Paying for clicks

Sep 01, 2005 9:30 PM  By

Hundreds of companies have sprung up in recent years offering paid search engine marketing (SEM) management services, and with them, a multitude of pricing plans. On the surface, these plans all seem reasonable. But when you analyze each in detail and look at how pricing can affect such things as copy and service, you quickly start to see differences.

Any multichannel merchant spending, or projecting to spend, $15,000 a month or more on paid search needs a robust SEM bid management system, trained experts to handle keyword strategies and daily analysis, and a thorough knowledge of how to interact with the engines to make your keyword buys most efficient. Most marketers at this monthly spending level are outsourcing this service, as the technology, staff and infrastructure requirements are prohibitive to do it inhouse except for the largest of retailers.

There are five primary means of compensating your paid search marketing vendor (for the purposes of this article, we will address only paid search, not search engine optimization). Those methods are:

  • per click

    A fee of several pennies or more is added to the cost of each click. So if a click on Google costs $0.25, your real cost may be $0.30.

  • flat fee monthly retainer

    The SEM vendor charges a monthly retainer or service fee that covers all the services it provides.

  • flat click fee

    The advertiser determines it will pay a set fee per click, and the SEM vendor will profit from arbitraging the cost per click with the search media providers.

  • cost per action

    An advertiser will pay a set amount for specific action delivered, and the SEM vendor is compensated only when such actions occur.

  • percentage of ad spend

    In this typical media buying commission process, the agency will add a fee based on an agreed-upon percentage of the media spend.

Some companies have additional fees, such as for set-up, copywriting, and other related services. Some charge using a combination of methods.

PER-CLICK COMPENSATION

On the surface, $0.05 tacked onto $0.25 seems pretty reasonable. That’s 20%. But it may not always be 20%. It may be $0.05 on a $0.50 click, or 10%. Or it may be $0.05 on a $0.15 click, or 33%. The lower the actual click cost, the higher the percentage the fee becomes.

But there’s a much bigger issue lurking in the shadows with this compensation method. When a vendor is compensated on each click, he has every incentive to generate as many clicks as possible. He may do this by bidding on keywords that don’t convert well or by writing very broad copy that encourages an impulsive click.

Therein lies the problem. If the compensation of an SEM vendor is tied only to clicks and not to conversions, there is a potential conflict. That’s why you should ensure that your SEM expense is tied to conversions, return on ad spend (ROAS), or some similar metric. The last thing you want is compensation tied to clicks, many of which won’t convert.

MONTHLY RETAINER

This method enables advertisers to know their SEM outsourcing expense in advance and keep it fixed on a monthly basis. And because most SEM vendors need to generate about $2,500 in fees a month to generate a profit, this pricing strategy provides the vendor with a lot of security. Both sides win.

Sounds great, right? Not really.

Every advertiser must contemplate what may happen to its marketing budget during the course of its contracted arrangement with the SEM vendor. For example, look at what happens when your budget shrinks and you have contracted for a $4,000 per month fee:

Monthly ad spend $4,000 as % of ad spend
$30,000 13%
$20,000 20%
$15,000 27%
$10,000 40%
$5,000 80%

In this example, your fixed cost will be way too high to economically justify compensating your SEM vendor with a fixed fee. This method also may result in the vendor not having a sense of urgency to make your SEM work. There are plenty of examples out there in which agencies have grown complacent when there is a steady check coming in.

FLAT CLICK FEE

During the past year we have talked with a number of companies that have had an interest in paying a flat fee per click. On the surface, it looks like this provides an advertiser with the security afforded a monthly retainer. Additionally, the vendor has a bit more incentive to find opportunities to increase productivity and earn more money for that attention. Sign me up, many adverstisers say! But here’s a cautionary tale about flat click fees.

A few months back my company, SendTec, approached a prospective client who was working with another SEM vendor for a flat fee of $0.35 per click. The company based this pricing on research conducted through Overture on one keyword, a generic one-word phrase with more than 30 bidders and 1.2 million monthly searches through Overture. During the company’s engagement with the SEM vendor, is was receiving equal traffic levels from Overture, Google, Kanoodle, Search123, Enhance Interactive, and FindWhat. Considering that Overture and Google represent 80%-90% of all searches…things smelled a little fishy. We dug in a little deeper on behalf of the prospective client. Here’s what we found:

  • 67% of the traffic was being generated through clicks on second-tier engines at an average (or should we say minimum bid) cost per click (CPC) of $0.04.

  • 33% of the traffic (Google and Overture) was being generated at $0.12 CPC.

  • The infamous generic one-word phrase that was the driver behind the price quote was bid upon at $0.11 CPC, delivering an average position of 23.

So the advertiser paid $0.35 per click while the SEM vendor’s cost was on average $0.067 per click. This equates to a gross margin of 81%, risk free, for the SEM vendor. It was great business for an agency but a proposition destined to fail for the advertiser.

The moral of this story is caveat emptor when it comes to flat click fees. All clicks are not created equal, and if you choose to go down this path, make sure you monitor closely what price your SEM vendor is bidding; this information is accessible through all the search media providers except Google.

COST PER ACTION

This is another compensation method that looks great in theory. The advertiser pays a set fee for a site visitor to take an explicit action and can set a consistent budget for what its acquisition costs will be. In this scenario, the SEM vendor has to be good at what it does in order to make a profit while providing the wide coverage of keywords an SEM program deserves.

To work under this arrangement, the advertiser needs to be prepared to give up visibility to microlevel analysis of the program. And this is where it can get messy, because under this pricing plan, your SEM vendor has no incentive to bid on words that won’t make it a profit.

If you want to treat your SEM vendor like an affiliate, that’s fine; many are happy to work under these terms. Just limit your expectations, as SEM vendors are encouraged to act like an affiliate if you structure pricing this way. Your organization will get a very steady flow of quality traffic, a satisfying amount of conversion, and a risk-free marketing program. Keep in mind, though, that you may not be taking advantage of the maximum volume potential available.

PERCENT OF AD SPEND

Of all the methods we have mentioned, this is the pricing plan that usually makes the most sense for direct marketers and SEM vendors alike. It keeps costs relatively fixed for the advertiser — in other words, if you commit to a 20% commission on what you’ve budgeted to spend, it remains 20%. But it also focuses the efforts of the vendor on an important return-on- investment objective. The SEM vendor has incentive to make the relationship work and grow conversion volume: If the SEM vendor can reach the objective, the advertiser will no doubt spend more money on SEM, hence enabling the SEM vendor to earn more. In this scenario, everyone wins.

Okay, maybe not everyone wins all the time. There are drawbacks to this approach as well. The SEM vendor is guaranteed a fee regardless of how well its strategies perform, so there’s not much for them to lose outside of future fees when they are fired.

If you consider this pricing plan, make sure you conduct a thorough review of vendors and validate their experience and skill sets. Most important, call their client references to gauge their capabilities, performance record, and service quality. In fact, you should conduct this sort of review regardless of the pricing plan you choose!

“WHAT DO I GET FOR MY FEE?”

One critical question you need to ask your vendor is “How many people-hours do I get for my fee?” There are vendors out there who simply set up all your keywords in a black box and let it run by itself, without much, if any, monitoring by a human. This is commonly referred to as “set it and forget it” SEM, and it can be a very risky proposition.

Paid search is like a game of chess with an infinite number of bidding scenarios. And as IBM proved in the mid-1990s in its historic man vs. machine chess match against world champion Garry Kasparov, machines prove ineffective when faced with infinite scenarios for consideration. (Kasparov won the match 6.5 games to 5.5 games).

Ensure that your vendor provides plenty of human analysis and support, and find out what that means: How many hours per month will you get for your money? Are you getting an experienced and trained analyst who reviews your account on a daily basis, or an inexperienced techie who has no direct response background and was hired to run a computer program and spit out quantitative reports only when you call?

And if you want the proactive sort of human involvement, don’t forget that human resources come with a cost. You may find out down the line that the lowest price provider is the “lowest” because the company isn’t placing people on your account. Run the numbers internally and see for yourself. Rule of thumb: For every $2,000 you pay in fees, expect to receive 20-30 hours of service.


Tim Daly is director of marketing and strategy at SendTec, a St. Petersburg, FL-based direct marketing services provider. Before joining SendTec, Daly held management positions at Office Depot, Hanover Direct, and Genesis Direct.

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