It used to be that marketing agencies mostly operated the same sort of way, but they differentiated based mostly on their creative work. While that still is true, many agencies have started to niche down into only doing hyper-specific things. For example, our agency, only does media buying and media planning, typically for other marketing agencies, for our professional services.
Through this niche, we’ve been lucky enough to see lots of different agency models and how it works for many different folks. Full disclosure, we charge a % of ad spend for direct clients or agency partners so there may be some bias as we describe the various models for marketing agencies and how they charge clients.
This is the classic way of charging that dates back to the 60s. It used to be the standard but is fading in popularity as the AOR (Agency of Record) deals have been falling out of favor. A lot of PPC shops still do this as well as large holding agencies and even local agencies. Rates typically range from 15%-33% depending on your budget where more budget usually means a lower percentage. That said the higher rates are typically there because the agency is also doing things like building landing pages or creating email sequences in addition to their media buying and advertising activities.
Pros: It scales really cleanly. You don’t have to go back and renegotiate contracts, and you don’t have to worry about hourly rates eating up too much of the budget in relation to the media buying.
Cons: The incentive is for the agency to get you to spend more pretty much always. Now, this can be a pro because it means they’ll be very on top of performance metrics to justify it, but the pressure will always be more and faster.
This is fairly self-explanatory. I see rates range from $50-$300+ an hour depending on the agency, seniority of the person, etc. Some folks will do a blended rate as well rather than a person rate. With a blended hourly rate you’ll be getting some smaller percentage of more senior folks and then a much larger % of the work will be done by more junior people (Which isn’t necessarily a bad thing).
-Pros: You get exactly what you pay for. You can also make sure to have very senior people doing your work if that’s what you want.
-Cons: There’s a bias towards action. Sometimes this is a good thing and sometimes not. Many campaigns simply should run and not be fiddled with because their performance improves over time. This is especially true with things like Facebook ads. However, to spend the hours, you have to always be doing thins even if they have low, no, or negative value to the client. Also many projects can run over budget or not get finished because of unexpected costs etc.
This is a flat fee per project. Typically an agency will forecast the number of hours then add their margin on top. This can be helpful for clients because you know what the outcomes of the work will be without having to worry about variable hourly costs. This helps clients understand total projects costs and can help them plan accordingly.
-Pros: You understand what total costs will be and what you’ll get exactly at the end.
–Cons: This model really only works well when you have a tangible thing you’re trying to get such as a logo or a specific piece of content. There’s no ongoing management and iteration. In addition, if what you bought ends up not working, you have to start another project or do something else. There’s no agile approach or iteration here in most cases.
This is a flat fee paid per month to run a specific scope of marketing activity for a client. This can be useful for constantly changing and on-going work. You can set KPIs (key performance indicators) and your agency will work to meet them. This gives some flexibility to what the work exactly is, and focuses on the business outcomes rather than the specific things being done.
-Pros: Focus on the business outcome versus specific marketing work being done. Flexibility and on-going support are typically prioritized by the agency.
-Cons: Can be very expensive as you’re basically offboarding an entire part of your marketing program to an agency. You can also “overpay” because they may have figured out the marketing problem early on then sat back and make a lot of money as they put in very little new work.
This is typically where your agency will get a % of revenue generated or a specific $ amount per lead generated etc. These are getting more popular because agencies typically make way more on their successful clients and use the massive profits they get from runaway campaigns to subsidize their losses. Marketers seem to favor these heavily because many of us have campaigns where if we took 10% of revenue or something we would get hundreds of thousands or millions of dollars. Clients seem to like this model because it feels like there’s less risk. If it doesn’t work I don’t have to pay right?
-Pros: You win together. If you lose and don’t achieve your campaign goals you likely won’t have to pay as much
-Cons: You can end up paying an agency 10-20x more than if you went for a more traditional deal such as an hourly rate or a retainer deal. In addition you usually end up covering the ad spend in these deals so even if you pay the agency nothing you could still potentially lose thousands of dollars on a deal gone wrong.
Some combination of the models above. You may have a retainer + % of ad spend or performance bonuses etc. Many folks choose to do this so they can get a better balance between the upside of of something like a performance deal while still covering their costs.
So there you have it. While we may have missed some of the more esoteric models for the vast majority of our agency partners they follow one of these models. What do you think? Does your ad agency follow one of these models? Do they do something else? Let us know in the comments below.