Your Marketing Agency is Probably Charging You Wrong
Don’t take that as an attack. There is every possibility that your working relationship with your marketing agency was arrived at after carefully reviewing all possible options, and careful negotiation of all terms.
However, that isn’t usually the way it works. More commonly, whether a client approaches an agency or vice versa, the agency eventually quotes a pricing scheme, and negotiations begin about whether that number should be lower or not. No one regularly addresses whether an entirely different agency pricing model is more appropriate. The fact is that a different pricing model would probably be better – for both of you.
Charging by percentage of spend is a fundamentally flawed model
Now, I’m not a marketing historian (if that is even a thing). I don’t know when this model became the industry standard, but it was certainly generations ago, and probably dates from the dim-and-misty when third party marketing and advertising agencies were first invented. That would be some time after the invention of movable type, but before the original Bewitched (Darren worked for an advertising agency.)
But traditions become traditions because ‘that’s just the way we do things here’. Traditional agency pricing models hang on well past their useful lifetimes because institutions fear change. Until something becomes actively and noticeably unprofitable, the tradition holds.
Well, I say the percentage of spend model is outdated, and is already being replaced by newer, more efficient models. Let me prove that case.
Not every campaign with the same budget takes the same time to manage
This strikes at the core assumption of the model that £50,000 worth of campaign costs translates into, say, £5,000 worth of work for the agency, at a reasonable profit margin. And most agencies will price it at somewhere between 10-15% of spend.
It seems blazingly obvious, but not all campaigns are the same. A single product £50,000 campaign in one country is very different from a £50,000 campaign for 10 products across 8 countries and 6 different languages. So why would a blanket percentage model work? In short, it doesn’t!
Wrong pricing models encourage wrong behaviour, and we often save clients 30%+
Now, if you like to see the best in people, you might say ‘well, the agency has every reason to be fair, and will surely set that percentage so that, if they lose out a little on labour-heavy campaigns they will make it up in others, and the total cost to me will eventually even out.
Oh, you sweet summer child…
But really, even if you assume the agency is too professional to fleece you, this model incentivises pitching campaigns that are cheaper for the agency to deliver. If they know you are going to spend that £50,000, and they are going to see a fixed percentage of that, their profitability is higher if they pitch you cheaper or less labour intensive options, even if these aren’t the options which will give you the best return.
If the agency, after getting into the weeds of a campaign can see that 40% of the budget is wasted, will they recommend that you cut it and reinvest it in another channel? Will they make that recommendation, knowing that it will cost them 40% of their fee? We all know that chances are that they won’t…
They make a higher profit and you… you get a less effective campaign.
An agency pricing model should focus on work delivered, and ultimately on results
Somebody Digital doesn’t work that way. We put your actual needs first, and focus on delivering results. As a result, we are often able to repurpose the 30% or more of a client’s spend which was devoted to keywords that simply weren’t converting. In one case, that wasted percentage was closer to 80%. There should always be an element of ‘waste’ in any campaign – if there isn’t then the agency isn’t trying hard enough. When you test new tactics and approaches sometimes it works and sometimes it doesn’t – that is why you test. But 40% is way too high and 80% is obviously ridiculous.
The simple fact is that we don’t have a single, universal pricing scheme for every campaign. We base our prices on the time, materials and overhead costs of the work we’ll be doing for you, and we charge accordingly. This gives us tremendous freedom to pitch exactly the campaigns we feel you need to have the best results.
…and most importantly, you really do see those results!