What to Look Out for In Adwords Management Pricing Models.

The excerpt below is taken from the free white paper "12 Questions You Should Ask a PPC Management Company Before You Hire Them!".

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Question #7 - What are your pricing models?

Ok, get ready — this is where things can get a bit confusing because there are so many variations on pricing models out there (and more are being invented every day). I will highlight a few of the most common models here.

Percentage of Spend. The most common pricing model out there is the “percentage of spend” model. Basically, the PPC company bases what they charge you (their monthly fee) on what you spend on Pay Per Click each month. The most common percentage is around 15% (some go a bit lower and some go a bit higher), and typically the more you spend, the lower the percentage of your spend you will pay for good management. If your spend is really low (like below $3,000 per month) most companies will charge you a flat monthly fee. In theory the percentage of spend model is fair because in general a larger account means greater complexity and more work for the optimizer. So if you spend $100,000 per month, there will likely be much more work for an optimizer to maintain and continue improving your account than if you spend $10,000 per month.

Personally, the aspect of the percentage of spend model that I have never been quite comfortable with is that it rewards your management company for getting you to spend more. That is the only way the management company will make more money on a monthly basis. Often-times in Pay Per Click advertising, spending more does not equal more revenue. So, if you choose a company that is employing this type of model, it’s crucial that you always keep them accountable for the results they are delivering to you. If they encourage you to spend more, they should also be able to show you in rock solid data how this is helping you make more money.

Flat Monthly Fee. The second most common model (which is rapidly growing in popularity) is the flat monthly fee. Under this model the PPC management company will determine the scope of work and amount of labor they anticipate putting into your account on a month-to-month basis to achieve their projected or your desired result. Once this fee is agreed upon and the contract is signed, the management company allocates a set amount of resources (which is in proportion to the monthly fee you are paying) to do the monthly management and optimization of your account.

The advantage of this model is that your cost is fixed. A disadvantage is that there is not really an incentive for your PPC company to grow your account. Often, through the investment of time and energy, a skillful company can effectively grow a client’s business (sometimes by as much as three- to four-fold). But if the amount that a PPC company makes from optimizing your account is fixed, the resources they will put towards managing your account will be fixed. With a skillful ethical company, this can still work out quite well even though it may mean slower progress in your account.

What to look out for with this model is that you do not fall into a rut with your management company where you pay a high monthly fee to basically maintain your business at status quo.

Payment Per Keyword. The third most common model is where companies charge you based on the number of keywords you have under management. Honestly, this model has never made any sense to me what-so-ever. The way this works is you pay a monthly fee which is determined by how many keywords you have in your Pay Per Click account. The reason I believe this is a completely ridiculous model is because to optimize and manage an account effectively could mean that the optimizer brings in many more keywords than you currently have in your account. Under this model you would either have to pay them to manage all these new keywords (which most likely won’t deliver a good return) or if you could not afford as many words as would be optimal you would have to unnecessarily limit the scope of your account. It just does not make sense and my suggestion would be to stay well clear of any company that is practicing this model.

Note: Although not yet commonplace, there is a rising demand for more accountability with Pay Per Click management. In response to this demand, we (Net Return Marketing) have created several performance-based PPC management solutions. We still charge a setup fee and a flat monthly fee like other companies, but we also incorporate a rock solid performance guarantee. Under our performance guarantee if your account does not meet our performance projections, you’ll receive a percentage of your money back – guaranteed.

Additionally, we build performance incentives into our contracts. These performance incentives allow us to invest more resources than would normally be merited by a Flat Fee or Percentage of Spend program because our potential for return is much greater. Typically, this results in a big win for both us and our clients. Because we have a greater potential for reward, we can invest more resources in your account, and this greater investment of resources is what leads to the truly exemplary results we achieve for some of our clients.

The bottom line here is there really isn’t a best pricing model (well we kinda think that our performance-based model is the best but I will leave that for you to judge). Each of the industry standard models (especially the first two I described) has its advantages and disadvantages. The most important thing is that you have to clearly understand the costs and terms of the pricing model for the PPC company that you choose. And, you also have to clearly understand what they are committing to do for you for the money you will be paying them. Just because you are paying someone what may be a lot of money to you does not mean they will deliver the result that you want. Make sure you understand what they deliver (like in real work not just empty promises) and that it is worth the cost to you.