I’m probably going to upset a few AdWords agencies with this post, but I feel many of them are ripping off their clients by charging a percentage of ad spend to manage an AdWords campaign.
This type of pricing structure has nothing to do with the level of work the agency actually does for the client. Instead, it’s simply indexed to what a client pays to Google.
For example, an agency will typically charge 15% of ad spend to manage an AdWords campaign. So, if client A spends $10,000 a month on Google, the agency pockets $1500. Client B spends on $5000 a month to Google ads, so the agency gets $750.
Certainly, this fee structure is nice and simple. But the downside (if you’re a client) is there’s NO correspondence between the actual level of work done and the fee charged by the agency.
Let’s say Client A’s account, with a $10,000/month spend, is a mature account that is ticking over nicely and requires only minor tweaking each month. Client B’s account, with a $5000 spend, is still in startup mode and requires many hours of testing keywords, ads, landing pages etc.
If anything, the agency should be charging more for client B’s account, due to the added work being done.
But this is not the worst part of the “percentage of ad spend” pricing model. The biggest downside is that it provides no incentive for the agency to reduce waste spending. In fact, it actually encourages waste spending!
Given that a typical conversion rate for AdWords campaigns is 2% to 3%, it means 97% of all clicks are wasted. The aim of a good AdWords agency is to reduce this wasted spend as much as possible. But if the agency is pocketing a percentage of ad spend, why would they be worried if the client spends more with Google? The more the client spends, the better it is for the agency!
This is why I’ve always favoured a monthly fixed price for managing AdWords campaigns. In addition, a setup fee is usually needed for the first month, because there’s a lot of work upfront needed to lay a good foundation. If any additional unforeseen work is required, then I will bill at an hourly rate for the actual time spent.
So, if an agency wants to charge you a percentage of ad spend to manage an AdWords campaign, ask them to justify this model. If they can give you a convincing explanation, by all means go with it. But otherwise, I recommend a fixed monthly fee based on the amount of work actually done.