6 Reasons Pay-for-Performance Models Suck
August 26, 2013
It comes up often, and I’ll admit in my younger PPC days it made me shudder:
“So if you’re charging us a fee based on spend, doesn’t that mean you’ll just push the spend to increase your fee?”
Well, let me start by saying – yes…if we were real scumbags who didn’t want to keep you around as a client for the long-term. Of course I realize that’s not the ANSWER, but it’s always the first thing that pops in my head. No agency is doing themselves any favors if they make a few extra bucks for 3 months by increasing your spend significantly but then you quit. It sounds cheesy and clichéd, but your agency should consider you a partner not just a client. There should be a shared interest in every dollar invested in paid search and what that dollar produced in return – meaning superfluous ad spend is non-negotiable.
All that on the table…still doesn’t keep this conversation from occurring in nearly every sales opportunity or process. So what else? What are the other reasons why you may want to shy away from a pay-for-performance model of PPC management? I’ve put together a short list of 6 of those reasons, as well as what you should look for instead, all of which should make this concept a bit easier to understand:
Pay-for-performance can mean a LOT of different things.
Not every agency that offers pay-for-performance means the same thing, and even those that define it similarly have nuances to their system. Is the performance based on one metric in particular or are there multiple metrics and goals to hit in order to be considered “performing?” Even then, let’s say it is just one metric, are you shooting for a range or an on-the-dot value goal? In those options alone I’ve outlined at least a handful of potential variations of what “pay-for-performance” could mean, and I can’t imagine what the contract or agreement has to read like to have both sides covered under any of them. So many ‘if, then’ statements even a geometry professor would wind up in a ball of tears.
Then there’s the added confusion that will rear its ugly head if/when a team change happens on the client side, especially if that new contact wasn’t involved in the initial negotiations. That transition time for many pay-for-performance model agencies ends in the client leaving, purely because the new contact doesn’t have the same ideas for what’s considered “performing.”
Even if you have the kind of PPC account that lends itself to very specific and measurable goals you can gauge performance off of, setting up a pay-for-performance pricing model starts your relationship off with a sense of distrust. When prospective clients ask for a pay-for-performance model, this is what I hear: “I don’t think is going to work, so would you go ahead and confirm to me that this isn’t going to work before we move forward?” My very first question here is, why are you contacting that agency if you don’t think they can deliver what you need? It may sound a little too simple, but if the agency has been around for longer than a few years and has a solid book of business with clients of various tenure – they’ve got to be performing, right?!
Both sides of a new client/agency relationship are taking a bit of a trust fall; the client has to trust the agency to deliver results and the agency has to trust the client to give them the real picture on goals and such in the onset and to consistently provide reports on where PPC traffic is ending up in their funnel. Keeping that in mind, a pay-for-performance model implies that the trust fall only counts for one side, which simply isn’t true.
Pay-for-performance can also lead to shortsighted account management.
Let’s play pretend for a minute and say you find an agency to work on a pay-for-performance fee structure…what did you ask them to perform against? Is it one metric or a couple of them? For those metrics selected, is there a goal number to get to for each or is performing considered any improvement over previous numbers? I touched on the definition of pay-for-performance being an issue in and of itself, but if you do get a firm definition, I promise you that you don’t want your management team focusing on ONLY that metric or set of KPI. There are way too many leading indicator metrics that contribute to that goal metric, but it is possible to manage to just that goal set…if you want to fail long-term, which is why pay-for-performance management tends to be shortsighted and not sustainable.
In my opinion, a pay-for-performance model is like asking a running back to only focus on his 40 time and never ask him to take a practice snap – he’ll run real well, but he could also fumble the ball before he takes off.
There are factors of PPC account management that neither the client nor agency has control over (GASP!).
I’ll apologize in advance if this list becomes somewhat verbose, but the truth of the matter is that holding your agency accountable for performance is like pretending they’re Bubble Boy and no one or no thing is capable of changing their environment. If only that were true! Without even straining my brain, I’ve seen the following things happen that have caused performance to change and the agency truly wasn’t responsible for the dip:
- Google and Bing change their algorithms or features available in their interfaces to help with management.
- The agency is not able to optimize traffic after the click (aka: conversion rate optimization). This can happen because the site isn’t built on a system that allows testing, the agency isn’t trained to do so, etc.
- The client has some people from their sales team leave, which causes a larger gap in lead follow-up and reporting back to the agency on viability or value.
- Client contacts go on vacation and aren’t able to provide reporting or feedback.
- The client contact themselves had no idea that their company was planning something with less (or more, even) emphasis on digital or paid search marketing.
As an agency representative myself, I would like to go on record saying that I LOVE when my clients go on vacation because it means I’m doing enough to at least let them detach a little bit. However, the flip side of that is that I also can’t ensure that my contact delegates report passing to one of their peers in their absence. Depending on the stipulations presented in the agreement, performance could be measured on a weekly basis, so a week long vacation with no reports may be the nail in the coffin. And seriously, Google and/or Bing makes some change to how we do what we do weekly, if not daily; some changes bigger than others. Your PPC agency should be experts, but they’re probably not able to see in to the future (and neither are you!), so those outside factors have to be considered.
Additionally, a pay-for-performance model is kind of like asking your agency to agree to being an equity partner in your company, but without the power to influence change on branding or any other company-wide decisions, which is quite a hefty request.
Depending on the account or vertical, there may be a lack of (or inaccurate) reporting.
This is actually a pretty straightforward point against pay-for-performance because it’s not unusual and happens way more often than you might think. You can be the most on-time report-providing client on the planet, but reports aren’t always as accurate as we need or would like them to be. Take in to consideration that conversions can be lagging, sales cycles can be long depending on the account, etc. This isn’t something that can be optimized out of an account in most cases, but it can also be a huge reason to avoid pay-for-performance when you may be comparing apple PPC numbers to orange return data.
Are you basing performance on quantity or quality?
I can say this with quite a bit of confidence – any account manager can increase lead/conversion volume, but are they working on lead quality as well as quantity? In most situations, you can add keywords and write ad copy that draws in more clicks and conversions, but if those don’t turn in to revenue-producing conversions, who cares? In nearly all verticals, it’s possible to push leads and conversions, just not necessarily valuable ones. Asking an agency to bill on pay-for-performance is like asking them to go out and blow up a barrel of fish to give you; it’s completely possible even the fish you can salvage aren’t worth it, let alone the ones blown to bits.
So it’s a no to pay-for-performance…why is percent of spend acceptable?
Like I said earlier, the tendency is to believe that if an agency is charging you a percent of your spend to manage your accounts that they are going to push that spend to increase their fees, regardless of the outcome. One more time I’ll mention that a good agency won’t see it that way. The way I, and the rest of the Hanapin/PPC Hero team, see it – if we’re not hitting goals, you’re going to put in notice and quit, so THAT’S our pay for performance. We’ll get paid if we perform and if we don’t, you will break up with us.
My preference is to refer to percent of spend pricing as pay-for-potential. Again, hopefully you’re only talking to this agency because they have the credibility and record to prove what they’re capable of, so pay them for the potential they are likely to provide. In the work place, you expect to make more money than your peers or other applicants if you have more experience or success – why treat your agency any different? You wouldn’t hire Warren Buffett as your financial advisor and then refuse to pay him until you saw dividends and you should chose an agency that you consider to be your PPC Warren Buffett. Trust them, they’re trusting you!
What are your thoughts? Agree or disagree that a pay-for-performance model can work? Tell us your experiences – whether from an agency or client perspective. Share them in the comments section below and as always, thank you for reading!
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