If you’ve ever looked at purchasing a PPC (Pay Per Click) management service such as Google Adwords management then you have most likely been offered this sort of payment model.
The agency tells you that the way they get compensated for running and managing your ad campaigns is by charging you 8-20% of the total ad spend each month as a service fee. From first blush, this compensation model looks great and makes sense. The more budget and responsibility they have to manage, the more the compensation should be.
As this model can be a great way to price for services, it also has a huge flaw you just can’t ignore.
Conflict of Interest
The agency is incentivized to spend more of your budget each month.
The more they spend, the more they get paid.
Sure, do you tell them what your monthly budget is so you can have a limit on what can be spent each month…yes. Regardless, it still has its problems.
Below I will discuss the different biases you can run into.
Forced Marketing Budget Spend
Your agency may not need to spend your whole budget each month to get you the best results. They may have a hard time spending your budget each month and end up adding unrelated keywords to your ad campaigns to drive up the number of clicks.
False Budget Increase Recommendations
They may tell you that you are missing out on a lot of opportunities with your smaller budget size and that you need to increase it… even though they know that’s not the case.
Biased Allocation of Budget
This issue gets even more dicey when the same agency that is getting compensated on a percentage of ad spend model is also running the rest of your marketing services. They could end up pushing you towards the services they offer that get them, the agency, a higher ROI, versus pushing you towards the services that will actually help your business best.
For example, If they got paid a flat fee to manage Facebook Ads and got paid a percentage of ad spend to manage Adwords then they would easily be incentivized to put more money into Adwords vs Facebook.
Honest Agencies are not Safe
Even if an agency is honest, this payment structure still has problems. Regardless of how truthful they may be, they subconsciously will start leaning towards the model that makes them more money and they will justify it in their head.
It’s always important to look at the payment model you have setup with your agency and see if there are any areas with conflict of interest. Each situation is unique so it’s important to look at your situation independently and ask yourself this one powerful question.
“Does my marketing agency have any financial benefits to perform or advise me in any way that is at the detriment of my business?”
Remember when answering this question, it’s not about what you think they would do but what you know they could.
If you need an audit of your current marketing agency relationship then reach out to us at www.aosaudit.com. We can take a look at your current agency payment model, find the flaws and propose changes to improve it.