cost per conversion as the core metric for evaluation. Spending more $ and not getting results wont work. Being paid a percent does offer an incentive that if I continue to decrease the cost per sale, the client will move more budget into paid search and everyone benefits. Flat fees have their advantages as well and you could structure a flat fee with a bonus if milestones are achieved.

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