Search Marketing Agency Pricing Models

Pricing structures and rates aren’t secret in established service industries. Real estate agents get 3% to 6% of the house’s price; recruiters get 1/3 of total first year comp; trial lawyers take 33% of the settlement; list brokers charge 20%. While specifics vary, each industry has conventional pricing arrangements.

Not so in paid search management. Not yet. Not only are rates kept under wraps, as an industry we’ve not even yet converged on the most appropriate structure for those fees.

You might ask, “Why does the pricing structure matter? If client and agency deem the fee fair for work performed, why does it matter how that fee is computed?”

Incentives drive behavior, and fee structures (not just amounts) influence how a SEM agency serves its clients. When we review prior results from prospective clients looking to move their search marketing to our firm, we can often guess the incumbent agency’s pricing structure just by looking at their results—even before peeking at the agency logo on the reports.

I’d suggest a sensible way for a paid search marketing agency to charge for their services is “capped percent of ad spend.” To see why we like capped percent of ad spend, let’s consider the strengths and weaknesses of three other models: Percent of revenue, percent ad spend, and flat fee.

Model #1: Percent of revenue SEM agency fees

Some advertisers like paying their SEM agency based on resulting revenue. They reason rev-share will incent their SEM to grow top line, just like commissioning a sales force. Here’s our take on the downsides of rev-share SEM fees.

First, under this approach, the SEM could earn the bulk of their monthly fee via sales on the client’s brand name. The SEM didn’t create the client’s brand equity. These sales don’t reflect the SEM’s effort, and brand search is often non-incremental—so why should these brand clicks drive the invoice?

Another problem with rev-share fees: Order allocation. Here’s the scenario. Searcher clicks a paid link to client’s site, doesn’t buy today but instead signs up for client’s email list, then buys two days later from link in first email received. If the SEM and email agency are using different tracking cookies, likely both will “claim” that order. Now, whether that PPC click or that email should get credit for that order is an important and subtle marketing question. (Aside: a major cataloger mentioned to me last week that a whopping 96% of their web orders involve customers with recent marketing touches in two or more channels: Catalog, search, email, affiliate, print, list rental, etc). It is hard enough for an agency to help clients suss out multi-channel allocation, and I’d suggest an agency can’t provide impartial guidance on this critical topic when their comp depends on the outcome.

Yet another problem with rev share: No economies of scale for client. When revenues double (think Christmas), the agency’s fees double. In most cases I don’t think that’s right. (You’ve probably guessed by now my resume has more years on the client side than on the agency side.) The agency doesn’t cause Christmas. So why should the agency earn double fees in November and December? Like a cataloger amortizing printing press make-ready fees over larger print runs, online advertisers deserve some economies of scale from their partners. Heck, given the rising cost of clicks and the new postal rates, direct marketers often require favorable economies of scale to stay afloat these days.

Rev share encourages SEMs to act like affiliates (stifling data sharing), and rev share can lead some agencies to “skim” (only tackling low-hanging opportunities)—but let’s move on.

Model #2: Percent of ad spend SEM agency fees

Some paid search agencies bill clients based on a percentage of their SEM advertising spend. Rates range from 5% to 20% of spend.

Percent of ad spend fixes several of the problems discussed above. Search costs are pretty unambiguous, so order allocations don’t impact the agency’s fee. (Advertisers: if you’ve not done a PPC cost audit and a PPC sales audit recently, do so.) The client’s brand name and trademarks, while responsible for a large chunk of tracked sales, usually comprise a modest chunk of PPC ad spend, so that mitigates the brand name problem discussed above. And Percent of Ad Spend billing should incent an agency to build out and maintain a robust keyword and copy portfolio, capturing value from the long tail.

But Percent of Ad Spend isn’t perfect. As with the Percent of Revenue model, the client doesn’t enjoy economies of scale. While holiday sales typically soar faster than holiday ad costs, many clients will still get hit with super-sized SEM invoices in November and December. Does this reflect more work on the part of the SEM? Somewhat —campaigns do need closer attention during the holiday madness, due to stock-outs, shipping windows, and competitors’ actions. But has the agency’s actual work increased as much as the ad spend? Nope.

For many advertisers, the glaring flaw with Percentage of Ad Spend pricing is that it incents the SEM agency for spending the advertiser’s money regardless of results. Point well taken. We’d suggest that if a SEM agency isn’t hitting mutually-agreed-upon performance metrics—that is, if the agency is failing to keep the ad-to-sales ratio within acceptable limits, or is failing to stay within budgets, or is failing to meet sales commitments, then the client should simply dismiss the agency. Advertisers, give an underperforming agency two weeks or 30 days to remedy, and if they can’t get their act in order, exercise your out. We recommend SEM contracts have 15 or 30 day outs for this very reason.

For the agency, pure Percent of Ad Spend fees can pose a downside risk if the work is too great and the fee is too little. Some SEM clients demand/require considerable effort managing modest PPC budgets. Examples include B2B clients in highly specialized verticals, or national specialty store retailers running numerous complex local campaigns in hundreds of geographies.

Model #3: Flat monthly fee

This is the simplest model: The client pays the agency a consistent flat monthly fee. Don’t laugh—this is the structure in use when advertisers choose to manage paid search in-house. Salaries for in-house PPC staff, accompanying benefits, bid management software—those are essentially flat each month, regardless of ad spend or sales.

Simplicity is a key advantage to the flat fee approach, and it certainly provides the advertiser economies of scale. But it has disadvantages. Going into the deal, neither agency nor client has a firm sense of the true work required. One side is likely to guess wrong, leaving either advertiser or agency disgruntled about pricing. And certain agencies might view a flat fee as a disincentive to hustle. But as above, fast-out clauses ensure clients stay satisfied.

Model #4: Percent ad spend, capped, with fast out

We believe Percentage Ad Spend, Capped, with Fast Out offers the best pricing model for SEM management. Client pays agency a monthly management fee calculated as a percentage of ad spend. Client and agency also agree on a monthly minimum fee cap to protect the agency if the ad spend is very small, and a monthly maximum fee cap to protect the client if the ad spend is very large.

Choosing different values for the min cap, the max cap, and the percentage allow agencies to signal potential clients where they’re positioned in the market place. For example, dividing the monthly min cap by the percentage yields the typical minimum suggested monthly ad spend for target clients.

We’ll show you ours if you show us yours

We’re not really sure why our industry is so secretive about pricing. We don’t have problems sharing our rates. (Perhaps we’ll start a trend?) If useful to readers, our standard SEM pricing is $3000 / 12.5% / $9500, per site. The monthly cap goes higher for highly complex retailers.

Want to share the structure and parameters of your pricing? Please chime in on the comments.

Of course, don’t buy SEM services by price alone

Agency fees are clearly not the most important aspect of picking an agency. What matters far more is performance. Compared to an average agency, a great agency can often produce double digit increases in profitable sales, just by building better campaigns and managing them better. For most advertisers, a difference of a few thousand dollars in management fees each month is completely dwarfed by your Google bill, by your resulting sales—and by the gain in profits you could realize from well-built campaigns and smart bidding.

So SEM fees aren’t the most important thing. But their size and structure do matter, both to client and to agency.

Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.

Related Topics: Channel: SEM | Paid Search Column | Search Ads: General | SEM Industry: General | SEM Industry: Outsourcing

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About The Author: sadly passed away in July 2009. His fellow co-founder of the Rimm-Kaufman group, George Michie, took over Alan's post as CEO, and is also a contributor at Search Engine Land.

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  • http://www.charlesknightseo.com CSKnight

    Thanks for an excellent review, Alan. As a new SEO, I had to sort through some of these very same options.

    Looking at accounts much smaller than yours, I have a $105 setup fee($100 to set up the Google Adwords campaign plus Google’s $5 activation fee).

    I then have a bottom cap of $100 per month. I charge 10% of Google Adwords spend, which will
    become 15% when I pass the Google Adwords exam.

    I don’t have any maximum caps at this time.

  • http://www.topranksearch.com David

    I have a flat fee for Google PPC campaign set up at the moment – $2500 – if the client is happy I offer a drastically reduced monthly “retainer’ fee for tweaks and my professional eye.

    My reasons are thus if I set the campaign up at a low price I can get booted once it is done so a few days work and research makes me nothing….

    I do negotiate with Yahoo! and MSN PPC set up though.

  • http://www.linux-girl.com Asia

    I charge a percentage of spent dollars per month plus a standard monthly fee or a percentage of sales. I would prefer that the industry move into advertising agency standards, and agency rates are supported vs raising to standard fee charges.

  • http://www.feedthebot.com feedthebot

    As far as being transparent about costs, you won’t start a trend, but hopefully you will sustain the one that was started by SEOmoz when they discussed their pricing here.

    Actually, they didn’t discuss SEM specifically but I like that you and SEOMOZ and others are beginning to be less tight lipped about pricing.

  • http://pardonmyfrench.typepad.com Eric Frenchman

    Alan,

    This was very helpful. I often thought #4 was the best model and have been trying to move more clients towards it. Thanks

    Eric

  • http://blog.thinkaboutsearch.com S Haar

    Interesting post Alan. My response to your assessment of a rev share is similar to that of your first article regarding branded keywords not being incremental – it is over simplified. We have been able to significantly improve the conversion rates for our partners on branded keywords (and non-branded) by taking ownership in a rev share model.

    The “click” in SEM is really only one part of a total package. What is the optimum positioning for end conversion? How are competitors challenging your client’s brand? How are you setting and addressing expectations pre and post click? What buy flow is optimal based on the iteration of the branded keyword?…and a host of other issues.

    With a rev share model, having skin in the game allows us to participate far more deeply in the entire process, thereby optimizing the program far beyond delivering a “click”. In a perfect world, all SEMs would do this. However, if you’re capped you are necessarily limiting resources. I do not believe this is good for either the client or the SEM.

    Any compensation model that distances the SEM from the ultimate goal eliminates the risk for the SEM. Sounds good, but it is not necessarily a panacea. As for who gets credit, there are ways to estimate the relative influence of each action. By understanding what an email subscriber (for instance) is worth based on a profile, email admin cost and average sale, even the future value of this can be assessed. Not to say that it is easy – it is not. But a rev share can be tiered and nuanced based on the client and the targeted actions, ultimately leading to the sale.
    I
    wrote
    about this last month in much more detail.

  • http://www.receptional.com Receptional

    So we charge a set up, then a percentage of spend (with a minimum cap) and then occassionally we taper the percentage at the top end rather than give it a ceiling.

    But I wish it were not so. It is not the right model as much as the model forced upon us by the agency world.

    The truth is that the work load is proportional to – mostly – the number of adgroups and creatives – rather than to a percentage of spend. If one creative gets 1,000 clicks per day then proportionally, the work was less than one that received 2 clicks per day… But my guess is that the 2 clicks per day cost much less on Google and much more for the SEM manager (in terms of time). The latter probably – statisticaly – has a better conversion rate too.

    Industry sectors are very different too. CPC proces in finance or porn are way higher than in travel or clothing, for example. So there is an argument to say that the percentage that the management company gets for porn or finance should be LESS than with travel or clothing.

    Maybe fixed fee with incentive overrides is a better model.

  • http://www.latitudegroup.com RichardGregory

    Great piece Alan but what about CPA based models?

    I also agree with Receptional’s comments that models can vary from client to client, or more likely sector to sector. For example, Travel campaigns are often more intenxive than finance campaigns.

    We have further complexity over here in Europe with the additionla element of search engine commissions/rebates being paid back to agencies spending suitably monthly amounts. How do you think that should be factored in?

    Richard

  • http://sendtraffic.com sendtraffic

    There’s more then what’s listed regarding PPC pricing models. We use a flat CPC that’s based on our clients current PPC campaigns. This way, we start with what’s working and not have to increase the CPC by X percent. We put skin into the game that we can make a bigger, better performing campaign. If we can’t, we make no margin. Something to think about…

  • http://www.roiworks.com Porkchop

    Alan -

    Great post. One aspect of pricing models that does not seem to be discussed here, but is alluded to, is the size of the company as a factor in pricing.

    We have 2 totally different pricing models for businesses. If we are dealing with small businesses with under 20 employees (e.g. a lawyer, dentist, etc.) we charge a flat set-up fee (usually 399, 499, 599) and a flat monthly fee(also 399, 499, etc). A percentage of ad spend would not allow us to make enough off these little guys.

    If we have a larger client, or one in a hard to reach niche that needs a lot of custom keyword research, or one that may be hyper-competitive (e.g. mortgage loans), we usually charge a fairly sizable set-up fee to cover our up-front costs (10K -20K), handholding, etc. Thereafter, we either a) take a percentage of ad spend, capped at $X (depends on the client’s budget) or b) do a flat monthly fee somewhere in the range of 5-10K/mo.

    Hope this helps anyone out there. Please feel free to email me with any questions and/or to compare notes on our weird, nascent little industry.

    cheers,

    George Revutsky (Porkchop)
    george@roiworks.com

 

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