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The Pros And Cons Of Different
PPC Agency Pricing Models

by Sean under PPC

    There are quite a few different PPC agency pricing models out there on 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 you know what to say when a potential client asks you “How much is this going to cost me, and why?” And as a business looking to hire a PPC agency, it’s equally important you know what to look for in their answer.

    There are certain pros and cons to each type of PPC agency pricing model that can affect your decision to sign with an agency or not. And there’s quite a lot of factors that go into the agency’s decision to choose a particular pricing model.

    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 deciding on 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 is going to depend on what your specific goals are. What exactly do you deem to be the most valuable aspect of your growth?

    Depending on the pain point your company is suffering from, you may be looking for a certain type of PPC agency/partner.

    image1

    Beaker has the right mentality for picking an agency
    image source

     

    Perhaps you simply don’t have the time to manage your own paid campaigns, in which case you’re looking for an agency to maintain your AdWords account.

    Or, maybe you’re new to the game and require some expert guidance in getting started.

    There’s even a likely chance that you’ve been running your own PPC campaigns thus far with success, and simply want to take your performance to the next level.

    Each type of agency will also have its own type of PPC pricing model. And it’s important you can identify what exactly is the most valuable quality you’re looking for in an agency so you know who to look for and what range of price to expect.

    For the sake of this post, I’m going to cover five different types of PPC agency pricing models:

    1. Charging Hourly
    2. Charging On Percentage Of Ad Spend
    3. Management Fee + Percentage Of Ad Spend
    4. Performance Based Pricing
    5. Milestone Based Pricing

    I’ll also cover the pros and cons of each. But keep in mind that choosing which is best for your business or agency is going to require a personal touch and identifying what you value most.

     

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    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 being held accountable for billable hours, so they can’t just leave you on the back burner.

    Pros

    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 also makes things easier on the agency’s side as tracking the hours put into 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.

    image2

    You can even integrate Harvest with report tools like Klipfolio – image source

     

    Keeping your PPC agency pricing model at an hourly rate also helps keep your campaigns under control. As is the case with most PPC endeavors, as your campaigns change and adapt and grow, so must the range of your ad spend and budget, etc.

    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 be working to grow and expand your paid search presence. But it should keep you from getting blindsided by some mammoth invoices you weren’t prepared for.

    Cons

    There are two major cons that come to mind when speaking about hourly pricing.

    They may be a bit cynical. But when it comes to your budget and the profitable growth of your business, who can blame you for using a little scrutiny in your decision making?

    image3

    Join us on the side of suspicion… – image source

     

    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 how wide 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 who is designing and optimizing landing pages, a lot of hours can go into the design without even touching your account.

    This 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 con for hourly pricing models is that it discourages speedy optimization. It simply 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 help you need with your PPC accounts, hourly pricing is a short-term solution that may or may not be right for you.

    Percentage Of Ad Spend

    Another one of the most popular PPC agency pricing models is to charge based on a percentage of ad spend. There’s a bit of a range in terms of what percentage agencies charge.

    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.

    Pros

    One of the biggest pros for partnering with an agency that functions on a percentage of ad spend is that you can see how the growth of your account will scale your spending as well.

    If your agency is transparent with you when you first sign on, you should be shown some different pricing “tiers” for their clientele.

    image4

    This way you know what growth will look like in terms of price – image source

     

    This way you can see any increased expenses coming as you increase you ad spend and you can 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.

    Cons

    Now, just because it’s “simple, reliable, and based on growth” doesn’t mean percentage of ad spend is without flaw.

    While many agencies trust the percentage of ad spend pricing models, there are a few hypotheticals that can make for some sticky situations with clients.

    For example, charging based on a percentage of ad spend means that, if the agency wants to make more money, their primary goal is going to be to increase 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.

    On the other hand, if the agency is managing and optimizing your account fine and – for whatever reason – the ad budget is accidentally paused or halted for part of a pay period, the question of the agency’s payment now 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.

    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.

    image5

    Rough, I know… – image source

     

    The same issue can arise simply from a PPC agency that uses this payment model partnering with a small business with too little ad spend. The problem of too small of an agency cut is always going to linger. For this reason, the pure percentage of ad spend model is best matched with larger companies with massive budgets.

    Management Fee + Percentage Of Ad Spend

    This PPC agency pricing model is essentially the same as the one above, with the inclusion of what agencies would consider 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 Note:

    There are some agencies that charge only a flat rate or singular management retainer fee. This means that you’re paying the same fee 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, etc, you may find yourself having to increase your monthly fee to broaden the services that the agency offers you.

    Just something to keep in mind.

    Now let’s get back to the pricing model pros and cons for agencies that charge a management fee + a percentage of ad spend.

    Pros 

    The pros of this PPC agency pricing model are of course the same as the ones for the above pricing model (being that 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 breath 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).

    image6

    You’re on the right track, Keanu – image source

     

    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 is generating you the most efficient conversions at the lowest price to maximize your performance while still collecting their fee.

    Cons

    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.

    If you don’t take the time to set the right goals and emphasize to your agency that you want to improve the ROI and ROAS of your campaigns over your traffic volume, etc, 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.

     

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    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.

    image7

    Pay Per Lead is still a broad category, though… – image source

     

    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 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 tactics for lead generation.

    Pros

    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 considering that internal 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 be making more money as you make more money.

    Cons

    The con for charging per lead is much the same as the con for charging per hour. And that’s that you, as the client, aren’t in control of the quality of what your agency is giving 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 those leads they send you are going to be quality or qualified leads at all.

    This can be a big problem for two reasons:

    1. First off, you’re throwing money down the drain paying your agency for crap leads. That’s an obvious waste of money.
    2. Secondly, and possibly worse, you’re continuing to waste more money, time, and resources, by chasing down these poor quality leads with your sales team.

    If things get bad enough, you could even begin to question the efficacy of your sales process without even knowing that it’s your lead quality that’s already compromised your entire marketing strategy. Pay off with these types of payment strutures tends to be rather low unless you happen to get a ton of super high quality leads from your agency.

    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.

    Pros

    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.

    Cons

    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 in regards to how you will 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’s vital that your business and agency communicate on the metrics that need to be tracked in order to determine the success of a campaign. 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.

    There’s also the issue of seasonal trends in shopping campaigns and other discrepancies in performance that can arise that are out of the agency’s control. There’s going to be months or quarters where a certain client’s account simply can’t hit its marks.

    These months are going to be harder for agencies who use this pricing model, simple as that. But, if they can weather the storm 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.

    image8

    Ah, I see we’ve ascertained who’s responsible… – image source

     

    Keep in mind that, regardless of the pros and cons, the milestone based pricing models is dependent on agency-client communication. As your business grows, your goals will change, and thus new conversations will need to be had regarding new strategies to try, new goals to hit, new metrics to track, and new percentages to pay.

    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, their pricing models will adjust accordingly.

    Always remember that true success in the PPC game isn’t going to come from how much you spend, but how well you spend it. 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.

    With your needs in mind, make sure that whatever pricing model your agency uses emphasizes the same goals that you want to achieve. The better you align your agency’s success with the successful growth of your business, the happier both of you will be.

Klientboost Blog Author Sean Thomas Martin Junior III

Sean Thomas Martin Junior III

Director of Content

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