Imagine a small ecommerce website. They started selling widgets 2 years ago and have had positive sales growth every quarter. About a year ago they started using AdWords, adding Yahoo and MSN a few months later. The “marketing guy” has been managing the accounts and the budgets have been growing at an alarming pace. They decide its time to look at hiring an agency to manage their PPC, but what is a reasonable quote? How much should PPC management cost?

How You Pay

Before discussing how much it should cost, we need to look at how agencies charge. It’s not all apples to apples out there.

• % of Ad Spend – This is the most common billing method out there. Basically an agency charges a percentage (say 7%) that they get paid for their services. For example, you spend $10,000 on clicks, they bill you $700.
• Pay-For-Performance – A much more novel approach; almost like a partnership or revenue sharing agreement. Payment can be a % of sales, % of profit, or a flat fee for each conversion. If you understand your cost structure and lifetime customer value, this method can work nicely for both parties.
• Flat Fee – Just what it sounds like, a flat monthly fee based on your account size and complexity. Great for budgeting because you know exactly what PPC management will cost each month.

But Which Is Best?

Like every question in life, it depends. % of Ad Spend is the most common because it is based on old-school media buying principles and is the easiest. However, I feel this is the worst option for 2 reasons. First, when comparing agencies you inevitably base your decision on price without factoring in quality. Second, the agency’s motivation isn’t aligned with your motivation. For the agency to make more money, they just have to pump up your spend (with little regard for results).

Naturally this leads us to Pay-For-Performance. Make the agency a stake-holder by aligning their pay with a metric like leads or revenue. This can work fantastically if you have good analytics and know your margin/cost structure/lifetime customer value. However, be warned that if your site isn’t converting well or you don’t give the agency a large enough piece of the pie, they may lose interest in your PPC and put you on the back burner. Or they may do a great job and drown your business in a flood of leads and sales (and they’ll go crazy if you tell them to slow down).

A flat management fee provides a middle ground. The fee is set, allowing you to stick to your budgets. The agency is motivated to improve because they know that next months check only comes if they delivered results this month. As you may have guessed, this is the billing method my agency employs and we’ve had good success. What has been your experience?