Why We Don’t Charge Based on PPC Media Spend

A client called recently and said “I was at an SEO training session the other day and someone there said that they pay 15% of the cost of their media spend to their PPC vendor for management services. We pay you much more than that. Can you help me understand?”

Normally when a client asks about pricing I start to think in my head something like “OK. Here we go. Help them see value and not a budget line item.” Can’t say that I’m always great at that, but that’s another story.

This time, however, it was very easy.

Here’s how I explained why we don’t use percentage of media spend as our pricing model:

1. I don’t feel that this aligns our interests with those of our clients. In Pay Per Click, you can simply click a button and change your level of spending. Why would we charge more if a client simply said that they wanted to raise their level of spending? We did not do any additional work. Conversely, if a client lowers daily budgets or reduces their target cost per click, we did not do any less work.

2. As alluded to above, “the work is the work.” The effort that goes into setting up and managing PPC campaigns is related to things such as the number of search engines being used, the number of distinct campaigns, ad testing parameters, landing page testing, performance reporting, and conversion tracking requirements. By the way, notice I did not say “the number of keywords.”

We can quickly generate lists of thousands of relevant keywords. And we can even effectively manage keyword bids for thousands of keywords without contributing significantly to overall effort (we typically prefer to do this manually, as opposed to using automated bidding software). For example, we could have 1 search engine, 3 campaigns, 6 ad groups and 10,000 keywords, OR, we could have 3 search engines 20 campaigns, 80 ad groups and 10,000 keywords. The effort behind managing the 10,000 keywords is clearly not related to the number of words itself. And that does not even account for how many ad versions, landing pages, and conversion actions there could be.

3. Even if I did feel that using a percent-of-media model was OK at aligning our interests with those of our clients, most of our clients do not have large click charge budgets. We focus on B2B, where pay per click ad spending can typically range from $2,000/month to $50,000/month. Unless we are talking about the upper end of that range, it’s pretty hard to provide high-quality talent and service for 15% of media spend in the B2B space. There are sure to be low-cost providers and individual consultants who could offer a service for 15% of a $5,000/month ad budget, but the client is sure to not receive the level of service that is required when the goals are high-quality lead generation and transactions (and when there is accountability in tracking the success of these programs).

The Budget Conversation

One issue that does arise from time to time (during the sales process), is that a company will see a proposal from us and ask why our management fee is a significant portion of the total search advertising program they are planning.

This is when we need to get to the real issues. Our goal is to generate a profitable return for you, the client. Whether our management fee is $1 or $1,000,000, is not what is important. We need to prove to you that you are getting a reasonable return on your investment. For this reason, we find it less desirable to work with companies who cannot work with us to attach advertising costs to some ROI metrics. It’s fine if the metric is $X per qualified lead, or X% profit after advertising. It’s not great if there is no reasonable expectation that we can create a process for proving ROI in some fashion.

Length of Contract

The need to prove ROI is also a factor in why we typically suggest a 3-month initial contract. Most companies in our industry will require 6-month or 12-month contracts. 3 months gives both parties an opportunity to get comfortable with each other, as well as time to begin to evaluate success. This is true even in cases where the B2B company has a long sales cycle and will not realize true profitable returns far beyond 3 months. We can evaluate the number of leads, the quality of the leads, and the cost/qualified lead even in the short term.

At the end of 3 months, we should all have an idea of whether or not the program is meeting expectations, or can likely meet expectations, and how much effort is involved. If a client wants more or less service that can be factored into how the arrangement is structured going forward.

Pricing Models

Before going any further, I want to point you to a recent post by James Zolman of semvironment. James discusses some of the PPC pricing models out there, and his belief is that it’s not the pricing model that matters, it’s the comfort level between the consultant and the client and the quality of service being provided. Couldn’t agree with James more!

We structure our pricing in monthly increments. If we spend more time in a given month to achieve goals, that is something we are responsible for. If we spend less time in a given month to achieve goals, then both parties should be happy with that.

The pricing models that don’t work for us are:

Hourly Pricing – Although we are thinking about offering 1-hour phone consultations.

Performance-Based Pricing – I believe that even if the conversion tracking mechanism was so foolproof that there would not be controversy, it is very difficult to structure a contract where all of the possible variables are controlled – website performance, changes to site user experience, content changes, product selection changes, market positioning of the company, and many more.

Packaged Pricing – When PPC is done right, there is no way to structure vanilla pricing levels (e.g. Phelps, Gold, Silver, Bronze, etc.). That is not to say that we don’t know very quickly how to price a project. It’s simply that advertising set levels of pricing, and offering strict levels of service, does not make sense for our preferred client – companies that are challenged to generate high-quality leads and high-value sales in complex environments.

What are your thoughts on paid search pricing models?