Earlier this year George Michie of the Rimm Kaufman blog had a great two-part blog series on performance-based pricing in PPC. The first post did an excellent job of outlining why performance-based pricing may not be as much of an incentive  for agencies as some contend, while the second post focused on three additional issues  with performance-based pricing, namely:
- Performance metrics aren’t simple
- The metrics commonly used can be artificially inflated
- Commissions are paid for the wrong performance
Before you get started with a pay for performance agency, you’d be well served to read both posts, but many successful agencies and happy advertisers find ways of making pay for performance work, as George himself points out in both the body and the comments of his posts.
Here we’ll walk through a few things to focus on if you’re considering an engagement with a pay for performance PPC firm.
Things to Look for in a Pay for Performance PPC Arrangement
At a high level, there are really three things you want to focus on in structuring a pay for performance pricing structure with a PPC agency:
- Scalability – Here we mean that the compensation structure you put in place can scale and adapt to different strategies and circumstances that might "break" your services pricing plan. For instance, let’s say you can pay up to $15 per lead and run profitably based on your margins. If a performance-based agency offers to pay for the media costs out of their end and deliver you as many $15 leads as they can get, this may sound pretty good. But what happens in a year when your board decides you need to grow your business more aggressively and focus on increased revenue? If your cost structure changes, your margins may change as well, and what was once a profitable channel at $15 per lead may become unprofitable due to shrinking margins. Think about likely scenarios in the near and slightly more distant future, and consider how different solutions such as cost per lead, tiers of compensation, and percentage of margin may solve (or create) problems for your specific business model.
- Simplicity – Many times the authors of compensation plans want to add in a lot of different types of clauses to help solve for the scalability problem. No matter how much granularity you introduce to a pay structure, you’re going to have some inadequacies. Your best bet is to spend more time comparing the most viable of a few simple, easy to calculate options at the outset, pick the best one, and address issues that arise as needed. Otherwise you’ll spend as much (or more) time creating an initial structure as you would simply modeling some different likely and possible outcomes, and then you’ll consistently be bogged down with complex calculations and potentially disputes and misunderstandings around what’s actually owed.
- Choosing the Right KPIs – This is where you’ll want to attempt to solve for the issues George mentions in the second post in the series: be very careful which metrics you choose to focus on in creating a compensation structure. Your objection with choosing and tracking these metrics should be that they are a clear, simple, and scalable indicator of actual business growth, that you do what you can to keep them from being gamed, and that you define them as tightly as possible to ensure that they are being driven by the agency and not efforts from other marketing campaigns.
Ultimately, as George points out in the second post , many of the issues with any PPC services pricing structure vanish if you have competent, trustworthy vendors working for smart advertisers willing to pay fairly for good work that grows their business.