You have probably heard multiple pitches from advertising agencies and SEM firms looking to take over the search engine marketing campaign for your company. When was the last time one of these firms offered to pay for all of the ads up-front and be paid only for the sales and leads generated? Not too often, I suspect.
Performance SEM agencies are out there building, managing and funding large scale search campaigns for companies that pay them a pre-negotiated rate for the sales and leads generated. Working with a performance SEM agency is a great way to take advantage of paid search while limiting your costs and risks.
In most cases, you’ll need to have a paid search campaign up and running before approaching a performance SEM agency about running or supplementing your campaign. Why?
Performance SEM firms live and die by the numbers and will want to estimate how much revenue they can expect to generate per click before agreeing to take you on as a client. Here are some important numbers you should know before pitching:
Commission rate. What is the highest commission rate you can offer the agency for the sales and leads generated? Performance SEM agencies do not typically bid on terms that lose money for very long. Since they are spending their own cash up front, they tend to track keyword performance very closely. Offering your highest commission rate up front will provide the agency with the best opportunity to be profitable while running the maximum number of keyword terms.
Site Conversion rate. What is your site’s conversion rate? Historically, what percentage of visitors to your site do you convert into a sale or lead? You should know what your conversion rate is and be ready to discuss the steps you are taking to optimize your site and improve conversion rates on an ongoing basis.
Average order value. If you are paying the agency a percentage of sales, as opposed to a fixed commission per lead, what is the average expected order value?
With these three numbers in hand, a performance SEM agency will be able to quickly calculate their estimated revenue per visitor (RPV). Take for example a company offering a commission rate of 5% with a site conversion rate of 2% and an average order value of $100:
Commission Rate (CR) = 5%
Site Conversion Rate (SCR) = 2%
Average order value (AOV) = $100
AOV x SCR x CR = RPV
$100 x 0.02 x 0.05 = $0.10
In this example, the performance SEM agency can expect to make an average of $0.10 per visitor. That is not a lot of room to bid on keywords. An experienced agency would probably pass on this opportunity because the risk of losing money would be too great.
It is important to understand that performance SEM firms often lose money on many of the campaigns they test. They quickly weed out the winners from the losers so they can focus their efforts on their most profitable opportunities.
Beyond knowing your numbers, you should be ready to talk about how to setup a measurable test for at least 90 days to determine if you can establish a win-win relationship. During this test period, you want the performance agency to prove to you that they can produce significant incremental results without driving up the costs of your internal search campaigns. You will want to prove to them that your commission rate and site conversion rate provides a significant profit opportunity for the agency so that they will be willing to invest their time, effort, and capital towards your campaign.
In these tough economic times, establishing a good working relationship with a top performance SEM agency can be a monumental win for your company. Not only can these agencies bring in a significant amount of new business, but smart companies are also leveraging their agency’s advertising budgets to bring in additional sales at a fixed cost of goods sold and to find areas where they can reduce their advertising expenses to meet increasing budget pressures.
Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.