Money For What? Search Marketing Payment Models

Session Intro: At one time the model was simple -- agencies got 15%. That's not the case with search engine optimization or paid search advertising. Digital media and measurable ROI spawned a school of new services and nearly as many pricing models, such as retainers, billable hours, pay-for-performance, keyword management fees, percentage of media spend. But with so many options on the table, which pricing model works best?

Comprised of a panel of SEM firm executives, this session will present the various search engine marketing pricing models in use today. Specifically, each panelist will discuss the pros and cons of a specific model -- from both the client and vendor perspective - including why they're effective and the important considerations associated with each.

Chris Elwell, President of Third Door Media is moderating this session and speakers include Ken Jurina, President of Epiar, George Michie, Principal of Search Marketing at Rimm-Kaufman Group and Paul Wilson, Chief Revenue Officer at iProspect.

Ken is up first. He first defines what SEM is -- SEO + paid search + paid inclusion. He then cautions to beware of analytics hole meaning that you should provide proof of your work. Otherwise you are simply tracking rankings and that alone which is not good enough.

Profile who the client is. Are they smaller, mid-size or large. Smaller companies will buy in quicker but will have small budgets. Mid size companies provide some level of stickiness. The large companies may not always have large budgets. There are also many layers that place obstacles to getting stuff actually implemented.

Typical industry pricing models include retainer based, pay for performance, fee for service and hourly consultation. One pitfall on hourly is that you are probably never getting the best reward. Ken's company uses the "fee-for-service" model most often. Campaigns include keyword research and analysis, on-page optimization, inbound link building and reporting/analytics on all these factors.

Ken points out that not all client's needs are the same. Web site audits are a very good way to get your "foot in the door." Bottom line is that differing services may be needed for specific client projects.

Some disadvantages of the fee-for-service model include no residual payment for years of good ROI. Also the constant education and reeducation process. Finally having to adjust deliverables over time. May be helpful breaking pricing into phases rather than a one price for all as it allows clients to "taste the goods."

Ken strongly suggests detailed proposals and solid contracts. They show seriousness and professionalism and lay out what is expected of each party. They define work without necessarily having to provide a guarantee.

In differentiating services, you have to be able to offer a value proposition. Define what your competitive advantages are. Focus on organizational strengths. Most important is to guarantee an exceptional level of service.

Next up is George. He first of all points out that they do paid search only -- no organic search marketing. They wrestled with pricing issues in the beginning. The idea was to charge a fair price where the client feels like they are getting value. Of course there is also the goal of actually making a profit. They wanted to create incentives that would motivate client to "do the right thing." Aslo important was to build a scalable model.

When they started out, they expected to be the highest priced and highest quality service provider in the space but discovered they were actually very low priced. They actually have lost accounts because their pricing was too low.

He then talks a bit why they di not choose a "rev-share" pricing model. First of all there is too much easy money on brand trade search. He also didn't want to dicker with clients over credit allocation or in other words -- who is responsible for what.

They also didn't like straight cost mark-up. On the low end, they did not make any money, they didn't get paid for wasteful spending, and for larger clients, fees become divorced from the cost of providing the service. He warns that if your fee structure gets way out of line with the service that is provided, it may encourage your clients to shop around. For example, client is spending a million a month and you are charging 15% or $150,000/mo.

Their solution was to charge a percentage of ad spend with a minimum monthly fee. Thy also have a maximum monthly fee. This keeps fees in line with service that is provided. Their pricing is as such: 12.5% of ad spend, minimum monthly fee - $3,000/mo.; maximum monthly fee - $12,500/mo.

Benefits of their model is clients are profitable for them, they are able to attract Marquis clients, clients who are "capped" are kept super happy (there is no incentive to waste money), and finally there is stability as no single client determines their bottom line.

Finally, Paul is up to finish the presentation. Paul starts off asking how many people watched the Indy 500 but shows a slide of NASCAR. WTH? Moving on, I believe he is trying to convey that pricing requires a team effort.

He talks about the pay for performance model. Bonus targets, incremental fees and percentages are all aspects of this type of pricing model. The pros of performance pricing is that goals are aligned, and protects against bad performance. Cons - constant monitoring, accurate tracking data, goals may change, challenges measuring SEO and paid media, and finally over and under performance.

In getting started, define conversion metric, define value of conversions, then factor in all costs as service provider, and finally pressure test. In making a performance model work, you need at least 12 months of historical data to look at. From that, establish baselines. You also have to build in a "what if" analysis and adjust metrics accordingly. lace everything in contract form.

The main idea in performance pricing models is to create a relationship that is a win win for both parties.

Q&A:

Here is a recap of "some" (not all) of the questions that were asked and answered.

1. How do you customize pricing for performance based models (question for Paul)?
   
   Look at historical data especially sales cycles. Maybe define benchmarks which is meet, bonuses are paid.
   
   
2. What do you do with clients who cannot meet minimum pricing requirements? Do you send them away?
   
   Ken answers that he investigates what client is doing overall for advertising and many times can uncover waste that will allow them to shift funds to search. He also has been flexible with allowing clients to make payments. If nothing works, they then have a select group of consultants they can hand projects off to. Paul may refer them to educational resources such as SEMPO. Otherwise, hand them off to companies that have lower pricing structures.
   
   
3. Have you considered a tiered type model as opposed to a cap-style model (question for George).
   
   They have used tiered but warns that it is an accounting nightmare.
   
   
4. Does Paul have any input as far as "adjusting" corporate pricing models when they do not align with client goals and/or budgets?
   
   Yes, they do have a discovery process that allows them to customize pricing structure.
   
   
5. How do you adjust incremental pricing after 3 years?
   
   It is challenging because initially you are up against historical data whereas as campaign ages, you are up against yourself.