Back in the aughts, charging on a percentage-of-spend basis was all the rage for online marketing agencies.
In that model, clients pay some percentage of their search engine marketing (or overall digital advertising) spend each month. The percentages would look something like this:
- Up to $100,000 in ad spend, agency charges 6% or $6,000 per month
- Up to $250,000 in ad spend, agency charges 4%
- At $1M in monthly ad spend, agency charges 2%
These are just ballpark figures — of course, every search marketing agency charges differently.
Here’s the hypothesis behind the popular percentage-of-spend model:
- As the account grows, the agency makes more money, and the client is happy because growing spend inevitably suggests growing conversion totals and revenue.
- It’s a simple method for approximating how much work the agency might have to invest in managing and structuring an ad campaign. Lots of spend suggests greater sophistication in Google AdWords.
- Finally, this is a way for agencies to charge a premium to large companies with large budgets.
Clever Zebo never has, and never will, charge on a percentage-of-spend basis. Here’s why this agency pricing model fails the client:
- Agencies are incentivized to recommend higher budgets. The higher the spend, the more the agency earns. There’s an indirect correlation with the success of ad performance here, but the most direct incentive is to keep spending more, no matter what.
- If spend drops, agencies must de-prioritize the account. Even if the ad spend drops for entirely logical business reasons and not due to poor performance, the agency suddenly has a smaller fish on their hands than they bargained for up front. It’s a difficult negative incentive — reduced compensation despite improved performance.
- As ad spend increases, the total cost to the client goes up. Usually, hiring an agency starts to pay off in ROI. If clients pay an agency more money as their ad spend rises, this hurts overall ROI. The fee to the agency must be considered in the ROI calculation.
We believe that a flat monthly fee creates the right behavioral incentives on the part of a marketing agency. The results we’ve seen with a flat monthly fee model are:
- Clever Zebo must demonstrate success quickly. The faster we show solid results and growth, the more confidence we build that the program can work and should be expanded.
- Our clients tend to see increasing ROI as the relationship goes on. Maybe the first month is a wash because the fee our clients pay us goes toward laying the groundwork for success and setting up and optimizing existing efforts, but once campaigns are optimized and conversions start to go up, the fee to us remains the same month after month, so the ROI graph goes up and to the right.
- Clients tend to feel like they’re entitled to as much of our time as they need in order to achieve the results we were hired to get. When there are no per-hour charges, or caps on total consulting hours an account can consume before prices go up, Clever Zebo is able to prove we’re confident in our service and the expected results.
For example, one recent client saw tripled conversion totals and a 48% better CPA in AdWords within the first month. Another saw a 249% lift in Facebook Ads conversion rate and a 67% drop in AdWords CPA within two months. If our fees rose with ad spend as clients saw these efficiency increases, our clients wouldn’t see the same margin on hiring us. With fees that stay the same month after month, Clever Zebo is challenged to demonstrate significant improvements in efficiency in order to keep each client’s business.