This post has been updated with new links and fresh content.
Original Publication Date: July 30, 2018
There are quite a few different PPC agency pricing models available for the digital market. And when it comes right down to it, almost every agency does it a little differently.
As a PPC agency, it’s important to know what to say when a potential client asks “How much is this going to cost me, and why?” And as a business looking to hire a PPC agency, it’s equally important that you know what to look for in their answer.
There are benefits and drawbacks to each type of PPC agency pricing model that can affect your decision to sign with a third-party partner or not. And agencies themselves have to navigate a lot of factors before deciding which pricing model to run with.
In this post, I’ll cover the most popular PPC agency pricing models, how they work, and the pros and cons of each. This way, the next time you’re in the market for an agency, you know exactly what to look for.
Start With Your Goals And Your Values
Finding an agency with the right pricing model for you depends on what your specific goals are. What exactly do you deem to be the most valuable aspect of your growth?
The pain points your company is suffering from can help you narrow your search for a PPC agency or partner.
Maybe you don’t have the time to manage your own paid campaigns. You’d like to find an agency to run Google Ads successfully for you.
Maybe you’re new to the game, and need some expert guidance to get started.
There are PPC agencies that can do each (and all) of these things, and every one of them will also have its own specific pricing model. But it’s important to identify what your expectations are for an agency first, so you know who to look for and what price range is reasonable.
In this post, we’ll cover five PPC agency pricing models and the pros and cons of each:
- Charging Hourly
- Charging By Percentage Of Ad Spend
- Management Fee + Percentage Of Ad Spend
- Performance Based Pricing
- Milestone Based Pricing
Keep in mind that choosing the best PPC agency pricing model for your business or agency will require a personal touch and and a healthy dose of self-assessment.
1) Charging Hourly
As far as pricing models go, you can’t get more straightforward than hourly pricing. You and the agency you sign with agree to a certain amount of hours per month that their PPC managers will dedicate to your account.
It’s a nice place to start, because you know exactly what you’re getting for what you’re paying. And, you can rest easy knowing that your agency is accountable for billable hours, so they can’t just leave you on the back burner.
As I mentioned above, the first obvious pro for charging by the hour is that it’s simple. But that doesn’t mean charging hourly is only for beginners and small-time agencies.
Paying by the hour ensures that your agency is working on your account every week throughout each payment cycle. It can also simplify things on the agency’s side. Tracking hours for each account is as simple as setting up some customizable time-tracking software.
Tools like Harvest are great for this, as you can create different “tasks” for you to track time for. You can create a separate task for each of the accounts you’re managing to ensure you’re putting in the proper hours for your clients.
Keeping your PPC agency pricing model at an hourly rate also helps keep your campaigns under control. With most PPC endeavors, as your campaigns change and adapt and grow, your ad spend and budget will need to follow suit.
Keeping the PPC agency you hire controlled within a set number of hours can help stop your campaigns from getting ahead of you.
This isn’t to say that your agency shouldn’t still work to expand your paid search presence. But it should keep you from getting blindsided by some mammoth invoices you weren’t prepared for.
There are two major problems with hourly PPC agency pricing.
And yes, they may be a bit cynical. But when it comes to your budget and the growth of your business, who can blame you for using a little scrutiny in your decision making?
The first is the classic quality over quantity debate.
The sad fact of the matter is that more hours doesn’t necessarily mean better work or improved results. As the great Vince Lombardi once said:
“Practice doesn’t make perfect. Only ‘perfect practice’ makes perfect.”
Depending on the scope of your PPC agency’s responsibilities, their hours can get spread thin pretty quickly. Especially if you’re dealing with a PPC and CRO agency that is designing and optimizing landing pages, a lot of hours can go into the design without even touching your account.
The time investment is worth it if the new variants increase performance. But as any experienced split-tester will tell you, sometimes the original outperforms the variation, which can leave you in a bit of a hole in terms of paying for wasted hours.
The second major downside of hourly pricing models is that they discourage speedy optimization. It makes more sense for an agency to take their time on routine projects if they’re getting paid by the hour to do so.
Depending on the scope of your PPC accounts, hourly pricing is a short-term solution that may or may not be right for you.
2) Charging By Percentage Of Ad Spend
Another one of the most popular PPC agency pricing models is to charge based on a percentage of ad spend. Most agencies fall within a standard percentage range in this model.
Some charge only 10% of ad spend while others shoot for 15%-20% of ad spend.
But as a general rule, these pricing models make the agency’s payment dependent on your business’s actual ad spend budget. Which can be a good thing and a bad thing. So let’s take a look.
One of this model’s biggest pros is that you can see how the growth of your account will scale your spending.
If your agency is transparent with you when you first sign on, you should be shown some different pricing “tiers” for their clientele.
This way you can see any increased expenses and ad spend coming and prepare accordingly.
Unlike certain flat rate agencies (which I’ll discuss later), you don’t have to re-negotiate your monthly fees based on the growth of your account. If you start to see success from your PPC campaigns and decide to increase your ad spend from $3K to $5K you can expect your agency fee to increase from $3000 to $5000.
Simple, reliable, and based on growth.
Now, just because it’s “simple, reliable, and based on growth” doesn’t mean the percentage of ad spend model is without flaws.
While many agencies trust the percentage of ad spend pricing models, there are a few situations that can make for some sticky situations with clients.
For example, charging based on a percentage of ad spend means that the agency’s most direct path to making more money is increasing your monthly PPC budget. They aren’t going to be as concerned with the ROI or ROAS of your campaigns as they are with the total spend.
This can mean a lot of wasteful budget burn on your part if you aren’t careful.
Here’s another hypothetical. If your agency is managing and optimizing your account well and the ad budget is paused or halted for any length of time, the agency’s fee becomes an issue. After all, they didn’t do anything wrong. Shouldn’t they still be paid their fee?
While these drawbacks to the percentage of ad spend are serious, they’re not my number one problem with this payment model.
What’s Your Number One Problem With This Payment Model?
Thanks for asking. 😉
The biggest issue with percentage of ad spend is that the agency runs into a bit of a paradox of motivation for improving your campaign’s performance.
Let’s say a PPC agency is able to dramatically decrease your cost-per-conversion to the point where you can now generate the same conversion volume from half the ad spend. Now you can cut your ad spend in half, and thus make the same amount of money while paying less in ad spend and cutting your agency fee in half.
So as a reward for amazing performance, the agency gets less money.
The same issue can occur with small businesses that have don’t have enough to spend on ads. If the agency’s share is too small to justify working on the campaign, you’re likely to have some friction. For this reason, the pure percentage of ad spend model matches best with larger companies and massive budgets.
3) Management Fee + Percentage Of Ad Spend
This PPC agency pricing model is essentially the same as the one above. The main difference is the inclusion of what agencies call a “minimum” monthly payment.
But you can consider this the same as their monthly retainer and anything additional being attributed to percentage of ad spend.
Quick Side Note:
There are some agencies that charge a flat rate or singular management retainer fee. This means that you’re paying the same amount no matter the hours spent or performance from month to month.
This can be good if your performance is increasing. However, if you’re looking to grow your account, you may have to increase your monthly fee to broaden the services that the agency offers you.
Just something to keep in mind.
The pros of this PPC agency pricing model are basically the same as the ones for the above pricing model. (Probably because they’re essentially the same.) However, this pricing model carries with it one big whopping “pro” that the previous one does not:
It gives your PPC agency room to breathe and focus on the actual ROI of the campaigns.
Because the agency can rely on a minimum monthly payment regardless of how much they lower your ad spend, they can really focus on optimization. And, as a truly experienced PPC marketer would tell you, optimization isn’t always about more. Sometimes, it’s about less. (Less irrelevant traffic, lower cost-per-click, lower cost-per-conversion, etc.)
This way the agency doesn’t have to focus their time and energy on maintaining a strategy that emphasizes high ad spend.
Instead, they can focus on any channel or strategy that generates the most efficient conversions at the lowest price to maximize your performance while still collecting their fee.
The big drawback to adding a management fee to a percentage of ad spend pricing model is that it opens you up to an even bigger invoice if you aren’t careful.
You must take the time to set the right goals. Emphasize to your agency that you want to improve the ROI and ROAS of your campaigns over your traffic volume, etc., or you could end up being taken for a ride.
If you never clarify during the onboarding process, then don’t act shocked when they suggest increasing your ad spend to boost conversions. They’re still trying to make money too, so it’s vital that you emphasize the importance of fiscal efficiency in your growth strategies from the get go.
This payment model really relies on the communication of goals between agency and client.
Any successful business relationship does, after all.
4) Performance Based Pricing (Charge By Lead)
Performance based PPC agency pricing models come in all shapes and sizes. But, at their core, what they all share in common is that they function on a “charge per lead” framework.
Some agencies that work with this performance based model may still charge a monthly agency fee, some may not. Some agencies will even shoulder the ad spend budget themselves and make the pricing work on their end by increasing the dollar amount they charge per lead.
But, what’s important to know about this PPC agency pricing model is that you’re paying directly for the results. You’re cutting past the means and going straight to the ends with money in hand.
This is also where certain strategies like affiliate marketing and other channels can come into play. When you aren’t concerned with where your leads are coming from, you allow your agency to widen their scope of lead generation tactics.
The first pro for performance based pricing is obvious: it encourages great performance. It’s easy to stay focused on your goals when you only have a singular KPI as an agency: monthly lead volume.
This makes increasing their monthly fee a quick and easy decision, as you’ve already agreed on set terms. Other pricing models require negotiating after each stage of growth.
This one, on the other hand, has growth built into the very logic of the pricing model, which is quite nice. And it makes sense. Employees’ salaries tend to increase with their performance, so why shouldn’t your agency’s?
If they can consistently increase your lead volume by 10% a month without increasing your spend, I don’t see a reason why they shouldn’t make more money while you make more money.
The con for charging per lead is much the same as the con for charging per hour. You, the client, can’t control or affect the quality of what your agency gives you.
If you’re paying your agency solely on the number of leads they generate, they can employ certain strategies to fill your pipeline to the brim. But that doesn’t necessarily mean that the leads they send you will be quality or qualified leads at all.
This can be a big problem for two reasons:
- You’re throwing money down the drain paying your agency for crap leads. That’s an obvious waste of money.
- Sending your sales team chasing after these poor quality leads wastes even more money, time, and resources.
If things get bad enough, you could even begin to question your sales process before realizing that it’s your lead quality that has compromised your marketing strategy. Payoffs with these types of payment structures tends to be rather low unless you happen to get a ton of super high quality leads from your agency.
5) Milestone Based Pricing (Increase With Goals Hit)
Milestone based pricing models, to differentiate them from performance based pricing models, aren’t focused solely on lead volume.
Agencies that use this pricing model establish custom goals for each of their clients during the onboarding process. Whether these goals are to generate more leads, lower cost-per-conversion, increase click-through-rate, etc, is up for grabs.
Whatever goals the agency and the client agree on, and whatever timeframe they set, is what determines the success of the agency. If they hit all their marks in the approved time frame, then their payments increase. If they don’t… well, better luck next time.
The pros of milestone based pricing models are that they closely align the goals of the client with those of the agency. Unlike percentage of ad spend models where decreasing CPC can actually hurt the agency’s margin, milestones help keep the agency focused on genuine growth and optimization of the account.
By setting easily tracked goals and setting clear parameters for wins and losses you make it very clear when the agency has missed, met, or exceeded your expectations. This way it makes it easier for them to ask for an increase in their fee.
Instead of tying your agency’s pricing to vanity metrics like lead volume or ad spend, milestone marketing links it directly to whichever KPI you agree on at the onset of your relationship.
So if you, as a PPC agency, are able to save a client $10K/month in ad spend, you can come to the next monthly update requesting a $1K/month increase in your fees.
You can do so with some confidence in your voice knowing that you’re still saving them an insane amount of cash. And, more importantly, you can do so knowing that you’ve earned your fair share as well.
The cons for milestone based pricing models is that the onboarding process can be time-consuming and difficult.
This is a vital step in the process to make sure both client and agency are on the same page in regards to goals and tracking. So taking your time is important. However, it can also get quite complicated and frustrating as well.
Complex questions can arise during the onboarding process. How will you weigh the success of different aspects of your campaign? For example, should you weigh conversions and leads from different channels differently?
Should the ad spend of a specific campaign or channel be considered when calculating a specific milestone being “achieved” or not?
Are these milestones all interconnected?
Or is there a hierarchy that prioritizes which are the most important?
I can go on…
It All Comes Back To Your Goals And Your Values
It’s vital that your business and agency communicate on the metrics that need to be tracked. The true success of a campaign can’t be determined without them.
Not only that, it’s also key to establish clear numbers for how much an agency’s fee will increase after hitting goals. You don’t want to be doubling your monthly retainer three months straight, after all.
Seasonal trends in shopping campaigns and other performance discrepancies that are out of the agency’s control can also affect this model. There will be months or quarters where client accounts simply can’t hit its marks.
These months can be hard for agencies using this pricing model, simple as that. If they can weather the storm, however, they just might make it through the other side to see some more milestones hit and some valuable testing insights.
While milestone pricing models are the most ideal when things are going well, they may just be your worst option when things aren’t going your way. Clients can blame agencies for missed milestones and agencies can blame clients for slow turnaround and feedback which caused those missed milestones.
When payment is dependent on subjective performance, client-agency relationships can be stressed, bent, and even broken. So keep an eye out for office drama.
Also, regardless of the pros and cons, milestone based pricing is dependent on agency-client communication. As your business grows, your goals will change, and conversations about new strategies, new goals, new metrics, and new percentages will be necessary.
Which PPC Agency Pricing Model Is Right For You?
These are just the most popular PPC agency pricing models that we’ve seen thus far. As agencies attempt to customize their offers to a continuously changing clientele base, pricing models will change accordingly.
Always remember that true success in the PPC game isn’t going to come from how much you spend. How well you spend it is much more important. So, when you’re deciding to sign with an agency or not, make sure you take the time to consider the needs of your business.
Whatever pricing model the agency you choose uses should align with your very specific goals. The more you connect your agency’s success to the growth of your business, the happier both of you will be.