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PPC Management – Agency Payment Models

There are a few PPC management agency payment models – which is best?

Is it best to pay your agency on a Flat fee, Performance or percentage of spend basis?

As if PPC management isn’t a confusing enough environment for the average merchant there’s also the critical factor of how a ppc management agency should be compensated. There are 3 main payment models and one less used model, all with pros and cons so we’ll cover them below.

1)  The Flat Fee PPC Management fee Model

Pros : Both you and your PPC agency knows the score with regard to costs, month in month out you’ll pay a set fee for the ppc agency to manage your accounts, The merchant can budget accordingly as it’s a fixed cost service.

Cons : The PPC agency only have to do an adequate job to keep the client happy as the fee is fixed. There’s no major incentive here for the ppc agency to shine, cut costs or even work even harder and expand the account out to generate more sales etc. as they know as long as they merely perform adequately they’ll get paid and keep the client for another month

2) The Performance Marketing PPC Management fee Model

Pros : Performance marketing is zero risk PPC marketing option where you pay nothing until a sale is made and then you pay a set fee or percentage per sale, so as a merchant it’s a good way to limit cost and only pay when sales are made. Another bonus is that for cash strapped merchants the ppc agency usually use their own account that the merchant has no access to and they pay their own spend too, the merchant just pays for every sale. (somewhat like affiliate marketing)

Cons : Most PPC Agencies running a performance PPC account model will focus hard on brand terms and not chase the sales that don’t yield a positive ROI for them, and sadly as their on a lower fee than the margin the merchant who could actually run their PPC at on a flat fee or percentage of spend model then sales are lost there. We saw one merchant’s PPC costs go from around £1.00 per sale with a 60% brand to generic split on a normal percentage of spend model, to over £2.50 per sale with a 87% brand to generic split, so in effect their own brand traffic was being used to drive 87 out of 100 sales and their costs had been increased by 150% and the overall sales volume had dropped as the agency had stopped trying to get the longer tail less profitable ROI term sales. Once we pointed this out they ceased their performance payment model with their current agency. Another big minus point is that the AdWords/Yahoo/Bing etc. PPC account is not the merchant’s property, so you could be getting great volumes of sales but then decide to take it in house and you can’t, you’d have to start from scratch, guessing at the keywords that work etc.

3) The Percentage of Spend PPC Management fee Model

Pros : The ppc agency is incentivised to grow the account to spend as much money as possible, but at the merchant’s target cost per lead or sale as the more the client spends the more the agency earns, but of course the agency is thinking long term so the spend needs to yield good results at a good ROI for the merchant to stay a client longer than the first week or month so it’s always done with the target cost per lead or sale in mind. The ppc agency naturally do the hard work to increase the spend level by creating many new adgroups. It’s also like performance marketing in that if they ppc agency increase the spend (whilst keeping an eye on the cost per lead/sale metrics) they will be rewarded more.

Cons : There is usually a minimum fee per month of a few hundred to thousand pounds (charges in London are usually high hundreds to low thousands) to cover the account building/reconfiguration work (sometimes a campaign fee is charged too) then as the agency work harder and build out a great account with good strong campaigns the spend should increase at the same time as the cost per sale decreases in most cases. The spend will vary by month and should actually increase over time as the account is expanded, of course the PPC Agencies fees should always be proportional to the income generated from PPC if it’s run properly.

4) Hybrid PPC Management fee Model

Pros : Some agencies/merchants prefer a mixed model where they are paid a flat or minimum fee and then a performance based override for when a certain sales/lead volume is hit or for sales over a certain amount etc. and this is a great way to get your PPC agency psyched up to work hard for you.

Cons : Some agencies will chase the easy money again, Brand names, or cross brand action on your competitor keywords so careful attention and monitoring is needed to ensure the agency aren’t just chasing the easy sales and ignored the sales that are more profitable for the merchant.

Summary :

Picking the right model for you isn’t always straight forward, But as a PPC agency with 10 years experience this is our thoughts on it;

A flat ppc management fee doesn’t incentivise an agency to do anything much, plus in order to increase billing revenues the ppc agency has to take on more clients, there’s no way to grow the agency or increase profits viably in the long term without more accounts.

Performance marketing ppc management fee model can work for some merchants however the danger is that as the ppc agency are working solely to generate sales to get paid they’ll concentrate on what drives sales and high ROI for them, and not the merchant, so often they’ll target the merchant’s brand terms hard, brand and generics to a degree and then some long tail but only those that they can make a profit on, whereas the merchant’s own ppc or either the flat fee or percentage of spend model would be viable to chase those sales for the merchant and mop up every one of them they could.

The Percentage of spend ppc management fee model is in our opinion the best model as the ppc agency is incentivised to work hard for the merchant, spend as much money as possible (by growing the campaigns out and not bidding high) but at the merchant’s target cost per lead or sale. the harder the agency work the more they should earn so growing revenues for the agency (whilst keeping clients happy) is a simple case of spending more but hitting the merchant’s target cost per lead or sale.

The Hybrid ppc management fee model is a good variation on the main 3 and can work well for some merchants, it’s format varies from flat fee to minimum fee and percentage but plus bonus for hitting certain volumes or even a revenue share so it’s worth exploring if a more inventive approach is required but for most the percentage of spend model is the best starting point.

Looking for improvements in you ppc management? For a no obligation chat about how we may be able to help you reduce costs and increase sales use the call me back form below, or ring free 0800 228 9122 or use our contact form HERE

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