The Great PPC Pricing Debate

If you pose the question “how do you price your PPC services” to a group of PPC pros, you’d better be ready for a lengthy and perhaps full throated conversation to ensue (I would suggest only doing this over some type of cocktail)… It is a question that plagues many an agency and consultant. How can you best price your services?

This post is inspired by two posts – John Doherty’s original post “Why Paying A Percentage Of Ad Spend Sets Everyone Up For Failure” and Kirk William’s response piece “PPC Pricing Ponderings: In Defense of Percentage of Spend (And a New Model!)“.

I love that this is being debated in such a thoughtful way. John’s piece is a really great reminder that clients don’t think like we do (PPC professionals). They do not have an intimate understanding of all of the ins and outs involved in successfully or even capably managing paid search initiatives. If your experiences are anything like mine, you have probably talked with and eventually worked with plenty of organizations who really only have a cursory understanding of how paid search even really works. He argues in his piece against the percentage of spend model (if you didn’t already click the link above to read it, do it now!).  I largely agree with his point of view.

In Kirk’s response piece (which you should also read if you have not yet), he does not argue that percentage of ad spend is the only or even right way to go when it comes to PPC billing structures. He does argue that is has a place in the mix though, but ultimately his preferred set up is a hybrid of the flat fee (his are tiered) plus a percentage of spend (also tiered). His primary argument for this model is that increase in spend always amounts to an increase in workload and therefore should trigger an increase in monthly fees to the agency or consultant.

I get where Kirk is coming from too – as agencies or consultants, it is a constant challenge to make sure that we are not losing profitability as accounts evolve. As we all know, there is no simple formula that you can use that is universally applicable to calculate for each $100 of increased ad spend, the work required to manage the campaign on the platform will increase by x hours, therefore resulting in a monthly billing increase of x times hourly rate. If only it were that simple… And this is where percent of spend starts to look attractive as a proxy for increased time. But I think it is a lousy proxy. Mainly because it is so uneven across platforms and industries.

An example of this unevenness has to do with the competitiveness of the client’s industry. If the average CPC for Client A is $4 and the average CPC for Client B is $40 and you figure that spend would be increased by the same percentage – does it really take 10x the work to manage Client B’s account than it does Client A’s? Clients in more competitive industries do require more aggressive management, but that should be built into your base structure for them already.

The other main argument for percentage of spend is that clients only spend more money in platforms when they are happy with the results you are getting for them. In other words, you are directly improving their bottom line, so why shouldn’t you get paid a percentage of what they are paying to the platforms as that increases? Again, for me this is a bad proxy. Paying an agency or consultant for performance is fine. But a better way to do this, in my opinion, is to have some type of bonus or incentive structure in place wherein if the agency/consultant meets the agreed upon goals, they get their bonus payment. If you set up your billings this way, all of your baseline costs should be built in to your flat fees. The bonus should be just that – a bonus.

I think that pricing is harder for consultants or small agencies than it is for larger ones. Larger agencies can much more easily make up for a project that is taking more time than anticipated (without having an increase in the agreed upon scope of work) by having other accounts that are in the opposite scenario. Workflow can also be divided among more people at larger agencies and efficiencies can be gained there that smaller outfits just can’t do.

To be fair, it is hard to have to talk with a client about how something you need to do to optimize their account’s performance will mean an increased monthly billing. But, if you lay this ground work when you start the project, it is easier to manage. Clients generally clearly understand that if you are going to add more campaigns or add another platform to their PPC mix, their ongoing/monthly costs are going to increase. You are managing more things, therefore it is going to cost more per month for those services.

One of the best things you can do as a smaller agency or consultant is to TRACK YOUR TIME as you manage accounts. And not just simply noting the hours spent, but on what tasks were those hours spent. Really get to know what it takes for you to manage accounts of different profiles, sizes and complexities. Learn from each project you price and adjust future ones as needed based on your data! Allow yourself a buffer when you figure your monthly fees. You should have a solid idea of what it will typically take to manage a campaign like the one you’re proposing. Your goal should be to have each account be profitable on average over the course of the year. And pricing for management should include room to be able to have smaller scope creep without removing your profitability or necessitating a fee increase for the client.

The other big issue, I think, is confidence in your pricing. Our industry, as noted, does not have a standard pricing structure adhered to by all who offer PPC services (it would be so much easier if it did!). In fact, the gamut of pricing approaches and ranges is huge. And, management is a subjective task. What you might quote as taking 3 hours someone else might quote at 1.5 or 8 hours. But, being confident in your pricing as being justified, goes a really long way toward being able to have conversations with clients about the need to increase your monthly management fees as things in their account change.

The big fear, at the root of a lot of this I suspect, is that you will talk to a client about the need for management fees to increase (with a fully explained in easy to understand language as to why this is) and they will freak out or flat out refuse to pay or end your relationship. I will say this, as someone who has been doing this for just about 18 years at this point – if having a reasonable conversation with a client about this in a respectful way and approaching it as their partner in this endeavor results in any of those actions, thank your lucky stars you found out now that this client is not a good fit for you. A strong agency/consultant and client relationship can weather things like fee increases on the agency side or budget cuts on the client side and hum right along.

If a client does balk at a management fee increase, I like to be prepared with an alternative offer to keep their fees at their current levels. It goes something like this:

Client: We are really happy with the performance of campaign X, but we just don’t have any more money to allocate to it right now.

Me: I’m so glad to hear you’re loving what we are doing for you with campaign X! And I do understand about budget limitations. Are you certain we can’t increase the spend by (insert proposed increase amount here)?

Client: I really wish we could, but we just got notice that all budgets are frozen at current levels until further notice.

Me: I see, well that is unfortunate. I would really like to keep the momentum going in this campaign if we can. Are there any of the other campaigns where we might be able to scale back our efforts to put those resources into campaign X? (If I have a specific suggestion, I will make it here as well).

You get the idea, I think! Approach this as their partner in the endeavor. In an ideal situation, your pricing structure and the bills a client pays to you should be a non issue, if they are happy with your performance. I am a huge believer that “satisfaction is a product of expectation”. Pricing your services is no exception. Be confident in your pricing model and explain how it works and what it covers. I like to also give clients an idea of what types of things will trigger management fee increases and I talk about it early on in the process.

If you haven’t gleaned already from this piece, my fee structures are more flat fee in nature. I have found over the years that this works well for me and for my clients. Fees are based on a scope of work and language about scope changes and subsequent fee changes are included in documents as early as the proposal phase. I generally price projects as a flat fee initial project (this includes discovery and strategy with proposed pricing for strategy implementation), implementation of strategy as a flat fee project and then a set monthly fee for ongoing management of the accounts and campaigns therein.

What about you? What are your thoughts on the great PPC pricing debate? As always, sound off in the comments or hit me up on Twitter (@NeptuneMoon)!

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