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.
A smart way to do it is on a weekly retainer or monthly fee, and quite rightly we do it just like you do. Getting real and lasting results for your clients has to be the most rewarding thing in the whole process, apart from the eventual pay out for the management.
Another potential payment model could include a built in bonus for increasing conversions by a certain percentage or by actually finding savings on budgets rather than bloating them.
As you’ve mentioned, it really doesn’t really make much sense to increase the campaign managers payout to be a percentage for badly managed costs.
This will eventually lead to inefficiency, not efficiency in terms of the spend.
Good post.
Hi Chris,
Enjoyed reading your post.
It’s very true that “some” Adwords companies will exploit customers with the percentage model. We do use this method but only when the budget increases at the request of the client. This will only be done based campaign delivering improved ROI.
There are two schools of thought on this topic, clients pay for the work or clients pay for the results.
When you look at it from the clients perspective, paying more upfront and less on the back end only makes sense if they actually receive the results.
The alternative is pay less upfront and more on the back end based when the results are delivered.
We are happy to share this risk for clients by charging no setup fees and having no contracts. This lowers their risk and we get the benefit of growing fees as the results are delivered. We only really start winning 3 or more months into the campaign. Therefor the pressure is on to deliver results rather than the service.
This is the main difference we see in the pay for service or pay for results approach.
Hi Chris,
Interesting post and from an agency perspective I can say it definitely swings both ways with a proportionate pricing model. Smaller clients end up getting a lot of work relative to spend and it doesn’t always scale up in a way that makes sense.
However the main issue for me is it is very difficult to measure work hours attributed to a project in online media vs traditional industries. Projects aren’t start to finish jobs but ongoing endeavours with changing goals and workloads depending on performance at a given time. Optimization in particular is an ongoing service that takes a few minutes here, a few hours there. If the campaign is tanking but the client can’t afford more “hours” should we just let it crash?
I’m not totally sure what the solution is but i’d like to see some sort of compromise pricing model that does take actual work into greater consideration.
I agree with the issue that it does not incentivize running tighter campaigns under the percentage model, but less effective account management is going to lead clients to look elsewhere for their needs.
Also the issue that often arises as you mentioned is the startup cost is usually substantial to test and optimize content. Proposing that to a prospective client will usually cause them to sign elsewhere. Amortizing that over a extended retainer often leads to increased sales.