By Jeff Campbell, VP, Search Account Director
The Q4 holiday season is approaching and with it typically comes new and increased marketing/media budgets. With increased spend, agency scopes of work need to be reviewed, teams potentially expanded, and contracts renegotiated heading into the new year.
I’ve come across dozens of different agency fee models in my day, but here is a quick reference guide to the most popular:
% of Media: This is, by far, the industry standard. Clients pay media costs plus a standard mark-up on those fees (typically 10-15%).
- Pros: Being the most popular model out there, it’s easy to compare fees of different agencies competing for a client's business (granted not all talent is created equal). It’s simple and straightforward and there are no surprises when an invoice arrives. This model is agile enough to cope with the ebbs and flows of very seasonal industries or media budgets that change monthly/quarterly.
- Cons: As spend/fees ebb and flow, it’s very hard for the agency to pulse the staff to meet demands. The main focus for the agency and client becomes budgeting versus performance of the media and there is a danger for quality of work to suffer. Personnel planning also becomes difficult for the agency if the annual budget isn’t locked in to staff against. Additionally, with no media spend for SEO, those services are typically forced into a second model.
Retainer/Dedicated Staff: This is the newest of the models that has arisen with marketers spending 8+ digits in media. Clients have a set and dedicated staff to work on their business. The linchpin in this model is a firm scope of work that details roles & responsibilities.
- Pros: Dedicated resources that learn the insides and out of your business, understand Y/Y trends and more. This model is easy for clients to audit (“who are my X team members and what are their individual roles?”). This also allows SEO resources to be included. The stable retainer is easy for both partners to plan for. A solid scope of work defines needs and duties of both parties.
- Cons: That detailed scope of work can really limit “outside the box/scope” thinking; times change in the digital world, it’s not uncommon for new service opportunities to pop up every few months. Dedicated employees are limiting their experience by focusing on a single client and it can be difficult for them to identify and apply strategies that have worked across other categories (a big reason for using an agency in the first place). Also, turnover in our industry is common – this model can test your “bench strength”. With a new client, you can not predict how demanding they or the campaign will be – it’s best to move to this model over time, IMHO. When a client is looking for cost savings, it’s easy to reduce the team size and therefore fees…but didn’t that just put the remaining team at a disadvantage?
CPA/Performance: Clients pay only when the agency performs to set goals. Payment can be based on % of revenue driven, a bounty for each lead, etc. This model seems to have been around the longest and is still prevalent in the affiliate world.
- Pros: Well, you pay only when someone performs so the risk is very low for a marketer. An agency also has done the math to show exactly the metrics they need to hit to breakeven – and further, the rewards high quality work will bring. It’s a win-win relationship. With a very broad scope typically in place, this model allows agencies to extend into other advertising mediums if they are performing.
- Cons: Highly efficient campaigns are easy to have…but hard to grow. Keywords that don’t perform immediately (think high funnel) will be ignored since they don’t produce results. Brand keywords will carry the torch of success. Will your campaigns (and business) scale under this model when costs and competition are increasing? Most importantly, an agency is handcuffed to the client’s site content, cart performance, product availability, market pricing and more…all holding back success and potentially causing some conflict between “partners” when one is investing resources and the other isn’t.
Beyond these three models, Hourly & CPC fee models exist but with their short-term and non-strategic nature, they have mostly disappeared. Finally the “hybrid” models exist which combine different aspects of the mentioned models and have proved quite successful. What works for some may not work for others – hopefully this guide can help you through the process.
Happy negotiation season!