The Pros And Cons Of Popular PPC Pricing Models

When it comes to PPC agency pricing models there are a few tried and true examples that most agencies like to stick to. But, in the end, nearly all agencies end up doing things a little bit differently each time. 

As a potential PPC buyer it’s vital that you know what questions to ask your potential marketing agency. And, as a PPC agency, it’s equally important to know what to say when a potential client asks “How much is this going to cost me, and why?” 

In this brief 20 minute read, we’ll  cover the most popular PPC agency pricing models, how they work, and the pros and cons of each. So that you, our precious audience, knows exactly what to look for and what to avoid when hiring a PPC agency.  

Keeping An Eye Out For Red Flags 

I’ve said it before and I’ll say it again. But the best thing about staying informed in terms of the pros and cons of different PPC pricing models is that it gives you supervision. That is, the ability to see through the BS that some advertising agencies sling at clients in order to hike up their fees. 

As I mentioned before in my blog post on digital marketing agency pricing models (as a whole): 

“Too often were we seeing clients deal with agencies that prioritized their own billing over the performance of their client’s campaigns. Certain pricing options prioritize the hours of work put in, others prioritize the quality. Some pricing options prioritize the growth of the actual business, while others prioritize the growth of just the marketing budget, which pays the agency more…”

And it’s all the more true when you’re dealing with PPC campaigns - where you're entering into an exclusively “pay to play” arena. 

The Starting Point:  Your Goals And Your Values

It’s a lot like Goldilocks and the three bears. Yes, it may have taken the young lady a few tries to find the “perfect fit.” But the payoff is definitely worth it (until the bears come home, that is). Finding an agency with the right pricing model for you is just the same. It depends on the unique fittings, goals, and resources of your individual campaign. 

What exactly do you deem to be the most valuable aspect of your growth? What resources do you have at your disposal?  And what are you willing to prioritize in order to achieve your goals? These are just a few of the questions you need to be asking yourself. 

The pain points your company is suffering from can help you narrow your search for a PPC agency or partner. The ideal partner will work to solve your most pressing problems in the most cost effective manner. The rest is all just marketing agency fluff. 

Let’s just say that Beaker’s headed in the right direction…

There are quite a few different avenues you can pursue even in the PPC world if you’re able to properly identify your needs and capabilities: 

• Maybe you don’t have the time to manage your own paid campaigns. You’d like to find an agency to run Google Ads successfully for you.
• Maybe you’re new to the game, and need some expert guidance to get started.
• Maybe you’ve been running your own PPC campaigns thus far with success, and simply want to take your performance to the next level.

Now, there are plenty of PPC agencies that can do each (and all) of these things. And, more importantly, every one of them will also have its own specific pricing model. What’s more  important to first identify is what your expectations are for your agency. This way you know who to look for and what price range is reasonable.

Pros And Cons Of Different PPC Pricing Models 

For the sake of simplicity, we’ll be covering the most popular PPC pricing models in the blog post instead of running the gamut with every digital pricing model available on the market. For our purposes, we’ll only need to focus on 7 core PPC pricing models: 

1. Charging Hourly
2. Charging By Percentage Of Ad Spend
3. Flat Rate Management Fees
4. Management Fee + Percentage Of Ad Spend
5. Performance Based Pricing
6. Milestone Based Pricing
7. Customized Increase Pricing

So, what are we waiting for? Let’s get started!

1. Charging Hourly

Hour pricing is a nice place to start, because you know exactly what you’re getting for what you’re paying. And, you can rest easy knowing that your agency is accountable for billable hours, so they can’t just leave you on the back burner.

Hourly charging works in a pretty straightforward manner: you and your agency agree to a set term of hours per month that their PPC managers are accountable for working on your account - for which you pay a set price. 

Hourly Pros

The first obvious pro for charging by the hour is that it’s simple. But that doesn’t mean charging hourly is only for beginners and small-time agencies. Not by a long shot. In fact, another big pay off of hourly pricing is the insurance that your agency is working on your account every week throughout each payment cycle. It can also simplify things on the agency’s side. Tracking hours for each account is as simple as setting up some customizable time-tracking software.

Keeping your PPC agency pricing model at an hourly rate also helps keep your campaigns under control. 

With most PPC endeavors, as your campaigns change and adapt and grow, your ad spend and budget will need to follow suit.

Keeping the PPC agency you hire controlled within a set number of hours can help stop your campaigns from getting ahead of you.

This should protect you from being blindsided by large invoices you weren’t expecting until later on down the road.

Hourly Cons

There are two major problems with hourly PPC agency pricing.

They may be a bit on the cynical side - suspicious even. But when it comes to the baby that is your growing business and its precious budget, can you ever be too careful?

The first problem is related to the classic debate of quality over quantity. The sad fact of the matter is that more hours doesn’t necessarily mean better work or improved results. As the late, great Vince Lombardi once said:

“Practice doesn’t make perfect. Only ‘perfect practice’ makes perfect.”

Depending on the scope of your PPC agency’s responsibilities, their hours can get spread thin pretty quickly. Especially if you’re dealing with a multi channel agency that is creating content for multiple campaigns across multiple mediums.

The second major downside of hourly pricing models is that they discourage speedy changes and optimizations to your account. It makes more sense for an agency to take their time on routine projects if the longer they take the more they get paid.

Depending on the urgency of your marketing needs - and the budget you're willing to put behind it - hourly pricing is a short-term solution that may or may not be right for you.

2. Charging Based On Percentage Of Ad Spend

Another one of the most popular PPC agency pricing models is to charge based on a percentage of ad spend. Most agencies fall within a standard percentage range in this model.

Some charge only 10% of ad spend while others shoot for 15%-20% of ad spend.

But as a general rule, these pricing models make the agency’s payment dependent on your business’s actual ad spend budget. Which can be a good thing and a bad thing. So let’s take a look.

Percentage Of Ad Spend Pros

One of this model’s biggest pros is that you can see how the growth of your account will scale your spending. If your agency is transparent with you when you first sign on, you should be shown some different pricing “tiers” for their clientele.

This way you can see any increased expenses and ad spend coming and prepare accordingly. Unlike certain flat rate agencies (which I’ll discuss later), you don’t have to re-negotiate your monthly fees based on the growth of your account. 

If you start to see success from your PPC campaigns and decide to increase your ad spend from $3K to $5K you can expect your agency fee to increase from $3000 to $5000. Pretty simple.

Percentage Of Ad Spend Cons

Now, just because it’s “simple, reliable, and based on growth” doesn’t mean the percentage of ad spend model is without flaws.

While many agencies trust the percentage of ad spend pricing models, there are a few situations that can make for some sticky situations with clients.

For example, charging based on a percentage of ad spend means that the agency’s most direct path to making more money is increasing your monthly PPC budget. They aren’t going to be as concerned with the ROI or ROAS of your campaigns as they are with the total spend.

This can mean a lot of wasteful budget burn on your part if you aren’t careful.

Here’s a hypothetical. If your agency is managing and optimizing your account well and the ad budget is paused or halted for any length of time, the agency’s fee becomes an issue. After all, they didn’t do anything wrong. Shouldn’t they still be paid their fee?

While these drawbacks to the percentage of ad spend are serious, they’re not my number one problem with this payment model.

The biggest issue with percentage of ad spend is that the agency runs into a bit of a paradox of motivation for improving your campaign’s performance.

Let’s say a PPC agency is able to dramatically decrease your cost-per-conversion to the point where you can now generate the same conversion volume from half the ad spend. Now you can cut your ad spend in half, and thus make the same amount of money while paying less in ad spend and cutting your agency fee in half.

So as a reward for amazing performance, the agency gets less money.

The same issue can occur with small businesses that don't have enough to spend on ads. If the agency’s share is too small to justify working on the campaign, you’re likely to have some friction. For this reason, the pure percentage of ad spend model matches best with larger companies and massive budgets.

3.  Flat Rate Management Fees

There are some agencies that charge a flat rate or singular management retainer fee. This means that you’re paying the same amount no matter the hours spent or performance from month to month.

This can be good if your performance is increasing. However, if you’re looking to grow your account, you may have to increase your monthly fee to broaden the services that the agency offers you.

Flat Rate Pros

The simplest and most obvious pro of flat rate pricing is that it is a simple one-and-done equation. If you have a solid relationship with your PPC agency and can trust that they’re working to continuously improve your performance, and if you can offer them a handsome retainer in return, a flat management fee can often be the Occam’s Razor of client-agency happiness. 

Flat Rate Cons

On the other hand, if you signed your contract with an zealous and eager-to-please startup agency, you may find that your flat rate doesn’t remain as flat as you originally had hoped. 

Many agencies offer simplified management fees to onboard more clients. But, as they grow in success (and size) they also must grow the size of their billable contracts. Meaning that your measly $500 monthly retainer might not be enough to satiate the growing demands of your agency’s payroll. This is why fat rates are so often bumped up later on in the contract after the agency has proven its worth and wants to “be paid equal to their performance.” 

4. Management Fee + Percentage Of Ad Spend

This PPC agency pricing model is essentially the same as our second pricing model. The main difference is the inclusion of what agencies call a “minimum” monthly payment.

But you can consider this the same as their monthly retainer and anything additional being attributed to your business’s percentage of ad spend.

Management Fee Pros

The pros of this PPC agency pricing model are basically the same as the ones for the above pricing model. (Probably because they’re essentially the same.) However, this pricing model carries with it one big whopping “pro” that the previous one does not:

It gives your PPC agency room to breathe and focus on the actual ROI of the campaigns.

Because the agency can rely on a minimum monthly payment regardless of how much they lower your ad spend, they can really focus on optimization. And, as a truly experienced PPC marketer would tell you, optimization isn’t always about more. Sometimes, it’s about less. (Less irrelevant traffic, lower cost-per-click, lower cost-per-conversion, etc.)

This way the agency doesn’t have to focus their time and energy on maintaining a strategy that emphasizes high ad spend.

Instead, they can focus on any channel or strategy that generates the most efficient conversions at the lowest price to maximize your performance while still collecting their fee.

Management Fee Cons

The big drawback to adding a management fee to a percentage of ad spend pricing model is that it opens you up to an even bigger invoice if you aren’t careful. You must take the time to set the right goals. Emphasize to your agency that you want to improve the ROI and ROAS of your campaigns over your traffic volume, etc., or you could end up being taken for a ride.

If you never clarify during the onboarding process, then don’t act shocked when they suggest increasing your ad spend to boost conversions. They’re still trying to make money too, so it’s vital that you emphasize the importance of fiscal efficiency in your growth strategies from the get go.

“This [retainer + ad spend] model really relies on the communication of goals between agency and client. Any successful business relationship does, after all.”

5. Performance Based Pricing (Charging By The Lead)

Performance based PPC agency pricing models come in all shapes and sizes. But, at their core, what they all share in common is that they function on a “charge per lead” framework.

What’s important to know about this PPC agency pricing model is that you’re paying directly for the results. You’re cutting past the means and going straight to the ends with money in hand.

This is also where certain strategies like affiliate marketing and other channels can come into play. When you aren’t concerned with where your leads are coming from, you allow your agency to widen their scope of lead generation tactics.

Lead Pricing Pros

The first pro for performance based pricing is obvious: it encourages great performance. It’s easy to stay focused on your goals when you only have a singular KPI as an agency: monthly lead volume.

This makes increasing their monthly fee a quick and easy decision, as you’ve already agreed on set terms. Other pricing models require negotiating after each stage of growth. This one, on the other hand, has growth built into the very logic of the pricing model, which is quite nice. And it makes sense. Employees’ salaries tend to increase with their performance, so why shouldn’t your agency’s?

If they can consistently increase your lead volume by 10% a month without increasing your spend, I don’t see a reason why they shouldn’t make more money while you make more money.

Lead Pricing Cons

The con for charging per lead is much the same as the con for charging per hour. You, the client, can’t control or affect the quality of what your agency gives you.

If you’re paying your agency solely on the number of leads they generate, they can employ certain strategies to fill your pipeline to the brim. But that doesn’t necessarily mean that the leads they send you will be quality or qualified leads at all.

This can be a big problem for two reasons:

1. You’re throwing money down the drain paying your agency for shite leads. That’s an obvious waste of money.
2. Sending your sales team chasing after these poor quality leads wastes even more money, time, and resources.

If things get bad enough, you could even begin to question your sales process before realizing that it’s your lead quality that has compromised your marketing strategy. Payoffs with these types of payment structures tend to be rather low unless you happen to get a ton of super high quality leads from your agency.

6. Milestone Based Pricing (Goals Hit = Increased Fees)

Milestone based pricing models aren’t focused solely on lead volume. Instead, agencies that use this pricing model establish custom goals for each of their clients during the onboarding process. Whether these goals are to generate more leads, lower cost-per-conversion, increase click-through-rate, etc, is up for grabs.

Whatever goals the agency and the client agree on, and whatever timeframe they set, is what determines the success of the agency. If they hit all their marks in the approved time frame, then their payments increase. If they don’t… well, better luck next time.

Milestone Pricing Pros

The pros of milestone based pricing models are that they closely align the goals of the client with those of the agency. Unlike the percentage of ad spend models where decreasing CPC can actually hurt the agency’s margin, milestones help keep the agency focused on genuine growth and optimization of the account.

By setting easily tracked goals and setting clear parameters for wins and losses you make it very clear when the agency has missed, met, or exceeded your expectations. This way it makes it easier for them to ask for an increase in their fee.

Instead of tying your agency’s pricing to vanity metrics like lead volume or ad spend, milestone marketing links it directly to whichever KPI you agree on at the onset of your relationship.

So if you, as a PPC agency, are able to save a client $10K/month in ad spend, you can come to the next monthly update requesting a $1K/month increase in your fees.

You can do so with some confidence in your voice knowing that you’re still saving them an insane amount of cash. And, more importantly, you can do so knowing that you’ve earned your fair share as well.

Milestone Pricing Cons

The cons for milestone based pricing models is that the onboarding process can be time-consuming and difficult.

This is a vital step in the process to make sure both client and agency are on the same page in regards to goals and tracking. So taking your time is important. However, it can also get quite complicated and frustrating as well.

Complex questions can arise during the onboarding process. 

• How will you weigh the success of different aspects of your campaign? 
• Should you weigh conversions and leads from different channels differently?
• Should the ad spend of a specific campaign or channel be considered when calculating a specific milestone being “achieved” or not?
• Are these milestones all interconnected?
• Or is there a hierarchy that prioritizes which are the most important?

The list goes on...But I think you get the point.

7. Customized Increasing Pricing 

Now as opposed to all the nuanced combinations of the more classical PPC pricing models, like the ones I’ve listed above, why don’t we take a look at something new? Something that - unlike the other pricing models that are only posing as the word - is truly customizable. 

I don’t have any actual term for it yet. But for the most part, this customized PPC pricing model allows agencies to create planned increases in their fees based on scaled up operations in the campaign. 

Unlike the flat management fees that are unknowingly bumped up later on in the contract, this customizable setup allows the agency and the client to work together to build a roadmap that allows both parties to grow together. 

Customized Pricing Pros

The beauty of customization at this level is that it’s the perfect way for both parties to get what they want. The agency gets a new client, while the new client gets to save money by starting with a low monthly management fee. 

During this first phase (which can range from any between one to three months depending on the scope of the campaign), the client can rest easy knowing that they aren’t burning too much money with a stranger. And, while they rest easy, the agency gets to prove themselves to the client as a worthy asset to their business. 

After proving themselves, the agency gets a more “appropriate” compensation for their work, and the process essentially repeats itself as they again undergo the process of proving themselves to the client - only now with a more complex marketing task. 

It seems so simple and obvious, but setting out an actual map of the goals and timelines of when the bumps are going to happen will not only hold your agency accountable, it will also help light a fire under their ass to see if they can get there faster. 

Customized Pricing Cons

There aren’t many cons when it comes to this PPC pricing model. In fact, the only ones I can think of would be time and scrutiny. To be clear, when I say “time” I’m referring to the patience necessary to sit down with your advertising agency and set out the goals and timelines of such a complicated custom contract. And, in regards to “scrutiny,” I mean that you need to be able to look past the majority of the agencies that choose such customized pricing. 

Whom might those agencies be? Well...small ones usually. This level of customization can usually only be achieved by a strong, personal, and familiar touch that only small, mom-and-pop / startup agencies can pull off. 

But keep in mind: it’s only usually the case that such customized ingenuity can be offered to every single client. 

The ‘X’ Factor (A Truly Customized Pricing Package)

The key to any healthy ppc agency-client relationship is communication and healthy accountability. The truth is that there will be months or quarters where your agency simply can’t hit its marks.

These months can be hard for agencies as well as your business, simple as that. But if you  can weather the storm and come out on the other end with an adaptive plan of attack, you just might make it through the other side to see some more milestones hit and some valuable testing insights gained.

Without accountability and communication, clients can blame agencies for missed milestones and agencies can blame clients for slow turnaround and feedback which caused those missed milestones. And when payment is dependent on subjective performance, client-agency relationships can be stressed, bent, and even broken. So keep an eye out for office drama.

After all, at the end of the day you and your agency are on the same team. Isn’t it time you started treating each other like it? 

Takeaways - Goldilocks Knows What She Wants

Like I said at the beginning of this little journey of ours: it may have taken Goldilocks a few tries to find the “perfect fit,” but the juice is most definitely worth the squeeze. So take the time to identify - and prioritize - what you think are the biggest problems plaguing your business today. Solving these will be the biggest needle movers in terms of changing and growing your business in a legitimate way. And the agency you choose to partner with should have a strategy, and a PPC pricing model, that reflects their concern in those same issues.