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.