Archive for February, 2010
Economics of PPC Pricing: Why Profit Sharing is the Future
Posted by Alan Mitchell in Techniques on February 23rd, 2010
In this third post in the Economics of PPC Pricing series, we consider the profit sharing model (you might also like to refer back to the previous Economics of PPC pricing posts on the markup model and the cost-per-sale model). By looking at the cost and revenue structures for both client and PPC agency, we discover that under the profit sharing model client and agency motivations are perfectly aligned, making profit sharing a highly efficient method of PPC compensation.
Although we infer that profit sharing is sound from an economic sense, we find it does have problems of its own in terms of implementation and conversion attribution, and conclude that profit sharing should only be considered once a strong and tested relationship has already been established between client and agency.
So let’s get started.
Economics of PPC Pricing: Why Performance Deals Often Fail
Posted by Alan Mitchell in Techniques on February 11th, 2010
For a business looking to hire a pay per click (PPC) agency, cost-per-sale (CPS) performance models are great. The business pays the agency a set price for each sale, so fees are entirely based on the agency’s performance.
From a client’s point of view, this is great. There is little risk – agency fees are only payable once sales come in. Guaranteed profit!
From an agency’s point of view, it’s also great. Each extra sale is extra revenue, so an agency which is confident of its abilities to deliver value from paid search is rewarded heavily (and fairly) for their efforts. Performance-related pay creates an incentive for agencies to invest their best resources and expertise into making PPC campaigns a success for their client.
Researching cheaper and high-converting long-tail keywords, restructuring ad groups to improve relevancy and regularly carrying out landing page testing to increase conversion rate become all the more worthwhile when there’s a monetary incentive. If an agency only gets paid when they deliver sales, it is worth their time and effort to deliver sales.
Sounds too good to be true. Client risk is minimal. Agencies which perform are rewarded. Agencies which don’t perform…well they are forced to perform if they are to stay in business.
So you’ve decided you want to give performance pricing a go. But how exactly would a performance deal work? And how should you go about creating one for your PPC agency?
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