Are SEM Agency Fees Too Low?

You may be short-changing yourself if you underpay your SEM (define) agency. When an agency or other service provider is paid less than the cost of providing the level of service required to excel, bad things are known to happen (even with venture capitalists temporarily footing the bill).

Of course, sometimes a service provider is willing to lose money on your account (or perhaps just the paid search portion). Alternately, it may deliver subpar service without managing expectations or may recommend you do more heavy-lifting production work in-house. In rare cases, the agency may alert you to the fact the nonoptimal service level is commensurate with the fee, and more could be done with a higher fee structure. It’s rare that an agency or service provider chooses to lose money, and few have the intestinal fortitude to tell a client the fee is too low to support the workload required to do the job correctly.

To truly maximize PPC (define) search’s potential value, many businesses should pay media PPC search fee percentages in excess of 25, 50, 75, even 100 percent of spend, instead of 10-20 percent (I’ve seen even lower fees, supposedly for full-service arrangements). This is particularly true for B2B (define), midsized, and smaller niche businesses.

This problem plagues big spenders, too. I recently met with a midlevel manager at a top 20 online merchant whose predecessor had negotiated a vendor down to such a low fee that it was impossible for the vendor to provide the level of work necessary to do PPC search correctly (the merchant’s business seasonality made the task especially daunting). Senior management seemed perplexed as to why service levels were insufficient and campaign performance wasn’t where it could (and should) have been.

Online media, particularly paid search, can get quite complex, especially with large campaigns for which it makes sense to tap some of the targeting and segmentation levers available in Google, Yahoo, and Microsoft’s adCenter. Search engines are torn between making the interfaces more intuitive and providing advanced marketers with the incremental targeting options that make a campaign really hum. Some combination of technology, automation, in-house, and outsourced resources must be applied to paid placement campaigns to ensure the required blocking and tackling (production work) is done along with strategic analysis, planning, and day-to-day campaign management.

Underinvesting in resources required to get everything done at a reasonable pace results in a stagnant, underoptimized campaign. Underinvestment may result in teams working on time-consuming projects with little likelihood of delivering a positive ROI (define). Every year, search marketing budgets and other keyword-targeting options grab a bigger share of both on- and offline media spend. Small in-house teams and some agencies certainly can get some of the work done. If staffed appropriately (assuming trained personnel are available), agencies are happy to make sure appropriate levels of traditional account, strategic, and production resources are available. However, many advertisers (particularly those negotiating advertising agency fee structures across large on- and offline budgets) mistakenly assume it’s OK to beat up their agencies on fees, assuming those agencies will nevertheless gleefully respond to their desire for increased PPC search, narrowcast media, and other labor-intensive ad buys.

Perhaps marketers take a lesson from niche direct mail marketers about the appropriate relative size of fees and media dollars. Consider niche direct mail in B2B or medical equipment marketing, where the cost of renting a highly targeted list may be $20,000, and the creative work to generate and produce a mail piece may be $80,000. Similarly, an ad in a niche yachting or equestrian magazine may be $15,000 per insertion, and a reasonable ad buy of $60,000 may garner production costs of $30,000. Small search spenders in particular have labor-intensive campaigns relative to their size and may need to spend more for SEM services and support than they do on actual paid search clicks.

If the CMO can’t get past the 15 percent media management fee barrier and is fighting to get the fee lowered, you may find yourself in a predicament. For the next several years, there will be plenty of broadcast and high-tonnage media in which the price tag per set-it-and-forget-it media placement is high. But the economics of narrowcast media, including PPC search, more closely resembles direct mail than most marketers comprehend. Like effective direct mail lists, impressions on relevant keywords are in short supply. Just as different mail lists perform best when tuned individually or by group, one simple strategy often doesn’t fit a PPC search campaign. Even with the most streamlined processes and killer technology, a certain amount of production work will always need to be done.

I hope that, over time, SEM agencies and marketers can find a way of getting all the work done.

Now may be the time for an internal discussion about appropriate allocation of PPC search campaign responsibilities and the division of labor given your fee structures. If you don’t see value from your SEM agency given the fees, have a frank discussion with them to determine how to structure a fair partnership that benefits both of you while permitting maximized campaign profitability. You may be unaware of the level of production work required to extract maximum profitability from your campaign.

If adding a couple of percentage points’ worth of media to the in-house staffing budget or paying it to your agency accounts for a double-digit lift in profit, isn’t that money well spent?

Join us for SES Search Engine Marketing Training Workshops on May 6, 2008, at Crowne Plaza Denver in Colorado.

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