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Many paid acquisition agencies and digital agencies charge a percentage of spend for their fees.
The question is: does this pricing strategy create a recipe for client-agency disaster?
Or, can it be a mutually-beneficial pricing strategy for both parties?
The agency gets the client clear results and the agency, having done the work, also profits.
Seems about right, right? Ah, if only it were this easy.
Table of Contents
Misaligned Incentives, Short-Lived Partnerships
A glaring issue with digital agencies charging a percentage of spend, and also with hourly pricing, is this:
Incentives are misaligned from the jump. This rarely leads to a longlasting client-agency relationship.
Somewhere along the way, either one – or both parties – generally find this pricing strategy untenable.
Either the client feels results do not match how much they spend, and that the agency is incentivized to spend more to make more
Or the agency finds the intitial pricing agreement was too lenient, too time-consuming for the fees charged, and is just not a profitable pricing strategy.
Of the myriad of reasons client/agency relationships fizzle and fade, disagreements on pricing surely hold a top spot on this list.
There’s a reason client-agency tenure is shorter than ever before, and only getting shorter each year.
The Age-Old Struggle to Set Agency Pricing
One the stickiest, trickiest parts of running a digital agency is setting a pricing model.
More often than not, an agency can take years as they struggle to fine-tune their pricing.
They test out different fees for setups, management, client calls, number of channels used, bulk discounts (or lack thereof), and what percentage of ad spend might be acceptable to clients.
A WordStream report found that nearly 50% of agencies charge a flat fee to charge clients for services. They also found percentage of ad spend pricing models had grown 10% from the previous year’s same report.
Especially for PPC agencies or agencies running Google or Facebook campaigns, they often have some clients on retainer, others on percentage of ad spend, and others on a combination of retainer plus lower percentage of spend.
[Photo Credit: WordStream]
They’re still not sure which one to use. This wishy-washy approach instills little confidence in clients.
This is not only frustrating for the agency but for clients who feel they are the pricing strategy guinea pigs and, as such, their ad spend is probably not being put to best use.
Some agencies try new business models; sometimes performance based, sometimes retainer based. They play around with minimum project lengths, minimum retainers, levels of service they offer, and more.
But the truth is, typically the client is the first to balk at agencies charging a percentage of ad spend.
Paying an agency/consultant a percentage of spend, as a business owner, does not make sense 90% of the time.
There may be a time and a place where this strategy does suit both parties and we’ll cover that at the end.
Let’s flesh this out from the perspective of both the business owner and the agency.
Percentage of Ad Spend From the Perspective of the Business
If you’re a business owner looking to hire someone to run or manage PPC campaigns for you, you may love the idea of paying someone based on the amount you spend instead of the number of hours that they work.
Doesn’t that make sense?
Absolutely not. They might employ poor digital strategies, they may be spread too thin with other clients, they may not be putting in the work.
Beyond a retainer fee (fairly normal for most agencies to charge), you just want to pay for the results that you get.
You might be thinking “but shouldn’t an agency get paid for the effort they put in?”
Absolutely not, is the most logical answer for business owners.
You pay an agency for results, conversions, sales; not for doing their best (in the best case scenario).
Just Showing Up Is NOT Half the Battle
Part of the business world culture is getting paid just for showing up.
People expect to get paid, and maybe even get a promotion (?!), simply for showing up and doing menial tasks at the absolute bare minimum of performance standards.
Typically, as long as numbers don’t go too far in the wrong direction, they keep their jobs and keep getting paid.
If you’re a business owner, why would you accept this from an agency much less an employee?
- Continue to pay an employee simply for the number of hours they put in?
- Not track their results to assure they are adding value to your business?
- What if they just “do things”, say “look at what I did”, and expect to get paid for it?
Most business owners recognize this in workers fairly quickly within their own business.
But if you’re not a PPC pro, you may struggle to grasp what you are paying for with a digital agency.
Understandably, it’s enticing to take the option where you think you’ll spend less to get the same results.
As a business owner, you think:
“Well, we’re only spending $300. Great! That means I’ll only pay $XX to them plus the management fee”.
If you can make $3000 from a $300 spend, then you got a great deal. A win-win for both sides.
And you did.
But this is never where it stops. This is where it goes…
But First, Some Quick Caveats On Worker Compensation
Of course, the above sentiment does not apply to all careers and industries. There are caveats.
In many jobs, especially for those on hourly wages, you should absolutely get paid for showing up.
If you work a construction job and there is a lack of a work to do one day, that is on the foreman.
Work at a retail brick and mortar store or in the service industry? You should be paid for the time you are there – assuming in all these cases you complete the work assigned to you to the highest standard possible.
But for a digital agency this is a different scenario altogether. Pay should be measured in KPIs, hitting key milestones, and improving overall business results. Just showing up doesn’t cut it in the marketing world.
Maybe it does for what a digital agency pays its own staff.
But NOT for what you as business owner pays a digital agency.
Percentage of Ad Spend From the Perspective of the Agency
Now the perspective from the flipside of the agency.
First, some sage advice on setting pricing from Gary Vaynerchuck, CEO of VaynerMedia, a full-service advertising agency that services several Fortune 100 clients:
As noted at the top, agencies structure their pay structures all sorts of ways.
One of the most common pricing structures is a setup fee with a base retainer, plus a percentage of ad spend.
From an agency perspective and without thinking about it too deep, percentage of spend is amazing! The thinking goes like this:
“If I’m spending $X,XXX of my client’s money and they’re making $XX,XXX, then why wouldn’t they increase their spend to $XX,XXX, make multiple $XX,XXX, and I’ll make more too!”
It’s attractive. It’s sexy. But it’s not reality.
There are two ways this plays out:
- Client starts off spending a decent amount and increases that spend because they are seeing a good return. But over time, that return becomes less so they get scared and dial back on the spend. You’re now making less money for the same amount of effort, simply because they got scared.
- Client starts off spending a small amount. You think you can convince them to spend more once they see a return. In reality, they’re happy with that return and never going to increase their spend. Oh, and they get frustrated that you’re trying to get them to increase their spend when they’re very happy with it.
Issues abound in both scenarios.
Why would a business not increase their spend if they are hitting profitability goals? Why turn it off for the rest of that month if they can make more?
He focused on three main reasons:
- They are part of a larger organization and it takes them time to get buy-in from higher in the company’s bureaucracy. The person interacting directly with the agency is often not the person controlling the budget and they do not have permission to increase spend.
- The company is happy reaching a certain level of profitability/revenue and does not need to exceed that as it may not make a material difference to their business (eg if they are publicly traded). They more care about consistent spend and returns than dramatically improving the bottom line.
- They are a small shop and increased spend means increased conversions that they might not be able to handle. This often occurs when there is limited stock of a product/service or the business owner is working too much and needs to hire someone to help out.
Incentives Are Misaligned With Just a Percentage of Spend
Misaligned in the way that that pay based on hours worked, as mentioned, may not be a viable or reasonable way to set up a pricing structure for a digital agency.
Again, the business/client wants to get the most from the fewest hours possible worked, and the agency is incentivized to work as many hours as possible to maximize dollars earned.
Paying as a percentage of ad spend present the same conflicting interests.
As a business owner, you’re incentivized to maximize every dollar of your spend and to spend as little as possible.
As a digital agency, the goal is to get your clients to spend more, even if it may not in their best interest.
No one wins when this power struggle exists.
There are some ways to structure your relationship that eliminates this dueling dynamic.
What Should You Pay For?
As discussed, paying a percentage of ad spend misaligns goals and can create client-agency friction.
Here are services that agencies stated they charge additional fees for:
[Photo Credit: WordStream]
So then, what should you pay for?
A few things to keep in mind:
- Results, clear and simple;
- Access to your agency’s expertise and keeping them from working with your competitors;
- The upfront time to set up of your account;
- Data and results from how they manage, optimize, and improve your account;
- Echoing numero uno, the return they get for you.
Let’s look at each of these.
Results & Return
You should be paying for results. Not about percentage of sales made not directly tied to the agency’s efforts. Some agencies do structure programs this way. It can work but the odds are not in favor of a lasting partnership.
If you’re happy with their work, get a good ROAS, and the agency is an integral part of your business then you keep paying them, they keep doing good work for you, and you continue to retain their service. Everyone is happy.
First, part of what you pay for in a retainer is your digital agency’s expertise.
You are paying for dedicated access to their brain and their help in solving your business’s problems. For some that’s going to be actually running campaigns/writing copy/building landing pages, if you do not have the time.
For others, a project will simply involve strategizing and helping to organize their team to get things done.
At the base, you’re paying for access to subject matter experts.
Setup & Ongoing Effort
Lastly, for the work that they are doing for you. Spending your money is not doing work for you. Setting up campaigns, doing audits, and maintaining campaigns is real active work that should be compensated.
Some agencies will do this as a flat fee, others include it in their retainer.
Time spent should be rewarded, but it is important to get frequent, data-driven updates on benefits of that time spent to your business and marketing efforts.
Pricing Strategy Is All About Perspective
Pricing is one of the trickiest parts of running an agency or working with an agency.
It is always some combination of:
Hours worked x hourly rate x expertise cost x some other factor
There is no one size fits all answer to how PPC agencies should price their work or how a business should compensate their PPC provider.
Thus, the age-old struggle shall carries on.
We’ve been through it, and through it again, and through it some more – and talked to a lot of agencies and clients who have done the same.
Combining what we’ve learned, here is one strategy that seems to work for pricing agreements with an agency:
- Base retainer to cover basic time costs;
- Add on setup fees for new campaigns, which really is compensating the agency for the hours worked to do the research and actually create the campaigns;
- Ongoing maintenance fee with specific, time-oriented (weekly, monthly, quarterly) deliverables.
One thing to keep in mind when hiring help for PPC, Facebook ads, Instagram ads, and more is that the agency is managing multiple channels with multiple campaigns on each channel. That is a monumental time expense.
For an agency to be profitable, and therefore able to continue offering their services, they need to be compensated for that.
So either they need to charge per additional hour (which is not ideal), per platform managed (does make sense and is a reasonable policy), and/or receive a percentage of ad spend.
Many agencies charge a base rate for management, then an additional fee per platform operated, and a percentage of spend above a certain spend amount. Is that right or wrong? Consider everything touched on above, then decide.
This is the most equitable pricing structure for everyone, in most cases.
Is Paying Percentage of Ad Spend *Always* Wrong?
Brass tacks answer? No. This fee structure is not always wrong.
It would be very hard to argue it is always wrong to pay an agency a percentage of spend as their fee above a monthly retainer (which we’ve already covered sufficiently above).
However, before you enter into this type of agreement with an agency, it will be helpful to under what percentage agencies typically charge and what is reasonable:
[Photo Credit: WordStream]
Beyond that, there should be a few prerequisites before entering any marketing partnership.
First, if you have any questions about if they will report to you enough and give you enough information to make a decision on if your investment is paying, then you should not hire them in the first place.
Any legitimate PPC agency or specialist will be transparent with you and let you have ownership of the accounts they are setting up and managing for you.
Second, you need to make sure:
- They will give you status reports at agreed upon times around spend vs profitability (ROAS);
- They will never increase your spend without your written, explicit approval;
- They should cover the downside by eating overspending if it happens, or they make it right the next month with a “discount”.
Third, there are two types of PPC agencies:
- Those who are consultative and high-touch, manage your accounts with a creative flair that helps increase your profitability;
- “Services” oriented agencies that simply try to get you in the door. Very low-touch. The “just paid to show up” crowd. Avoid these, even if their rates are better. The lack of value they provide is not worth the savings.
There are indeed times to pay hourly – for a specific task, for quick advice, for specific campaigns or tasks – but these are few and far between.
There are very few hard and fast answers in the marketing world – and especially not with pricing.
Pay close attention to what you are paying for, whether you and your agency are actually on the same page, and if your project has the right elements in place to make paying a percentage of spend a wise choice for you.