The Best Way To Charge For PPC Management

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Much has been said and written about how agencies should charge for PPC management. A lively discussion usually ensues when the topic comes up in social media. So what is the best way to charge for PPC management, anyway?

Types Of Fee Structures

Pat East of PPC Hero did a great series of posts on the various ways to charge for PPC management, so I won’t go into them in detail here. In summary, the most common methods of charging for PPC management are:

•    Percent of spend
•    Hourly rate
•    Flat monthly fee
•    A hybrid of the above

Percent of Spend Is Common

In my conversations with PPC managers, percent of spend seems to be a common way to charge. Percent of spend is a holdover from the Mad Men days of ad agencies. Back in the old days, when I started working in advertising, agencies added an upcharge over what the media charged for space or time.

For example, if a print ad cost $100, the agency would charge $115 to place the ad – they’d pay the publication $100 and pocket $15. In reality, all the agency was doing was brokering space. They weren’t “managing” any media because really, what’s to manage? Unlike PPC, which requires daily oversight, placing newspaper or TV ads is one-and-done – you buy the space or time, send in your creative, and collect a check. Agencies charged separate fees for creative, so the percent of spend was there solely to cover their time to call the newspaper or TV station.

Early in my career, I worked in advertising for a couple radio stations and the local newspaper. We hated working with agencies because of the percent of spend upcharges. Often the clients didn’t want to pay any more than the space was worth, so the agency would come to us and beat us up for a lower price.

While PPC is much different from traditional media, the percent of spend model penalizes clients for increasing their budget. And it doesn’t account for the difficulty of account management. A competitive industry could have a huge spend for a relatively simple account to manage, while a less competitive industry could spend half as much, but require a lot more work in their account to reach enough of an audience to move the needle.

An account running paid social and paid search is going to take a lot more time to manage than an account running just paid search. And what happens when a client shifts budget from search to social? I’ve seen that happen before, and suddenly as an agency you’re in the hole – you’re spending a lot more time for the same fees.

Hybrid Models Are A Bit Better

At the agency I worked for before gyro, we used a hybrid pricing model. We charged a base fee plus a percent of spend. The base fee was intended to cover routine tasks that we’d be performing regardless of the size of the account: reporting, client calls, technology, etc.

In general, the model worked well, but clients frequently got upset when their fees went up with their budgets.  The base fee was still rooted in total spend – those who spent more were charged a higher base – so in essence the base wasn’t really a flat fee at all. And we still had challenges with fees not matching the workload, especially with smaller accounts that were often high-maintenance.

Flat Fee Is Easier

At gyro, we charge a flat fee. We estimate the amount of time and effort the account is going to take to manage, and arrive at the fee from there. Spend is factored in, but fees aren’t based solely on spend. Accounts with multiple programs or very complex campaigns might pay more than a simple account spending the same budget. If the client drastically changes their budget or the amount of work they’re asking us to do, we adjust the fees. We don’t change fees if the budget change is so small as to not impact the amount of work we’ll be doing.

Freelancers

Freelance PPC managers are a separate breed, to an extent. I’ve done some freelance work, and know a lot of people who do, too. I’ve charged both a flat fee and an hourly rate for freelance. I’m not a fan of hourly rates for agencies, but when I’m doing work outside of my “day job,” it seems to make sense. I’ll use the hourly rate for clients I’m managing indefinitely. For one-off projects, such as account audits, I usually charge a flat rate.

I’m sure some freelancers charge a percent of spend, but honestly, I wouldn’t want to do the work of calculating my fees every month, nor would I want my compensation to be at the whim of client budgets.

The Best Way To Charge

You know I’m going to say it – the best way to charge is whatever works for you. I personally am not a fan of percent of spend, but that doesn’t mean it’s wrong. Nor does it mean that a flat rate is always right. Clients with flexible budgets can get frustrated with fees that are a moving, unpredictable target as they often are with flat rates; whereas with a percent of spend, they expect fluctuations in fees.

Whatever method you choose, be clear and transparent with your clients. Make sure you’re getting paid what you’re worth and for the work you’re putting in. I see a lot of PPC pros who vastly undercharge and undervalue their time. We’re a special breed – make sure you’re paid for it!

What do you think? What are the pros and cons of the various fee structures? Share in the comments!

Hat tip to Julie Friedman Bacchini of Neptune Moon for a conversation that gave me the idea for this blog post.

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Comments

  1. I notice that “Performance Based Pricing” is conspicuous by its absence. I know a few agencies in India that charge on the basis of outcomes like deals, leads, registrations, etc. Customer receptivity is mixed: Companies who want total visibility into the campaign won’t get it with this model whereas the “I don’t care what you do as long as I get X Y Z” crowd loves it.

    • Melissa Mackey says:

      Good point – I don’t know many agencies here in the US who use that so honestly I forgot about it. IMHO that model is difficult for agencies to make a profit unless they have total control over the entire sale/lead process – from landing pages to shopping carts, etc. Doing a performance model when you don’t control the landing pages and checkout process is a recipe for disaster imho.

  2. Communicate well, be transparent & get paid what you’re worth. If you can achieve those 3 things you’ll have a win-win pricing model.

    Great post Mel.

  3. Fantastic post, as always.

    In addition to all of your great points, I’d like to add this – be very specific about exactly what scope of work is covered by whatever fee structure you choose to use. Scope creep is almost inevitable in PPC management and if you have properly spelled out what is included in the original scope for the original fee, it will be MUCH easier for you to adjust said fee as the required work changes.

    • Melissa Mackey says:

      YES – very important Julie! If you don’t do this then it’s very hard to adjust fees down the road. Scope creep can happen no matter what your pricing model, too.

  4. It’s kinda like how everything we do (cpc) is backed into CPM. The way we price everything is, in the long run, backed into an hourly rate. We know how much our time should be worth and we want to be rewarded accordingly.

    I’m a big advocate of the % of spend/flat fee + performance bonus. Makes it easy to invest more & rewards spend growth, BUT also can reward the user if spend goes down but revenue goes up. Gotta work for both parties, ya dig?

    • Melissa Mackey says:

      Flat fee + performance bonus is an interesting model. Seems like that could work well for agencies who control landing pages. Thanks for the feedback Aaron!

      • Here is the thing about performance-based compensation though, based on some real life examples. Forget about just landing pages, unless you control the entire lead through sales process, measuring your actual contribution can be difficult.

        What if:

        The client’s sales people are routinely ignoring leads of a certain type that they don’t want to work on but that management has identified as market growth opportunities? Is this the PPC’s fault?

        The client’s sales force only responds to 50% of the leads generated. Is this the PPC’s fault?

        The client’s techs don’t want to work on weekends, so even though the client has put a premium on getting weekend leads, their staff are not responding to them. Is this the PPC’s fault?

        You can see where I am going with this. I love the concept – if we help improve your bottom line, we get a bonus. On paper, it sounds like a great win-win type of set up. But in the reality that I’ve experienced at least, there is way too much that is completely out of my control that could significantly impact those bonus triggering figures to make me want to use this model.

        That being said, maybe it works great for other people? I certainly don’t think I have all the answers on this front!

        • TY for your comment. I should’ve clarified upfront that the few agencies I know who offer “performance based pricing” do so only in hardcore B2C situations where the “look to book” journey happens in a single session within a few minutes – no sales force, no offline, etc. And, yes, the agency does have full control over the landing page. In fact, most often in such cases, the agency actually develops the landing page, so a certain level of CRO is baked in by design.

          • Melissa Mackey says:

            You’re both right, IMHO. Performance based doesn’t work for lead gen – too many variables outside the control of the PPC manager. It can work for B2C where sales happen immediately and the agency can control the LPs.

          • I agree that performance based pricing based on DEALS generated does not work in B2B where there are so many factors outside the control of PPC. However, I’m not sure why you think it does not work for LEADGEN. I know several agencies in USA and India that accept performance pricing for B2B PPC based on (say) number of webinar registrations generated, which is a form of leadgen (although they won’t accept a MOFU / BOFU performance metric like proposal or contract).

      • Well, the idea of a performance based bonus is to counter the two major cons of Flat/% of Spend and performance only. Performance only takes the quality of lead/sale out of the advertisers mind and makes them reticent to test. % of spend or flat makes an advertiser questionably motivated to spend spend spend spend spend without as much responsibility to real return.

        Bonus model is best of both. You get your $$$ from time spent (assume you’ll factor this in normally), AND you’ll be rewarded for making things better, whether that means revenue growth or spend decrease. Doesn’t have to be just all about landing pages.

  5. After many years of kicking different pricing models around (as a one person agency, ork ork) have settled on an hourly fee for initial set up / clean up, and then a monthly retainer for maintenance / expansion (based on my estimate of how much management / improvement the account is going to need) So far nobody’s complained, and I still have a waiting list, so I’ll stick with this.

  6. My experience form freelancing on the side is that small clients like flat fees because it is much easier to plan with. Hiring an external marketing expert can be a substantial cost factor that needs to be calculated with. I also feel they think of it more like cost comparable to printing flyers than an investment (what it actually is).

    Performance based modeling seems logical as often salary bonuses are just the same thing but cannot be applied to many SMEs. They do not have the tracking and attribution in place and don’t want to spend even more to you for fixing it 😉

    Question is: who to set up a consistent felt fee scheme that can be applied to different clients?

    I go different hourly rates depending on budget plus type of business (eg: e-commerce shop with low turn over + small budget = $XX/h.

  7. I think the percentage model stinks. At least for the client it does. There is a disconnect between the amount of effort it takes to manage a PPC account well and the amount a PPC spends. While initial account setup is very time intensive, once that work is done the amount for maintenance general declines over time as the account stabilizes. So the provider is going to be underpaid at first and then overpaid later.

    Adding a performance bonus could be good incentive, or it could be good gravy. If you are paying for account management, don’t you expect the best possible results?

    “I will pay you this much to paint my house, and if you don’t leave any streaks, miss any spots, or spill paint on the roses, I will pay you an extra $500.”

    As a PPC consultant I only see the hourly fee model as being fair to both parties. An estimate of the work should be provided with a high and low range of what the provider things is needed. Not quoting a single price allows the provider to set the client’s expectations. They will expect it will cost at least $x and if there are problems it could go up to $xxx. Anything between those numbers should satisfy the client and the closer to the lower number you can go and deliver what they asked for, the more happy your client will be. if you can do the work for under the low number, you may find the client helps you with marketing by telling others how happy they are with your work.

  8. Honestly, so many times the problem is not what kind of model is good for us, but for the customer! I’m comfortable with any model that, given certain circumstancies, pays my efforts. Not rarely i found customer prones to spend more money than i would expected just because they decide the model they like.

  9. Great post on a subject that polarizes many people.

    My view is that ultimately pricing shouldn’t be an issue with the client if the value being added is tangible, we go with whatever works for the client, our preferred one is percentage of spend, we make enough money to give the client our full attention and they should feel the difference, our retention rates tell us we are charging less than we are worth, not more, even via the percentage of spend model although we do run hybrid and fixed fee models for some clients too.

    I think as AI rolls out across the PPC landscape there are going to be significant changes ahead in terms of models and pricing, Also PPC management as a standalone service may fade and be less lucrative, there will still be scope for specialists but I think more and more PPC decisions and actions will be software based and automated.

    Ultimately I feel that it’s about perceived value, we charge more than many competitors yet have happy clients who have shopped around, they pay our rates as we communicate the value we are adding effectively, so if clients are complaining about price, don’t drop the price, reveal the true value you are adding!

  10. Do you charge up front the monthly ad spend + fees or do you bill after the month? I’m a little hesitant to bill after the month for fear of non-paying customers.

    • Melissa Mackey says:

      Hi Adam – we charge upfront. You’re right that charging after the fact creates issues if the client doesn’t pay.

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