Why I’m Quitting Percentage of Spend
“Show me the incentive and I’ll show you the outcome.” – Charlie Munger
A few years ago, our agency transitioned away from the common “percentage of ad spend” billing model.
It all started when I was at a conference in Vail, 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 get an incentive for each order that comes from our efforts. This incentivizes us to decrease your CAC as much as possible so that we can increase your order volume as much as possible. Which is a win for you and a win for us. If we can keep ad spend the same but cut your CAC in half and double your orders, that’s a great result for everyone. This is all transparently tracked so both sides know what counts and what doesn’t.
If you want more details on this new agency billing model 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.