If you are investigating hiring a SEM agency, one thing you will soon realise is that there is no standard pricing model for SEM and that no one model is perfect. The only standard you can be certain of is that SEM pricing models will differ from agency to agency.

Selecting the one that will work best for your business involves understanding the how much risk you are willing to take to secure your desired return on investment.

In this post, we give you the 4 most common SEM pricing models as well as some pros and cons to help you understand what is available.

1. Percentage of Spend:

Some agencies prefer to bill based on advertising budget. The higher the spend the higher the amount you will be billed for. Agencies usually charge between 10 and 20 percent of spend with this pricing model.

Pros: The main advantage of this model is that it is very easy to understand and communicate. This structure could work well for your business if your advertising campaigns are seasonal. In slower months, where advertising budgets are lower, you might look at paying a smaller percentage of spend to an agency. Just as in peak seasons, where spend is ramped up, the agency will be compensated for the increased activity and work required. Therefore, it’s easy to understand what level of investment you are committed to at any stage of the project and to budget accordingly.

Cons: Sometimes increasing budget does not mean more work for an agency. If an account is held back by budget then simply increasing the spend would not necessarily require more work, but might result in the agency billing more for no extra service. 

2. Flat Monthly Fee:

Some agencies will charge a flat monthly fee for their services. The fees are usually tiered depending on the size of the accounts (a larger account will have a higher set monthly fee than smaller tiered accounts).

Pros: The major pro of this model is that you have certainty about what the agency charges. This option can be beneficial for your account if you would like the best bang for your buck. Your business could get many hours of work from an agency for a basic flat fee where, if another option was available, it would usually cost much more.

Cons: If you lower the spend in quiet times, you may not see a corresponding reduction in fees. It also may be slightly harder to budget for management fees if you’re planning on increasing the spend on your account. 

3. Revenue Share:

The more revenue an agency generates for your company the more their fee would be.

Pros: This method incentivises agencies to give the account an unusually high level of attention and optimisation, as the agency has a vested interest in your account’s performance. The better the account performs the more the agency makes.

Cons: Measuring difficulties between leads and sales. You need robust marketing systems need to be in place to track and effectively attribute conversions to SEM.

3. Hybrid Options:

This billing structure involves a mixture of set fees and revenue share or percentage of spend.

Pros: You could pay a monthly fee based on a percentage of your spend. On top of that a minimum flat fee is added to protect the agency if the ad spend is very small, and a maximum fee cap to protect the yourself if the ad spend is very large.

Cons: A high spending account does not always require more work and can often be quite a small sized account. Charging a percentage of spend and a flat fee for small accounts that have high spend would work out better for the agency than the advertiser.

Conclusion

Although we have given you some food for thought on selecting an appropriate model, agency fees should not be the sole deciding factor when looking for a company to manage your AdWords account. Performance, reliability and transparency will all add to a higher ROI and a healthy working relationship between you and your SEM agency.

Image Credit: Keith Ramsey, Flickr, Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0)