There has always been debate over which agency pricing model is best to incentivise your agency towards the same goals that you have been set by management. In this article specifically we’re going to look at the model of charging clients based on performance, also known as the CPA (cost per acquisition) model.
There are PPC agencies that will work on a CPA model, where agencies pay for the client media budget and where clients then pay their agency either a fixed amount every time a sale is made or a percentage of the value of the sale similar to an affiliate arrangement.
On the face of things this seems like a pretty good deal, if the agency doesn’t generate sales, they don’t get paid. In most cases you won’t pay any setup fees or fixed monthly management costs for using the agency. Furthermore It should incentivise your agency in theory to generate as many sales as possible so they can get the biggest possible commission.
It has in a lot of cases however resulted in quite a significant moral hazard, instead of agencies looking to maximise sales to get the largest commission which should result in additional profit for brands it has instead incentivised them to generate the maximum amount of profit for them.
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This is particularly so in the fashion sector because, due to the level of competition for non branded generic terms such as “women’s dresses” or “men’s coats” the vast majority of conversions come from branded searchers.
Why the CPA model won’t scale
The CPA model will simply not work for anyone who is looking to scale out their account or increase brand awareness as the goals of the agency and client are not aligned.
To scale out fashion accounts there are only really two options unless you’re fortunate enough to be one of the big well recognised brands like ASOS or Topshop who can bid on generic terms and be profitable due to their brand recognition.
You can either invest your media budget into Shopping campaigns or you can invest it in display advertising to build brand awareness.
The average ROAS (return on ad spend) of Google Shopping campaigns in the apparel sector is around 565%, which in basic terms mean for every £1 you spend you would expect to get £5.65 back. This works out at 17.6% of revenue as an acquisition cost.
From my understanding most CPA models work on a commission of around 5-15%. So if you’re paying your agency 15% on the top end as a commission, not only would they not be making money, they would actually be losing money if they were running Shopping campaigns for you, which is why in the vast majority of cases agencies will run very low budget, low bid shopping campaigns that just don’t scale on a CPA model.
Your agency will “piggyback off your brand”
The most common problem with the CPA model is that agencies will focus on the cheapest forms of traffic, namely brand traffic as they have the best return on investment for them.
Brand PPC is also one of the most profitable forms of marketing you can do in the fashion sector with the level of competition.
Branded searchers are where users are searching for your brand name. These users are very cheap to acquire as you have virtually no competition and are likely to buy from you as they already know who you are and trust you.
A good proportion of these users who are searching may have already purchased from you in the past.
In essence the agency takes people who are already going to find you on Google as you rank number 1 organically for your own brand name, and then sell you these visitors back at an extortionate rate.
There are several good arguments for bidding on your brand, that we won’t cover here, so I’m not suggesting you don’t bid on your brand, but instead don’t do it on a CPA model.
To give you an example of the difference in fees that you get on a CPA model (when an agency focuses heavily on brand) compared to a standard percentage of media spend model, here are the figures from last month for a fashion brand we work with at Clicteq.
Last month they spent £320 on branded campaigns and returned £58,980 (other agencies would see similarly high ROAS, if they were running brand terms on this account). If we had been working on a CPA model charging 10% we would have billed the client £5,890 in fees for managing £320 spend on a very basic campaign.
Contrast this to an agency model where you would pay based on a percentage of spend – where you would probably pay on average around 15% with a minimum of a few hundred pounds. Your agency management fee this way would be around £48 and the other £5,842 could have been invested into media to grow your presence on Google Shopping.
In conclusion, there are two main issues with the CPA model in the fashion sector. Firstly that it doesn’t incentivise your agency to scale your accounts, it incentivises them to maximise their profit.
Secondly it in most cases results in them piggy backing off your brand searchers. That results in huge management fees on very simple brand campaigns shown to searchers who were already looking to buy from you.
Overall, although it is commonly used in the fashion sector, the CPA model is not an effective one for incentivising your agency to grow your account and is very expensive when looking to protect your branded terms compared to a standard percentage of spend model.
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