This article explores several models that may be considered when paying a digital marketing agency for their work.
Every business has to get leads. That should be obvious. Unfortunately, not every business owner seems to understand how front and central lead generation should be to their business strategy.
Those who do get it may decide to appoint a digital marketing agency to manage their strategy. If you’re in this position, agencies will have offered you various models of payment. Pay-per-lead and retainer are probably the most popular, though there are others.
So which is best? Does it depend entirely on your individual circumstances, or is there a model that’s generally more favourable?
Your particularly circumstances will, of course, influence your decision, depending on which gives the best ROI for your business. However, you can draw some general conclusions.
Paying a digital marketing agency by the Hour
The simplest and generally least satisfactory payment method is on the basis of the hours the agency works on your behalf. While this might seem the most logical system, it has a number of drawbacks.
For one thing, this approach makes budgeting difficult. The agency would invoice you at the end of the month for the number of hours worked. This means you could find the invoice is for far more than you expected.
This wouldn’t necessarily matter if the hours worked translated into increased business, but there’s no guarantee of that. The other major drawback of paying for hours worked is that the amount you’re charged has no relationship to the quality of the work done. While most good agencies pride themselves on quality, an unscrupulous agency could simply be going through the motions.
Finally, you’re unlikely to find a well-established digital marketing agency with a good reputation offering this kind of service. If an agency does offer you an hourly rate, there’s a good chance it’s new and inexperienced.
Payment by Retainer
Paying a monthly retainer is a fairly standard payment method. It has a number of advantages, in particular easy budgeting for a set payment at a set time. Many marketing agencies like this model for the same reason, that it guarantees them regular income.
The big downside of the retainer model is that, again, it gives the agency no incentive to work harder on your behalf. It has advantages, though. It doesn’t necessarily put a limit on the amount of work you can ask the agency to do for you. Of course, they may specifically write that into the contract you made when you set up the retainer.
Nevertheless, unless your requirements are simple or you have a high level of confidence in the agency’s work ethic, you should approach the retainer model with caution.
Payment by Results
There are various models for payment by results, but the most straightforward is pay-per-lead. Under this system, you pay the agency an agreed sum for each lead their work generates. Of course, it’s then your responsibility to convert those leads.
This also prevents you from budgeting in advance, but it’s less of a problem than for the hourly rate model. Under this system, the amount you pay is directly linked to the amount you have an opportunity to generate.
Of course, the pay-per-lead model gives the agency a powerful incentive to work harder on your behalf. That’s because the more strongly they perform, the more you’ll pay them. This makes the model more popular among agencies who are confident in their ability to generate leads. Another point in favour of an agency that’s happy to offer it.
An alternative to the simple pay-per-lead model is a sliding scale of payment depending on the value of the lead. While this involves paying considerably more for some leads, the agency has the incentive to go after the really big opportunities. On the other hand, you’re likely to be paying before you’ve generated the income from the lead This means you’ll need a more flexible budget.
Payment by Percentage of Ad Spend
A model the advertising industry has traditionally used, this involves paying the agency a commission on the money you spend on a campaign. Under this system, you would pay the agency an agreed sum for a particular campaign. They would then retain a percentage (e.g. 15%) with the remainder being the actual cost of the campaign.
This has the advantage of being straightforward and directly tied into your marketing budget. The drawback, however, is that the quality of the campaign won’t necessarily be directly proportional to its cost. As with some other approaches, the agency doesn’t have the incentive to generate leads for you.
Hybrid Payment Models
All these methods have disadvantages. However, you can sometimes improve performance by combining the best of two or more in a hybrid payment model.
For example, you could combine the retainer and pay-per-lead method. This would involve paying a monthly retainer with a bonus added for each lead the campaign generates. Though this sum wouldn’t be as much as under pay-per-lead as the sole method, the digital marketing agency would still have the incentive to pursue extra leads. At the same time, you’d have the security of being able to budget reliably for the rest of the payment.
Which Is the Best Model?
As we established at the beginning, there isn’t a single answer to the question of which model to use. Payment by hours worked is unlikely to be a suitable approach. The percentage model, though it has some advantages such as a planned budget, isn’t necessarily tied in to quality.
Retainer and pay-per-lead are perhaps the most reliable models. The retainer model is preferable for a company with tight budgeting margins. Pay-per-lead, meanwhile, suits a company with the capacity to fund extra payment for the prospect of extra business.
However, the hybrid model tends to combine the best of the two. This allows a basic monthly payment that you can budget for, with extra payable for results that will directly benefit your ROI.