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Towards the end of last year, I started a series of posts digging into the mechanics of PPC agency pricing models.

The aim? To help buyers make more informed decisions when it comes to choosing a model that’s right for their business, whilst hopefully leading to some healthy debate amongst buyers and sellers alike.

If you haven’t already, check out the overview of percentage of spend and pay on performance models. And if you have, thank you for sticking with me. Here we go with the final post in the series, a look at fixed fee models.

Overview

This is perhaps the most straightforward model to understand. The agency charges you a set amount, based on an hourly or day rate, for the time spent on your account. 

This is likely to include a set-up fee for analysis, planning, forecasting, keyword research, ad copy and creating the actual account (Google Adwords, for example).

On a monthly basis, a flat fee will then be charged for management of the campaign, which is likely to include ongoing analysis, optimisation and reporting.

Is this model right for me? Start by working the numbers

When considering a fixed fee model, I think the main focus needs to be on the ratio of media spend to agency fee. This is of particular importance when your media spend is relatively low. 

For example, let’s say you’ve got a monthly media budget of £4K. Based on their experience of running similar size accounts, alongside factors specific to your business (price point, margin and competition, for example), a fee of £1,500 per month is quoted, equivalent to 37.5% of media spend.

Does it make commercial sense to invest the equivalent of almost 40% of your media spend on agency fees? In some instances, yes, in others, perhaps not.

This is not to say that, by default, a percentage of spend model, at say 10%, would be more appropriate. As I covered in greater detail last year, £400 per month (using the above example) doesn’t buy you much time - maybe four or five hours per month on a typical agency hourly rate. 

The key therefore is to understand the effort required (in time) to drive a positive return. A fixed fee model might, on paper, appear expensive.

However, when you crunch the numbers you might find that the ROI will be greater with the flat fee model (despite the fee being much higher) because the agency is able to invest the actual amount of time required on the account, rather than cut corners, which is inevitable when working to a very low fee.

There is a third option of course. Without taking anything away from the skill and expertise required to effectively set up and run paid search campaigns, if the media spend is relatively low (and where you have the resource to do so), you might find managing the campaign in-house a better option (with some training of course - far too much money is already wasted on paid search by people naïve to its complexity).

Other things to look out for

From experience, one or two other things should be considered when assessing this model:

Additional fees

In the spirit of openness, my agency mainly employs a fixed fee model. However, we also use bid optimisation and management tools to support the expertise of the team. These are charged to the client as a percentage of media spend (albeit a very low percentage). In that sense, I suppose we employ a kind of hybrid model.

You should therefore question the agency on the tools and technologies they use and whether any additional fees apply. You want to ensure that you understand the total cost of the agency managing the campaign upfront. Additional fees shouldn’t come as a nasty surprise later on. 

Peaks and troughs

In the retail world I operate in, seasonality, sales, promotions, events and new product launches are of course regular occurrences. In turn, new paid search campaigns need to be regularly created and existing ones updated accordingly.

It is therefore important that you understand exactly what is included within the monthly fee. For example, if you want to create a new seasonal campaign around Valentine’s Day, will the time required be covered in the agreed retainer or will additional fees apply to cover the set up required?

With a percentage of spend model, the agency can, in theory, flex resource in line with increases in ad spend (around seasonal events, for example). A flat fee model doesn’t allow for this flexibility so clarity in how much time you are buying and what is covered should be made clear from the outset.

The most straightforward approach would be to agree a number of hours and tasks included within the agreed monthly retainer, with any additional set-up work quoted and agreed along the way. Good forward planning will help with budgeting.

When this model works best

From experience, of the three models covered in this series, a flat fee model promotes the greatest level of transparency. This is mainly because there is no hidden agenda. For example, with a percentage of spend model, it is actually in the interests of the agency that you spend more on media. The more you spend, the more they earn.

As I stated previously, I am not accusing agencies of running campaigns in such a way as to effectively ‘waste’ a client’s money purely for their financial gain…but neither am I saying this doesn’t happen.

Conversely, with a flat fee model there is no benefit to the agency if the client spends more on media. This should focus the agency’s attention on driving efficiency; getting ‘the biggest bang for your buck’ if you like.

With any model, understanding exactly what you are paying for and what you will get in return, is essential. Furthermore, there should be complete transparency when it comes to the strategy, for example the keywords being targeted and justification for doing so.

It is likely that an agency employing a fixed fee model will be much more open with this information. If that’s how you like to do business, then a fixed fee model might well suit you best.

It is worth adding that transparency works both ways – as a buyer of PPC services you need to be open with your agency, willing to share data and insight, as well as take an active role in campaign execution. PPC, like any other digital activity, isn’t something you ‘outsource’ in the traditional sense – success will be driven by a collaborative, open partnership between agency and client.

Concluding this series

If you were hoping my conclusion to this series of posts would outline the model I feel is ‘best’ (in a ‘my dad’s better than your dad’ kinda way!), I'm sorry to disappoint. It is totally dependent on your business, market, products, competition, target audience, pricing strategy and margin, amongst other factors.

If you are not including this information in a formal brief or the agency is failing to ask for it, you are much more likely to choose a model that isn’t commercially right for your business. You’ll probably end up either significantly overpaying the agency or paying too little compared to the effort required…both of which will negatively impact your ROI.

I therefore hope to have given you a fairly conclusive set of considerations when weighing up your options over the course of this series.

Well, that’s it folks. Thank you for comments so far. If you’ve had experience of fixed fee models and have anything to add, please feedback below.

Ben Potter

Published 22 January, 2014 by Ben Potter

Ben Potter is the former Commercial Director at Leapfrogg and now a new business mentor to aspiring digital agencies. You can follow him on Twitter or connect on LinkedIn.

18 more posts from this author

Comments (6)

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Gail Walker

I've really enjoyed reading this mini series of posts, thank you. From personal experience, I have worked to a fixed fee model and as long as there is transparency and collaboration then this is a good approach. Any peaks and troughs throughout the year were provisioned for as part of the planning process so we didn't incur any incremental charges. We also included a quarterly audit and review so this also helped to ensure we were getting the best out of the campaign.

over 2 years ago

Ben Potter

Ben Potter, Director at Ben Potter - new business mentor

Hi Gail,

Thank you very much - I am glad you have enjoyed this series.

I agree that transparency and collaboration are key here. It sounds as though your past experience has been very positive. That's good to hear!

Ben

over 2 years ago

Jayne Reddyhoff

Jayne Reddyhoff, Director at Zanzi Digital

I have also enjoyed these articles and found them very useful.

We have always worked with a fixed fee model. The fee is calculated based on the time that will be required to manage a particular account.
I agree that with complete honesty and collaboration, this works well. We have had the same approach as Gail to seasonal peaks and troughs and also include a quarterly review with the client.

However, we have recently set up a mixture of fixed fee and performance bonus with one new client. This seems to be working well because the performance metric being used is straightforward and WE can have an impact on it.

Your articles will help me explain the pros and cons of the different options to a client who is questioning our fixed fee approach.

Thanks a lot

over 2 years ago

Ben Potter

Ben Potter, Director at Ben Potter - new business mentor

Hi Jayne,

Again, I am delighted the articles have proved useful.

Thank you for your comments.

Ben

over 2 years ago

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Parteek Khunger, Senior Analyst at The Smart Cube

Hi,

Came across the series of posts. Can you please let me know that which model will be highly successful for companies with spending in range of £100 million and high margins (30-40%)

11 months ago

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Hassaan Mian, PPC Manager at Personal

Hi Ben,

Read the whole series and must say it has been a great journey...I am a freshee who is going to start pitching to clients but need suggestions in whether i should spend the media spend out of my own pocket or just charge a fixed fee and ask the client to put in their credentials for the payments in Adwords/FB and just be an admin along side? The type of clients i would be pitching to, some of them might want me to spend my self and would only ask for a total amount that i would charge and in return what they would get?

Trying to think broadly, i have an opportunity by which i can earn more by telling them an average amount of clicks/conversions/traffic that i can get them by charging them a certain fee keeping my margin over "the actual media spent" + my fixed service fee, (but i don't know I'm confused, if they are asking for it then should i go ahead?) but on the parallel concerned about whether they would pay me at the end or not.

From here another question arises whether a client should charge the whole amount in the starting of the month or ask for partial payment or wait for the client to pay after a month?

I hope i make sense :S ?

8 months ago

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