Why I’m Quitting Percentage of Spend
“Show me the incentive and I’ll show you the outcome.” – Charlie Munger
My agency recently started transitioning away from the common “percentage of ad spend” billing model. And frankly, I’m relieved.
It all started when I was at a conference in Vail last year, walking to dinner and talking to a potential client when they said, “Why should I pay you more just because our ad spend goes up?”
I went through my normal explanation of how “because if your spend goes up, it’s a bit more work for us and because we think we should grow alongside you.”
But with this being the 26th time someone had asked this question in one way or another, it occurred to me that there’s probably a better way to go about this.
So, we brainstormed some ideas and came up with a new model that I think you’re going to love. One that we believe is better for the client and the agency.
But first, why does percentage of spend get so much flack?
Most clients have an issue with paying their agency a percentage of spend because they feel like it just incentivizes them to spend more and more. And it leads to a lot of begrudging thoughts when they see the higher invoice.
You’re spending $50k/mo. And you make $100k from ads.
Next month, you spend $100k/mo, and make $150k from ads.
Your agency doubled their fee, but your ad campaigns became less profitable.
Because we also wanted a model that was fair to the agency. If we grow someone’s business, we believe that we absolutely should share in the upside.
So the new model we created aligns incentives a lot more on both sides.
We wanted something where:
1). We’d share in the upside if campaigns performed well and
2.) We didn’t make more just because spend went up
So we created a model where we bill:
1.) A base fee and
2.) a performance fee
Base fee: The base fee is pretty simple, it’s just a flat fee each month.
Performance fee: For the performance piece we take a percentage of the return. How we do that is at the end of the month, we take your revenue from ads then subtract your ad spend and take a percentage of that number. This way, we’re incentivized to scale your return, not your ad spend.
Spend $100k on ads and make $300k in revenue? Then we both do pretty well. Spend $200k but only make $200k in revenue? Then we’d make no more than the base fee.
If you want more details on this new agency billing model (including our exact base fee and performance %) and more info on how Biddyco can improve your ad campaigns. Enter your info below.
Why not just bill a performance component only? Because we’re putting significant time and energy into your campaigns so we charge enough in the base fee to cover our overhead. A model where we could potentially spend 40+ hours in a month on your account and earn $0 is not a good long-term model for either side.
Why not just bill a flat fee? Because we believe if we’re growing your business, we should share in that and you should want to share the growing pie so that we’re incentivized to grow things even more.