A Practical Guide to Performance Based Pricing

Posted in Agencies

It seemed simple enough
Creative Commons License photo credit: Diego Cupolo

In these risky financial times, some marketing executives who purchase SEO, PPC and Social services are exploring alternative business models for engaging and incenting vendors. One attractive option for mitigating financial risk and maximizing return, has always been pay-per-performance. So how does performance pricing fit in today’s brave new world of online marketing vendor services?

This SES San Jose panel, Performance Pricing Models: What Every CMO Must Know!” evaluated successful SEM campaign case studies contracted by this pricing model. Speakers also offered a thorough overview of the concept, applicability to various channels, key benefits, caveats and crucial success factors.

Andy Atkins-Krüger, Managing Director of WebCertain Global Ltd moderated the session [he originally wanted no blogging, tweeting or the sharing of information outside of the session].

Paul Wilson, Chief Revenue Officer, iProspect was up first
Paul asked the important question: “How many marketers were in the room and a large percentage were?“. Paul provided an overview of the performance based pricing concept.

  • Most Important: remember that it’s a team effort
  • Pros: alignment of goals, partner incentive, maximize performance, protection from non-performance
  • Cons: constant monitoring, accurate tracking data (with responsibility defined), goals can change, decide between SEO and PPC, compensation for overperformance or underperformance
  • Compensation suggestions: bonus targets, incremental fees, percentage of revenue
  • How do you get started?
    • Define conversion metrics
    • Define value of the conversion
    • Factor in operating costs
    • Pressure text the metrics
  • How to avoid situations that don’t work:
    • Start with at least 12 months of historical data
    • Establish a baseline for performance review
    • Establish value of conversion metric
    • Identify “What If” analysis – how better performance might improve the overall business model
    • Flexibility to adjust based on performance (or lack there of)
    • Write everything into the contract
    • Lastly, consider hybrid models that blend pricing structures

Paul indicated that about 5% of iProspects accounts are transitioning into some form of performance based pricing model.

Andrew Beckman, President of Location3 Media was up next. He identified the various types of deals they are engaged in, including cost per lead, per sale and revenue share with clients.

Management Fee

  • Pro: Percentage is fixed
  • Con: No incentive for the agency to perform; risk is solely on the advertiser paying a fee (which is not ties to a metric)

Performance Based Pricing

  • Pro: Limited risk
  • Pro: Agency pays for clicks and link building to generate effective leads
  • Con: Client must provide access to all of their data

For PPC, Beckman’s company starts with a management fee based contract but then flips to performance based when appropriate. It’s dependent on goals, expectations and relationship.

  • Necessities include historical PPC performance, seasonal data, creative arsenal, and landing page optimization.

For SEO, measurements can include increased organic search referral traffic (non-brand related), pay per submissions and the collection of inbound links and the quality of inbound links acquired. Beckman acknowledges that this is not a large percentage of their deals.

  • Necessities include analytics, historical data (traffic, rankings and inbound link reports), creative arsenal

Key issues that often arise with CPA models

  • Who gets credit for the actual sale/lead?
  • What tools are used to benchmark performance?

Two Important Truths:

  • Performance based campaigns require a cooperative relationship
  • Agencies have an opportunity to earn more based on this model, since there is a financial incentive to do so.

Beckman’s last slide offered two final thoughts: “If they’re good, they know they have nothing to fear. If they’re smart, they know they could come out at the better end”

Finally, Vivek Bhargava, Managing Director of Communicate 2 [he acknowledges that he is holding us from tonight’s beer]

  • Bhargava believes “we know what we get paid for, but we don’t get paid for a lot of the things we do”.

He cautions of making assumptions too quickly.

Bhargava suggests that that there are other metrics that will provide value, such as time on site, repeat visitors, profile views or page views/visitor. Improving these metrics can still impact the clients’ bottom line. Some of these metrics have been used in contracts with clients working with Communicate 2.

In fact, EVERY project Communicate 2 works with has some form of performance based pricing built in; however the specific metrics they evaluate are unique per client.

Final Thoughts on the Session
Unfortunately, about half the audience was left unconvinced that performance based pricing would actually work. Here’s to hoping the Q&A and conversations after the session would help mitigate some of these concerns or at least leave the door open for further exploration.

Derek Edmond is a Managing Partner at KoMarketing Associates, providing B2B SEO, PPC & Social Media services for technology, industrial and professional services companies