July 29, 2015
This is the first of three blog posts on the topic of pricing models and contracts. The next one will be published on August 12 and the final one on August 26. They’ll cover topics like hourly rate, pricing for boutique versus traditional agencies, whether you should charge a minimum amount, charging a flat fee plus a percentage of spend, pay for performance, hourly rates, how to bill for miscellaneous work like updating URLs*, length of contract and terms, and what to look for in a contract if you’re hiring an agency.
This blog post is inspired by a recent article we saw on Jimmy Data’s website which centered on PPC pricing models. Matt Umbro, who keeps a good pulse on the industry and topics for Hanapin, brought it to my attention.
There are several different pricing models and types of services you can charge for. This blog post explores some of the ones mentioned in Jimmy Data and also outlines the pros and cons of a handful of other methods and services. Jimmy Data’s post did a good job of outlining specific numbers, so I’ll keep my post more philosophical and not repeat the numbers as much.
Percentage Of Spend
This is the model that Hanapin uses and is widely used within the PPC industry. It comes from the traditional agency model of charging a commission of the client’s budget and thus, something that would be familiar to clients. I like this model because it allows the agency to be rewarded whenever the spending increases, hopefully because the client is seeing a return on their investment and wants to spend more. Also, sometimes competition becomes more intense, thus the amount of work and bids/spend increases to match.
The main thing I don’t like about this model is the perception that it doesn’t align the client’s interest in the agency’s interest because there’s a commission on how much we spend. It implies that an agency would increase the spend simply to drive more revenue for itself. Not only do clients set the budget, thus agencies can’t actually increase their revenue unless they can first convince the client they’ll generate more revenue, but even if agencies could, it’s a short-sighted approach in an industry based on monthly recurring revenue.
To retain the client longer and to generate more revenue in the long-term, it’s in the agency’s best interest not to increase spending just for the sake of. It makes for short, short engagements.
Degrading Percentages Of Spend
This is one of the models that Hanapin has previously used. It’s based upon “the more you spend, the cheaper it gets” theory. For every additional $50,000 in monthly spend, our percentage for that tier would decrease by 1%. So if the client was spending $100,000 a month, they would be charged 12% for the first $50,000 and 11% for the second $50,000, for an aggregate percentage of 11.5%.
The pros of this approach are that the agency maintains margins. While there is more work as the spend increases, it’s not a linear increase compared to the work involved. Meaning if you’re spending $200,000 it’s not two times as much work as $100,000. I also like it because it encourages consolidation of other accounts to Hanapin, both from other divisions/websites of the client and other platforms like Facebook and LinkedIn.
The negative to this approach was the difficulty explaining it to clients, particularly when they were used to a flat percentage of the spend. We’ve had clients that requested a flat percentage of the spend, that was higher than what they would spend on the integrating percentages spend, simply because it was easier for them to understand.
Hanapin now charges a flat percentage of the spend based upon a grading percentage of the spend, but we simply tell the client exactly what flat percentage is. So in the example above, instead of saying it’s 12% for the first $50,000 and 11% for the second $50,000, we simply tell the client it’s 11.5% for the full $100,000. This approach seems to give us the best of both worlds.
This is one of the models that Hanapin used, primarily when the company was less than five employees. I would derive that flat fee based upon a percentage of the spend. For example, if the client was spending $100,000 and we were charging 12% of the spend, I would simply tell them the flat fee per month is $12,000. This is really easy for clients to understand and it’s easy for us to explain, which are the main benefits of this model.
Particularly in the early days, it allowed us to count on a very reliable and specific amount of revenue each month. Also, charging a flat fee allows you to charge in advance at the beginning of the month versus having to wait until the end of the month once you know the actual spend. I highly recommend this for folks who are starting out as freelancers or small agencies.
The drawback to this approach is that when the spend increases, your workload increases too (but for freelancers or small agencies, the benefit of earlier payment and reliable/consistent revenue outweighs this). The specific client that forced us to change our model was our largest client and doubled their spend for an entire year to see how it impacted their total leads and revenue generated. Thankfully, they decreased their spend after that year which also decreased our workload. But our margins for the year were somewhat slim so moving away from that flat model made sense as we grew because we were growing our clients’ accounts.
*Here, I’m talking about updating URLs account wide when there are millions of them and when the client overhauls their website and/or backend database, not the general maintenance and updating of URLs during monthly management.