This is a guest post from Kirk Williams, the founder of Zato Marketing, an industry-leading PPC specialist, and an all around good dude. He read my post a couple of weeks ago and wanted to write this response. I sprinkle a little bit of commentary through it in italics. Enjoy! – John
Last week, the savvy and wise (John note: and good looking!) John Doherty (flattery gets me everywhere, right??) wrote a thought-provoking post concluding that percentage of spend fees in PPC pricing models were ill-advised.
Since I am writing this article as a response, you may want to read through his initial article here: Why Paying A Percentage of Ad Spend Sets Everyone Up for Failure
John and I talked before he published the post, and we were able to think through some aspects of his analysis, as well as PPC pricing models. I asked if he would mind if I wrote a “response” of sorts to his article, and he graciously acquiesced!
Here is what is interesting in this post: You are going to get into the mind of someone (me) who has thought for years on PPC pricing models (I’ve even spoken on them, slides here: PPC Pricing Models), but who is currently in the state of mentally wrestling with his (my) current model.
In other words, I’m going to do something rather odd in a “defense” post.
I’m going to write this post defending against some of John’s statements… and then make it to the end and detail how I am in the middle of another evolutionary shift in my agency pricing model that moves away from a strict percentage of spend model.
In Response to John
First, it’s fantastic to see someone outside of PPC helping us think through pricing models. I don’t say this sarcastically. Every industry needs outside influence for disrupting our current way of thinking. Anytime any industry gets into too much of a bubble, the risk of that bubble popping grows.
That being said, I think John brings some great points and objections (as we noted on our call), but I wanted to note a couple of “from the other side” thoughts. I was going to begin this post as a comment on the original post, and then it turned into its own post!
All that being said, I have a few response thoughts that I think will ease the burden of % of spend slightly.
Thought #1: Getting away from value = hours spent is good
I love that John is getting away from the idea of value = hours. That is one of the strengths of the percentage of spend model and we 100% agree there. My clients aren’t paying me to punch a clock, they are paying me to make them money and my goal is to create a pricing strategy that is aligned with that goal. John did an excellent job in thinking through what true value is, as I think that is absolutely crucial to the pricing conversation. John’s experience with multiple businesses shines through here.
Note from John – thanks man 🙂
Thought #2: Spend should be aligned with profitability goals
My main problem with the misaligned goals objection is that, if you do it right, the client will not increase spend unless they’re satisfied with our PPC work… and thus the spend is tied directly to their profitability (hence, also to their goals; hence, our goals are aligned).
In ZATO’s instance, we develop relationships with clients in which they are completely in charge of their monthly spend thresholds. If they are happy with our results, they’ll increase spend in that month and we’ll be rewarded accordingly. In this instance, the misaligned goals accusation falls apart, because spend is actually aligned with their profitability goals.
Note from John – I think we are splitting hairs here. I totally agree that clients should not increase budget unless they see profitability. I also know that it’s hard to have a client that is never upping their budget (which can be for many reasons) and if an agency is being rewarded for their efforts (supposedly) by increased budgets which means increased revenue, and the agency isn’t getting that, that client probably eventually won’t get the attention they deserve. Jury is still out on my thinking here.
Thought #3: Retaining of services is not a reward
John stated in one paragraph that:
“The real payment for getting an agency getting a return for your business is continuing to retain their services. If you’re happy with their work, getting a good return, and they’re an integral part of your business then you keep paying them, they keep doing good work for you, and everyone is happy.”
I disagree vehemently with this since I believe that increased profit and revenue deserves more than simply a cold-calculated retention. This is because there is a difference in quality of account management in the same way that there are differences in quality of employees. Using this illustration: It’s a good thing to reward Employee A who provides more value for the company than Employee B with a bonus, or raise. This encourages trust, harder work out of Employee A since they are being recognized, it is good for the business because they are likely to hang around longer as their work is being actively rewarded, etc, etc.
In my opinion, it is no different with maintaining relationships with valuable agency partners. Think of it like this, can you afford to lose the *awesome* agency who is increasing your profit consistently year over year? If not, then you better understand that their happiness is just as important to you as your happiness is to them.
You don’t hold all the cards; this is a relationship.
I believe work that provides actual value should itself receive value, not simply retention.
Note from John – I actually disagree with this still and stated my reasoning in my original post. Search for “Finally, you should be paying for results” to get there directly.
Thought #4: Increased spend = more work (often)
More practically, increased spend actually does often (if not always) increase work. Remember that in PPC, increased spend generally means more traffic, which means keywords need more bid adjustments, ad tests need to be run more often, tools need to be purchased to help manage the accounts, communication increases as clients are more invested in the bigger budget (seriously, EVERY time).
I’ve found that practically, an in-place % of spend agreement is a great way to for the agency to avoid scope creep as well as be rewarded for a job well done. I have found from personal experience that a client who doubles their ad spend also tends to double (at least, if not more) the level of interest they have in your management and thus communication alone drastically expands.
Note from John – fair point! Look at Kirk’s thinking at the end of this article for how he is rethinking his pricing.
Thought #5: percentage of spend sets fee growth expectations for clients
One of the crucial things that Percentage of Spend does well, is to provide a simple, agreed-upon, and expected form of fee growth between clients and agencies. While there are many alternative forms of PPC pricing out there, I am attracted to the percentage of spend model precisely because of these 3 things.
- Simple: some agencies make an effort to figure out performance based pricing, but with attribution issues (what about incorporating other channels’ influences on PPC or vice versa?), and tracking issues (do you the agency really, truly trust the client’s profit internal numbers?) as well as non-management issues (seasonal variances, or client breaking their own website), this gets messy fast. The benefit that basing fee growth off of spend, is that it provides a verifiable-by-both-sides simple, 3rd party tracked metric whereby all sides can see a clear way forward as PPC benefit is demonstrated.
- Agreed-Upon: Hand in hand with the previous point, is that I’ve found in the contract stage we can agree quickly on using this structure and then I no longer have to hit them up constantly over the remainder of the relationship for additional fees in increase to work scope. We have already agreed upon it, and the clients *always* remember that this is part of the deal with increasing spend, so if they do so they are already aware of the fact that ZATO’s fees will increase as well. It clears the way of communication so you’re not always the awkward brother-in-law hitting you up for money.
- Expected: This goes hand-in-hand with the previous point, but is a crucial part of the model (and where I believe other models fail). Communication and expectation with clients is everything, and I’ve found the expectation from the beginning that ZATO will be rewarded as value is demonstrated and work increased helps set the stage for a true partnership. We aren’t an employee dependent on hitting them up for a raise when we gather the courage. We are a true partner with a stake in the business value. It’s to our benefit to raise their profits, so they raise their spend, and we all get rewarded. If they expect this, it’s a different ballgame then hitting them up again and again for cash.
All in all, there is no perfect PPC pricing model, but I think for these reasons that percentage of spend should get a more positive review than noted in John’s article.
What I have found to be true in working on employing various models in my agency, is that there is truly no perfect model.
In the meantime, having someone outside the industry who can help disrupt the status quo thinking is never a bad thing. Who knows, maybe discussion from this post will discover a new way of pricing that will become the norm for PPCers for years to come.
An Alternative Solution (I.e., The Best of All Worlds Scenario)
Tiered Flat Rate Based on Spend
After spending all my time defending percentage of spend, I wanted to share with you the inner workings of my own agency pricing changes happening even as we speak. One of the things I’ve begun to learn is that clients (1) understand the idea of increased fees with increased spend as value is shown, but (2) they like consistency (3) small shifts in spend happen all the time, which to be 100% honest, makes invoicing really, really, really annoying.
The way that I am shifting in my thinking lately, is to combine the Flat Rate pricing model with the percentage of spend model. I think this nails the best of both worlds.
Please note that this is not ZATO’s actual pricing as that depends on project scope and other factors. It is merely to give you an idea of what this pricing tiered model could look like:
This also makes invoicing WAAAAYYY easier than with percentage of spend 🙂
I have begun personally to become more drawn to this for many reasons.
What about you, any thoughts you would have to add to all of this! I love moving the agency PPC pricing conversation forward!
Evolve or die!
About the Author
Kirk is the owner of ZATO, his Search & Social Marketing agency, and has been working in Paid Search since 2010. In 2016, he was named the #7 Most Influential PPCer by PPC Hero and has written articles for many industry publications. He is also an avid conference speaker, having traveled across the US and UK to talk about Paid Search.
Kirk currently resides in Billings, MT with his wife, four children, and little sleep. if you are interested in talking to Kirk about Paid Search management on your account, you can connect with him on his Credo profile here: Connect with Kirk. He can also be found regularly on Twitter: @PPCKirk.