Evaluating Digital Agency Billing Models

It takes a very special kind of person to enjoy managing money. It’s even rarer to find someone who enjoys asking people for money. But whether you love it or hate it, at the end of the day, an agency needs to bill clients in order to keep the lights on. Across the industry, opinions vary widely on the best approach to billing, especially when digital work can be difficult to “show” outside of a final report.

In this article, we’ll review four possible approaches to billing clients, along with their pros and cons:

  • Percentage of spend
  • Hourly
  • Flat Fee
  • Profit-Based

Percentage of Spend

First, PPC management agencies most commonly charge a percentage of ad spend as a management fee, often ranging anywhere from 10-25%. This model ensures that the reimbursement to the agency will increase as the workload increases.

An agency can cover the necessary management time and earn a profit with a 15% fee on a $20,000/month account ($3,000/month for management). However, a percentage of spend approach doesn’t always scale well for smaller accounts. Say a client only wants to spend $1,000/month: an agency either applies minimal management time or has to increase the percentage of spend in order to retain a profit.

In light of this concern, an agency that tends to manage smaller spends may do well to have defined tiers for percentages of spend. For instance, clients spending $1,000-$3,000 monthly may pay 25%, while those spending above $3,000 may pay only 15%, and those above $10,000 pay 10%.

The drawback of this model comes to light when an agency automatically receives more return from a higher ad budget. In those cases this model can be misused to make a client spend more than they need to. Also, higher spend does not always equate to greater performance; in fact, an agency doing its job well may optimize a campaign to spend less but drive more leads. In this case, the agency isn’t being rewarded fairly for its success, while an agency driving up spend for no reason gets disproportionately rewarded.

Hourly Rates

Another model involves billing based on hours, either for a predicted number of hours each month or actual hours accrued. Each client starts with a defined hourly rate. This model, when properly planned, can help to account for the total amount of time that goes into a project.

However, strategic work such as PPC management can’t always be accurately confined to a flat hourly model. Some months may involve extra hours of work that are not always expectedly. For instance, AdWords may release an update (like Expanded Text Ads) where you want to spend additional time adapting ads to a new format. Or a client may decide to run heavier promotion in one month vs. another. In either case, an hourly model should either adapt to actual hours put into a month or be built to average out over the course of a year, understanding that some months may involve more hours than others.

In addition, working within an “hourly” mindset can make staff feel limited about what they can accomplish in a given month. Especially on smaller accounts, staff can quickly use up hours, between making campaign edits, strategic meetings and creating reports. Once you’ve burnt through hours for a month, you may feel forced to either go over hours or wait until another month to further implement your strategy for a client. Waiting to implement a new tactic can then cost the client in terms of delayed results.

Flat Fee

A flat fee model helps to balance the pros and cons of both the percentage of spend and hourly rate models. A client pays a single pre-determined fee per month for management, while the actual level of work on the agency’s end may reasonably vary from month to month.

This type of model, common among agencies that sell low-budget services, can help to alleviate concerns over a percentage of spend or set number of hours properly covering the amount of work. You can set tiers with flat fees (for instance, starting with a minimum of $500/month for any accounts spending up to $2,000 monthly).

The downside though is that this fee can prove inflexible without proper safeguards. For instance, without some sort of tier in place to scale fees higher for higher spend, an agency can lose money for a rapidly increased budget. Conversely, if an account reduces spend for any reason, the client doesn’t benefit from reduced management fees.

Profit-Based Billing

Profit-based billing requires payment only when the client sees a concrete return on investment from a PPC campaign. This payment could be a percentage of ROI that came directly from ads or a tiered system of fees based on the level of return seen.

This system obviously benefits the client in that they don’t have to pay unless a campaign is actually working for them. In turn, the agency has an urgent motivation to make a campaign successful in order to profit more. In any of the other cases, an agency would receive the same fee whether a campaign has a 2x or 10x return on investment. Within a system of profit-based billing, the agency would make significantly more from a 10x return.

However, this system can also prove detrimental to both the client and agency. No self-respecting digital agency can (or should) guarantee positive results from every campaign. While you can promise skill and expertise, you can’t promise that ads will result in new paying customers.

Most importantly, the reality of the selling process lies in much more than just the agency’s ad management. The customer experience ranges from the search to the experience of landing on the website, the process of filling out a form or completing a shopping cart purchase or to a conversation with sales staff and ultimately, the company’s backend fulfillment process. Even brand reputation outside of the web can harm or help the ability to drive business. While an agency is hired to drive qualified leads, at the end of the day, the client must close deals and provide superior customer service.

Attribution also gets tricky: how do you truly denote exactly how much revenue came from online advertising? Do you attribute only leads where the first or last click before converting came from an ad? Do you include leads where a salesperson already had a relationship with a person, who later signed up for a service after clicking a display ad? While these are questions anyone running digital campaigns should ask when planning out reporting, they become ever more important when the agency’s reimbursement hinges directly on the answer.

Conclusion

Each of these billing systems has its pros and cons, and there is certainly no perfect go-to solution for every agency. Agency decision makers should take serious time to think through the risks and benefits of each model. You may end up developing a hybrid model of these approaches: a flat base fee added to a percentage of spend, a flat fee that ultimately translates into hours, or the use of different methods of billing for clients of different sizes or in different verticals. The realities of billing are similar to those of reporting: how it’s done may change based on the client’s needs, business goals and services engaged. While billing processes and models need to have some consistency for a business to function, they must also be flexible enough to adjust to changing circumstances and realities.

What agency billing model do you prefer, and why? Let us know in the comments!

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