PPC Management Options – Are Your Fees Inline With The Advertiser’s Goals?

There are many ways to bill for PPC management and each has its own distinct characteristics. Some of these billing techniques align more with an agency, and others more with an advertiser.

For agencies, the proper billing types can make the difference between being profitable and going out of business. In addition, if your goals are aligned with your advertisers, then long term synergies usually develop which means longer client retention.

For advertisers, it is important to understand the options that exist. Not all agencies offer all of the below pricing options. However, some will be willing to work with you to find a solution that benefits both parties.

A contract extends beyond just billing to include contract lengths and contract renewal types. First, we will examine agency fees, then we will dive into contract lengths.

By seeing the billing point of view from both an agency and an advertiser, it can be easier to choose the proper type of contract so that both the agency and the advertisers succeed in their digital efforts.

PPC Management Fees

Percentage of Spend

This is by far the most common method of billing. While it’s common to see this number between ten and twenty percent of spend, it can fluctuate in percentage. If an advertiser is only spending $500 per month, and one is charging 10%, that’s only $50 per month in management fees. Generally, this is too little for an agency to be profitable. For small account, advertisers should be willing to pay a higher percentage of management fees. For larger spends, that number may decrease. If someone is spending $1 million per month, a $150,000 monthly management fee will drive many companies to bring their PPC management in-house. I’m not going to debate the merits of in-house vs. outsourced management at this time. Just note how many full time employees could be paid based upon the management fee.

How it affects Agencies

If a company is spending a set amount each month, this becomes a predictable amount of income. If you have a full or semi-automated system, often this payment method is more profitable than other types of billing as a system is doing a lot of day-to-day operations. If you have a manual system, you need to track how many hours each analyst is spending per company they are managing as you can end up with clients who are taking a disproportionate time compared to how much they are being billed.

How it affects Advertisers

The more you spend, the more the PPC management company bills you each month. The issue here is trust. First, you should give upper limits on how much your are willing to spend each month in advertising so you have a predictable bill. Secondly, you must trust the company you are working with. One of their incentives is to have advertisers spend more each month, as the agency makes more money. If the agency is increasing your spend while your profits continue to rise, this is an excellent option. It is common for agencies using this billing method to test many keywords and ad copies so that you receive results and want to spend more each month. However, if your spend is increasing and you are not seeing more conversions, this is an issue as the company could be bidding on untargeted keywords to increase your spend. This does not mean it’s a good or bad billing situation. It means that you should be aware of your return on investment, which holds true to any type of billing relationship you enter.

Percentage of Profits (or Sales)

Some companies are so sure of their methodologies that they are willing to charge a percentage of profits that the PPC campaigns generates.  In many cases, this makes the agency more akin to an affiliate than a management company.

How it affects Agencies

This is a very risky proposition as it’s not as simple as “If the account performs, we make money. If the account doesn’t perform, we don’t make money”. If it were that simple, then this would be a more common billing method. An agency must evaluate a few major items before they are willing to engage in this type of billing:

1. What type of conversion leaks exist? For instance, if the company takes orders over the phone, are those orders being credited to the PPC campaign?
2. Do you have the ability to change the website? If the website is not converting, what are your options?
3. Branded keywords. Are you able to bid on these types of keywords?
4. Additional offerings. As PPC and SEO (as well as display campaigns) can be utilized to create synergies between the advertising outlets to further increase engagement and conversions, do you have control over the SEO or display ads?
5. Tracking. Will the advertiser be fully transparent with their analytics, shopping cart, and billing systems?
6. Can the advertiser track profits (or just gross sales) as it relates to their PPC campaign?
7. Contract length. Setting up a new PPC account can take many hours. If the advertiser walks away after a month you may have produced a profitable campaign yet lost money in the setup process.

Be careful and think about all of the options before engaging in this type of relationship. If your company is willing to take this risk, they also might wish to engage in affiliate advertising at the same time.

How it affects Advertisers

If an advertiser wants to engage in this type of billing relationship, then an advertiser should also have an affiliate program. Since an advertiser is only engaging one company to manage their PPC at a time, if the agency is not converting they will stop spending money as they aren’t making anything. If you have a multi-month contract, this can hurt your overall advertising mix. Advertisers should be cognizant of conversion leaks and work with the agency to close the loops in those situations.

Percentage of Profits (or sales) Variations

The above billing plan is not overly common as their are many inherit difficulties between tracking and attribution. However, on the surface it is coming close to aligning the agency and an advertiser in their respective goals. There are a few variations on that plan which I believe create alignment between the agency’s and advertiser’s goals to make each party more successful.

Monthly Minimums

An advertiser agrees to pay a certain dollar amount to the agency (which can be any of the billing types in this article). If the agency does not make enough sales to hit the minimum dollar amount, then the advertiser pays the minimum instead of the actual fee based upon sales.

Monthly Bonus

Ad advertiser agrees to one of the other billing options on this page, and a percentage of profits (or sales) are allocated as a bonus to the agency. This is one of my favorite billing plans as it aligns everyone’s goals. The agency is ensured of a certain amount of revenue each month for traditional PPC management. However, if they can perform at a high level, then they can receive a bonus from the company. This gives the agency an incentive to spend extra hours tweaking a campaign, performing testing, and squeezing every ounce of productivity possible out of a campaign. In some cases, the advertiser might want to pay a percentage of profits after a certain amount to cover the basic management fee.

Percentage Lift in Profits (or sales)

An advertiser has a baseline of what they can generate from their PPC account. The agency takes over the account and increases the advertisers profits. The agency charges a percentage of the increase profits they were able to achieve through managing the advertiser’s PPC account. While this is similar to charging a percentage of total sales, and the above considerations should be carefully weighed, there are quite a few differences that should be called out.

How much time does it take to manage the account to the previous standards? If an advertiser has a full time employee managing the account, and it takes someone forty hours a week just to keep the account running properly, an agency can do a good job of running a PPC account and yet lose money due to maintaining the current performance level.

How well was the account run previously? If the account was being well run, then any improvements might be incremental. However, if the account was poorly run, an agency might be able to make dramatic changes in overall performance.

Their are more questions to ask yourself before engaging in this type of billing relationship. However, advertiser’s should always keep in mind that if an agency is not making money on their account, then that account is not going to receive much attention.

Number of Keywords under Management

Once upon a time before APIs and automated programs did much of the work, a common billing method was to charge for the number of keywords being managed. The main reason that this billing became popular as agencies were using Atlas OnePoint  (formerly GoToast) for keyword management, and one paid Atlas based upon a combination of total keywords under management and how many times per day the keywords were updated. While this was important with the old Overture bidding system, it is not nearly as relevant today. Those facts, combined with a longer tail approach make this billing almost obsolete.

How it affects Agencies

The more keywords you manage, the more your company makes each month. The biggest disadvantage is that since you bill by keyword, the ‘long tail’ approach where keywords are receive 0-100 impressions a month do not align with this strategy. The second large disadvantage is that since you are billing by keyword, often advertisers will comb through the keyword list and try to remove keywords. The conversations with advertisers stop being around ROI and conversions and more about what keywords to keep vs remove.

How it affects Advertisers

If you are being charged by keyword, the ‘long tail’ keywords are generally unprofitable. While the long tail may not normally be the majority of your sales, in this pricing model, there is less experimentation that can be profitable be implemented.

Charged Per Click

This is another method that was once in favor due to two major reasons. The first was that many 3rd party tools charged in this manner, and agencies were using these tools and adding a small markup on top of the tool. The second reason was in response to the more-in-favor percentage of spend (discussed above). In the early days of PPC, click costs could range dramatically. Advertisers would see their clicks remain constant and yet their bills continued to rise. As advertisers didn’t think agencies were doing more work, yet were charging more for PPC management, the price per click billing method evolved. Many of the advantages and disadvantage of this pricing model is the same as a percentage of spend. However, instead of agencies trying to spend more, they are trying to drive more traffic. The key to this billing method is ensuring that those clicks are all relevant.

How it affects Agencies

The more clicks you get for an advertiser, the more money you make. This means that agencies often do constant keyword research in order to find more ways of bringing clicks to the advertiser.

How it affects Advertisers

Not all clicks are equal or relevant. If you are looking for traffic or an alternative to percentage of spend, this can be a useful billing method. However, ensure that your agency is also willing to testing and offer other services you might need.

Fixed Monthly Management Fee

One common method of billing that has continued to stay in favor is a fixed monthly billing. A fixed monthly billing easily allows both an advertiser and agency to project expenses. It also allows agencies to to examine the full need of an advertiser to arrive at a fair price. For instance, if an agency is managing your PPC account, merging PPC data with analytics data, split testing ad copies, and consulting on changes to your website; that agency is performing many actions past PPC management. This is a very common relationship for agencies and advertisers to have. Some agencies consider these services as part of some of the above pricing methods and do not break out these charges. Other agencies prefer to break out the charges into multiple services. It is also common to determine the approximate spend of a campaign, and then charge a fixed monthly fee even though the fee is derived from the total spend. This makes billing for agencies easier and more consistent. In addition, most agencies will not mind if you want to raise or lower your budget a nominal amount each month

How it affects Agencies

Often the fixed monthly fee is derived based upon the approximate spend of a campaign. In this instance, you do not have to recalculate the percentage of spend each month for variable billing, but can agree with an advertiser upon a fixed fee which your account department will prefer.

How it affects Advertisers

Often agencies do not mind if you change your spend by a small amount each month. If you change your spend by a significant amount, the agency may wish to revisit the pricing fees. Where one should be careful is how the fees are determined. This pricing method also makes it easy to add or remove services. If you want a few extra reports each month, the agency can often be accommodating and adjust your monthly charges for any additional services you require.

Hourly Management – Pay by the Hour

This method is straightforward. For every hour a company works on a campaign, they bill a certain amount. The hourly amount can vary greatly; however, this is one of the most flexible options available, especially if you wish to add and remove services each month.

How it affects Advertisers

As an advertiser who is paying for the management of a campaign, it is your job to understand how those hours are being used. If your campaign is running well, you might want to cut back on the hours being allocated to keyword research. If you are launching a new product, be prepared for an increase in fees while the new campaigns are being built. This is also a very useful option if you need on-demand reporting, occasional split testing, or general services.

How it affects Agencies

While detailing out how your hours are spent can seem tedious, it also ensures that your are being paid for each hour you work on an account. Many companies examine their billable hours per month per employee, and this option allows companies to allot the appropriate time for each advertiser. In monthly billing scenarios, it’s common for some companies to spend significantly more time on one account than another which causes some accounts to be very profitable, and others to not be very profitable. If one analyst is handling both of those types of accounts, some accounts may suffer because other accounts have high-touch advertisers. By billing by the hour, you ensure that each advertiser is getting their money’s worth, but not at the expense of other accounts.

The agencies other job in a pay-by-the-hour scenario is to sell the advertiser on additional services. Want to run several testing scenarios, then showcase the benefits of testing and bill for a few more hours of time to setup and manage a test. While items like this make it appear that an agency has more work to do, because of the increased customer interaction of showcasing new tests, it also forces the agency to be more involved with the advertiser. This often has the added benefit of ensuring a better relationship and a client who stays longer than some other scenario.

By the Hour Consulting

While this is very similar to the above, it has a slightly different flavor. In this scenario, a company is not doing all of the bid management, instead the company (or another agency) runs the day-to-day operations of a campaign; however, the advertiser is also paying a consultant to asssist with the campaign.

If the advertiser is running their own campaign, often a consultant will help with how to organize accounts, expansion, tests, and lay out a plan of success for the campaign, but the advertiser will do most of the hands on work.

If the advertiser is having a 3rd party manage their campaign, often a consultant is paid as a second set of eyes on the campaign. The consultant can watch the account, sit in on calls, and ensure that the agency is acting in the best interest of their client. This is more common with large and complex accounts than small ones. However, an advertiser may choose this option (sometimes without the agency knowing) when the advertiser has limited knowledge of PPC advertising and wants to make sure their interests are being handled properly.

Additional Fees

It is not uncommon for agencies to use one of the above billing scenarios, and add additional charges for 3rd party software they might utilize. Sometimes agencies roll this fee into a monthly management fee so it’s not transparent. In a pay-by-the-hour scenario, this will appear as a separate line item on a bill.

How it affects Advertisers

It is important to understand what the agency is doing in-house and outsources. Outsourcing a software solution should not inherently be seen as a weakness by the agency. Advertisers should understand why they are outsourcing and the costs associated with that vendor, and how that affects their bill. In some instances, agencies provide excellent services but do not have the development team to write their own applications. Conversely, there are some excellent software solutions which do not offer agency services and focus on providing the best software possible. The match of these two different teams can provide a complete solution to meet all of an advertiser’s needs. However, sometmes an agency is just running a program and not providing any additional benefit to the campaign. Therefore, advertiser’s should understand how their accounts are being managed and additional software costs.

How it affects Agencies

By utilizing 3rd party software, an agency can often become more profitable. Some of the manual work can be taken away which does not diminish the results of a campaign. However, there will be agencies who have their own tools and showcase them when trying to land a client. Each side should be showcasing what they do best when trying to land a client. While one agency may showcase how they own and develop all their tools which reduces margins and provides results for an advertiser; another agency may showcase their creative team and mention they some of the bid management is done by a software service so that the agency can more focus on the creative aspects of a campaign. Each has it’s benefit, it’s a matter of agencies developing their own unique selling propositions.

Setup Fees & Contract Length

The length of a contract can often be a sticking point in negotiations. Many advertisers want month-to-month contracts. However, agencies may want longer contracts to ensure revenue, or need to recoup the initial hours of setting up a campaign.

Setup Fees

Setting up a campaign can take many hours. There are two ways that agencies can deal with ensuing that this time is billed. The first is a setup fee. Once the advertiser’s goals are understood, the agency can discuss with the advertiser how long this campaign will take to set-up. Depending on the complexity of this setup, it may be a one-time fee or divided into a few monthly installments. However, advertiser’s should not shy away from setup fees. If someone is setting up your campaign for fee, you must ask yourself how good this setup will be as the agency is losing money by taking this route.

Contract Length

One year. Month-to-month. Three month intervals. Which is right for you?

Advertisers should understand that most accounts take a month or two to hit it’s stride. In many cases, the first month of a PPC campaign might not perform fantastically. This does not mean the agency is not doing a good job. This is a factor of an account building up a quality score, the agency receiving some statistics on what is and is not working, then adjusting the campaign, and letting some more statistics roll-in so the proper decisions can be made. Due to these reasons, I’m in favor of all new accounts starting with a three month contract.

However, the real question is after three months, how long should the contract be? A month-to-month auto-renew contract is a good option to consider. This ensures that the agency is performing every month, and ensures that the advertiser has a quick out if something were to arise. This out can be difficult for an agency as revenues and human resource requirements can shift quickly and may not be ideal.

A three month auto-renew contract gives agencies a bit more stability in revenues. Advertisers should want their agency to be stable as well so they can continue to provide a high level of service. This is often a nice compromise between the need for advertisers to get our of their contracts for various reasons and for agencies to provide stability.

Year long contracts are rare, but do have their place. If an agency is offering bundled services where some of them may have additional built-in costs (website design, domain name procurement, call-tracking numbers, etc) then a year long contract may be the correct answer. Sometimes these are written as a year long contract with a three month opt-out. This type of contract is often used for smaller spends (under a couple thousand each month) as larger advertisers need more control of their budgets in case of strategic company shifts.

Evergreen Vs New Contracts

Evergreen contracts are also known as auto-renewal contracts. In this scenario, the initial contract is often automatically renewed if neither party takes action. In most cases these are one or three month contracts. This has a benefit of neither side having to add additional paperwork to their regular work. The downside is that it doesn’t force either side to evaluate the progress of an account and things can easily move into a ‘coast’ mode.

Signing a new contract every month or three also has advantages and disadvantages. The disadvantage is that there is additional paperwork. The agency must call, resell, and get a new contract every few months. The upside to this is that it forces an advertiser to evaluate their campaign every few months to make sure that it continues to meet their needs.

Some Final Notes on Pricing

The absolute first note is that if it sounds too good to be true, it usually is. Exceptional PPC management is not cheap. Skilled individuals charge what they are worth and try not to leave money on the table. If you see an offer for $295 monthly PPC management regardless of the number of keywords you want managed, and tests you wish to run, think twice (or three times) before signing that contract. Why is it so cheap?

Before signing a contract, make sure you understand the pricing, contract length, and renewal status.

Before signing a contact, make sure that the agency can handle your needs.

Agencies are for-profit businesses. They need to make money in order to stay in business and provide exceptional services. Advertisers need exceptional services to help grow and manage their marketing. However, advertisers also can only afford to pay based upon what their profits are in a given month. Advertisers and agencies should create a symbiotic relationship where both parties put each other on a path to success. That relationship starts with billing and contracts. Don’t let the money get in the way of ensuring that your partner succeeds.

Brad Geddes is the Director of Search for LocalLaunch, a blogger at eWhisper.net, and a frequent conference speaker. The Paid Search column appears Mondays at Search Engine Land (except when Monday is a holiday and the editor doesn’t post it until Tuesday).