Variable revenue can be an performance marketing agency’s kryptonite. Those delicious fees that are tied to the amount of media spend can feel so comforting, and give you the sense that your good performance can lead to more spend. That isn’t always the case. Here is a true story – an agency that I worked with did a great job. They took their client’s paid search cost per acquisition from $103 to $33. Amazing, right?!? The expectation would be that the company would dump tons more money into this account and the agency would be ROLLING in fees. Guess what – instead of spending more in paid search, the client diverted budget from this newly efficient channel to an underfunded channel that was not managed by this agency. So their GREAT work was rewarded with a slimmer budget and lower fees. I posted about how selling strategy can raise agency fees, but here are few other ways to think about turning some of that variable revenue into beautiful, gorgeous monthly recurring revenue:
Hey gang, it’s Tim. How are you? Today I want to talk about pricing. Now, pricing is arguably the hardest thing for any company to get right. It doesn’t matter if you’re an ad agency or startup or even a plumber. Pricing is incredibly hard. And it’s hard because we think about it from our own perspective. So typically we think about it cost plus. A typical consulting firm might think, okay, there’s the consultant rates and we charge 3x that because one-third goes to the consultant, one-third goes to overhead, and one-third is profits. But that’s wrong. That’s cost based.
What you need to do is actually sort of flip it on its head so that your pricing is more value based. So, if you are going to provide services that generate x, y, or z, kind of result, you should charge commensurate with the results set not with the cost of your service. Now if you’re providing a marketing service, like paid search or SEO, you tend to get caught in these market-based constraints. You know, 10% of ad spend for SEM or 12%, or 5%. Whatever that number is. And you tend to get stuck there, and so you don’t think that you can really, truly break out of that mold.
Well, you can. And it’s really about thinking in terms of what you’re bringing to the table. So, a couple of weeks ago, I talked about how leveraging strategic engagement can help agencies land more business and frankly charge bigger fees. You can also think about it, so strategy, as an offering, can have a discreet price. So you might say that for your paid search engagement, you are going to charge a $10,000 strategy fee where you investigate the business and provide a document and that’s sort of the guiding principles for you moving forward. Quite possibly, that’s a great way for you to change the pricing paradigm so you’re charging discreetly for the strategy and then you charge additionally for the service, rather than pushing them all together.
But, pricing is not one size fits all. So I encourage all of my agency clients, especially to come out with some sort of good, better, best kind of pricing. Maybe the good pricing is percentage of media spent. Maybe the better pricing is management fee plus media spent. And maybe the best pricing is management fee plus media spent plus strategy plus, plus, plus, and each of these things has sort of a total cost of ownership associated with them. But, when you choose good, you’re not getting the same level of service as best. So it’s not that you’re diminishing your service. You’re just not adding in the extras.
And so, it’s incumbent on you as a provider of any sort of service, is to separate the work that you’re doing from the value that it brings. Consequently, strategy, setup, discovery, those sorts of things, those are the things that you need to do in order to do the work, to do the management. But, what I think you need to do is really think about the value that each one of those pieces have and to whatever stance you can, try to charge for them discreetly, because that will help break you out of the percentage of media spent zone because customers don’t spend the same amount and that leads to variable revenue.
What you as a business owner really want to get to is a healthy base of recurring predictable revenue, with a smaller base of incremental variable revenue. But you really want to know how much you’re making every month based on your fee structure. So try to experiment with different models so that you can mitigate some of the risk that come just with percentage of media spent and maybe think about a platform fee, or a strategy fee, or a discovery fee, or something like that, so that you can smooth out those bumps that happen from variable only pricing. Thanks. Talk to you soon. Take care.