Your Ad Agency Is A Contractor, Not A Partner

by , Apr 27, 2012, 11:51 AM
  • Comment (5)
  • Recommend (13)
Subscribe to Search Insider

Imagine gathering bids for a construction project in your house such as a bathroom renovation.  A few hours before the deal is signed, you happen to find out that your friend had his comparable bathroom redone for $7,500 by the same contractor, but your quote comes in at $12,000, for the same work and material. You confront your contractor over the pricing disparity and he tells you, "I'm charging you more because you pay more in property taxes." 

Sounds ridiculous, right? It is, but this kind of discriminatory pricing is exactly what many interactive ad agencies do every day. Just like our mercenary construction contractor, their pricing structure has NOTHING to do with the level of work they do for a client. Instead, it's absurdly indexed to what a client PAYS to Google.

This artificial fee formula is called “percentage of media spend.” Its only virtue is its brain-dead simplicity. Say the agency marks up the client’s media spend by 15% on search accounts. Client A spends $100K/month on Google, so the agency pockets $15K. Client B spends $50K, so the agency takes $7.5K. Dead simple, right? Yes -- simple and absurd. The problem is that there's NO correspondence between the actual level of account work done and the fee charged to the client.

For example, Client A's account may be a mature account that's in maintenance mode. One or two account reps might tinker with it from time to time, but that's all. On the other hand, Client B's account might be in start-up mode, in a highly seasonal industry, with hundreds of SKU’s requiring price changes, and the agency's account reps working on keyword development, cross-engine account reconciliation, landing page build-outs, among other things. 

If anything, the agency should be charging DOUBLE for client B's account, due to the added work being done. Why should the agency have to eat these added costs? Conversely, why should Client A be saddled with a huge bill, just because they're buying more media?

But the worst part of this fee arrangement is its effect on waste. Don’t forget that the industry delivers an approximate 2% to 3% conversion rate across the board. This means that 97% of clicks are wasted, but the percentage of media spend fee arrangement not only provides no incentive for the agency to reduce waste; it actually encourages it!

This fee structure often works for larger search accounts in which agency resources are not held back, due to the agency revenue from a client in that category, but medium and smaller search accounts often get left behind.

Is there a better way? Performance type deals might sound great, but they don't work for the client (although they sometimes do for the agency).

One such model that will benefit medium and small search agencies is a monthly fixed price that will guarantee the same attention to detail regardless of account size.

So forget about self-serving partnerships with your agency. Think of your agency as a CONTRACTOR, and get an itemized statement for the work done. This way, you know what your fees are and can prepare the budget to handle it, thus placing the control in your hands.

This kind of fee structure works admirably in real life.  After all, you wouldn't contract to paint your house unless you knew exactly what you were paying for. There's no reason it shouldn't work with interactive ad agencies -- as long as you, the client, begin demanding it.

 

5 comments on "Your Ad Agency Is A Contractor, Not A Partner".

  1. Gordon Vasquez from RealTVfilms.com
    commented on: April 27, 2012 at 12:42 p.m.
    Mark; Brave article, don't plan on consulting for any advertising companies in your lifetime .. HA Gordon@RealTVfilms.com
  2. David Burdon from Simply Clicks
    commented on: April 27, 2012 at 12:45 p.m.
    Mark, Whereas I appreciate where you're coming from, I couldn't disagree more. The bathroom is a one off job, whereas an agency/client relationship typically lasts 3+ years, and longer if successful. It should never be about the amount of work done but rather the quality of the work and the return generated. Whether leads, sales, market share or brand improvement measures etc. The model you suggest me even encourage the agency to chop and change things just to justify their fee. Much of the costs an benefits of good agency/client relationships come from getting close to the client, understanding the organisation and strategy and delivering solutions that fit. Sometimes this can't be measure on a strict timeclock basis.
  3. Christina Starkweather from in-house
    commented on: April 27, 2012 at 1:11 p.m.
    Mark, I absolutely think agency cost models need to be questioned...but I have to agree with Dave on this one. I’ve been on the agency-side of several different pricing models (hourly/itemized tasks, % media spend, pay for performance, etc), but have since moved in-house. The models that served my clients best were either the percent of media spend (with specific goals/thresholds) or pay for performance. I don’t think the billable hours/tasks concept was productive for either party as it didn’t address the impact of the work and didn’t necessarily incentivize the agency to pick projects with the most business impact for the client. The other two models had some specific performance expectation tied to them, making it in the agency’s best interest to build a partnership with the client to increase both parties’ revenue. That being said, I think the client/agency relationship can be successful under any model with proper goal-setting—each agency/client relationship should figure out the best fit for their business.
  4. Marcus Wickman from Search Integration
    commented on: April 27, 2012 at 1:42 p.m.
    Very good and honest article on a subject in need of more of that much talked about "transparency". I am not saying one or the other is completely wrong here. Only that it is important to bring eventual flaws to the surface and there are flaws, as described above. Thank you!
  5. Jack a. Silverman from Bolin Marketing
    commented on: April 27, 2012 at 2:32 p.m.
    Mark, Thanks for putting ad agencies back into the contractor status VS partners. We have enough trouble getting our clients to view us as “partners” rather than vendors.” The only thing ridiculous here is your commentary. I also don’t get your monthly fixed price argument. How are you compensated when your work doubles in a given monthly period? I don’t know about your clients but ours know exactly what they are paying for and that’s the time to invest in their account, the care we take in the management of their financial resources and the successes we help deliver. We usually work on a hybrid compensation model that compensates us via media commissions built on a sliding scale connected to volume discounts while also compensating us for strategy and creative development via fees or hourly billing. We take a lot of care to provide accurate itemized statements of work so our clients do know exactly what they are paying for. If it’s a trusting collaborative partnership, clients and agencies can generate a lot of success together.

Leave a Comment

Sign in to leave a comment. Don't have an account? Join Now

Recent Search Insider Articles

» Search Insider Archives