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Navigating Agency Fees: Flat Fee or Percentage of Ad Spend… Which Is Better For You?

Let’s talk about pricing.

Specifically agency pricing and how it’s structured.

retro-popNo one likes to talk about it, whether you’re on the agency side or on the client side of things. But the trouble is that not talking about it, and why a particular pricing philosophy is in place, actually hurts both sides of the table.

Let’s remedy that right here by exploring our pricing philosophy and why we think it’s the right structure to ensure that everyone’s interests are squarely in line so that client success is the first and only consideration.

How Most Agencies Set Their Pricing

Many agencies choose to price their services based on what’s known as an “agency model”.

What that means is that they charge an initial setup fee and then take a percentage of your advertising spend every month. And at first glance, this might seem like a smart approach.

If you’re only spending $1,000 on your cost of advertising a month, and your agency charges you a 20% fee on top of that spend in order to provide you with service, you will probably only spend about $200 a month on agency fees – unless of course there’s a minimum charge, which there usually is.

But what’s often overlooked from the client side is that this is actually a horrible misalignment with your interests. Your goal as a business is to generate the best results at the best price, in the shortest amount of time.

It’s easy to forget, however, that the agency is also a business; and when they are not incentivized by their compensation structure to service your account with their full attention because your advertising spend might not yield them a sustainable fee as compared to a bigger spender, the performance that they can deliver can obviously suffer.

And it’s easy to blame them and say that this is wrong and not fair. But if you’re being honest with yourself, you’ll be hard pressed to admit that you’d act any differently. After all, one of your primary responsibilities to your business (in addition to making sure your clients are happy!) is to make sure that you’re working smart so as to maximize revenue and grow your bottom line.

And because that’s the world we live in, it means that a percent-of-spend agency pricing model can cause a major misalignment and conflict of interest. While it’s the goal of every marketing agency to deliver results for their clients, those that structure their compensation as a percent of advertising spend can be wrongly incentivized to optimize their campaigns for increased spend over time, rather than always striving to pop-art-woman-violetachieve a lower cost of engagement – which may or may not entail the need for a larger budget.

The truth, and what most agencies will never tell you, is that the amount of work that goes into planning, building, launching, monitoring and continually optimizing a marketing campaign on Facebook, Google AdWords or any other similar platform where you ideal customers may be, is going to be about the same regardless of whether you’re spending $1,000 a month or $50,000 a month in direct ad spend.

 

Comparing and Contrasting – Why We Believe in Flat Fee Pricing

Now let’s compare that model to a retainer or management fee model (which is the only pricing structure we use here at Oscar Diggs Digital).

In this scenario marketing agencies charge you a flat fee retainer each month to strategize, plan, create, manage, optimize, report and monitor all your digital marketing campaigns – regardless of how much you’re spending.

Now stop and think about that for a second.

That means that you, as an advertiser, will get the same attention from your agency regardless of whether you’re spending $1,000 a month or $50,000 a month in spend.

Why is this?

It’s because the agency is not under motivated to service your account for the simple reason that their fee for doing so is the same regardless of what your ad spend is.

It also means that when quoting a price, the agency will need to deeply consider your realistic overall ROI on the combination of both fees and ad spend. When fees are separate and apart from ad spend, it forces the focus of the relationship between the agency and the client to be on achieving and maintaining profitability in a quantifiable way, rather than a pay-to-play model where one party simply “manages” the ad spend of the other.

That translates into a perfect alignment of interests and goals with the only driving motivation on the part of the agency being to ensure the best results at the best price, in the shortest amount of time possible. After all, if they can do that then you, the client, will be happy and continue to work with them month after month.

business-successWith an agency pricing model, while there is obviously the intent on the part of the agency that your campaigns perform well so that you will stay on board with them month after month (just like with a retainer structure), they are also incentivized to have you spend more and more each month – regardless of whether or not your business really needs the additional spend in order to achieve and exceed your goals.

So when choosing a marketing partner to work with, stop and ask yourself if the pricing structure they’re proposing is really in line with your best interests. Because when it is, you and your agency will both be primed for success.

And that’s called a win-win situation.

 

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