I was in a client-pitch meeting yesterday and the potential client brought up the dreaded “performance pricing” question. For those of you who aren’t in the PPC agency space, the conversation goes something like this:

Client: How do you charge for your services?

Me: We charge on a percentage of spend, pretty typical of agencies.

Client: Would you consider a performance pricing plan, where we pay you based on your ability to incrementally grow our [revenue/traffic/profit]?

I’ve got a standard retort for this – one which is not just lip-service but something I actually believe in: I don’t do performance-pricing because it usually ends up being a lose-lose proposition for me. If I don’t hit the metrics, I don’t get paid, or get paid very little; if I blow performance out of the water – and the client suddenly owes me a big check – the client inevitably comes back and says he wants to switch to a percentage of spend pricing plan. I explained this to the client and added “Besides, if I was getting paid on performance, you’d have to make some major commitments to me in terms of landing page testing resources, tracking, and turn-around time.”

About ten seconds after I said this, a shock went through my body (no, the client did not taze me); my comment was the sort of thing that I had always reviled from big agencies. Think about what I had said here: I’ll manage your campaign for a fee that’s based on how much you spend, but if you want to hold me accountable for actual results, then I need guarantees about your commitment to making your site better.

To me, that’s a pathetic statement – the point of an agency is to do everything possible to drive client success, and if an element of success is internal commitment to testing, that should be a requirement to working together regardless of how the agency is paid. In other words, you have to be the client. You have to think of the client’s business as your business. The moment you start thinking about an agency-client relationship as an “us and them” interaction, its inevitable that you’ll make decisions that put the agency first and the client second.

A couple of weeks ago I wrote an internal memo to my team about my approach to client relationships. I re-read it again today because I think I needed a refresher course. Here’s some of the highlights from that memo:

  1. Be Proactive, Not Reactive: Anticipate problems, suggest initiatives, don’t wait for the client to do so. Once you start reacting to client requests instead of driving the conversation, you are toast.
  2. Over-Communicate: Never assume that your clients – or your teammates or supervisors – know what you are doing. Send regular email updates, reiterate accomplishments on phone calls – do what it takes to make 100% certain that everyone knows exactly what you are doing.
  3. Everyone is a Client: I am your client, your teammates are clients, and of course your clients are clients. If someone asks you for help, treat them like a client. If someone is upset, treat them like a client. Remember that a happy customer tells three friends, an unhappy customer tells 10.
  4. Do More than the Bare Minimum: If a client asks you for 100 keywords, come up with 200. Doing the bare minimum fulfills the client’s explicit request, but implicitly shows that you are lazy.
  5. Love the Client, and Demonstrate Your Love: Know your client’s business backwards and forwards. Learn about their business objectives, their competitors, their corporate structure. When you talk to the client, share your knowledge, they will love it!
  6. Make Face Time: Make sure to email clients regularly and have regular phone calls. Never assume that clients are happy just because you haven’t heard from them in a while. Frequently the opposite is true.
  7. Act Like Its Your Business: Before you recommend a $25,000 test that has little chance of success, ask yourself – if it was my money, would I make that recommendation? On a related note, ask yourself: given the effort and results I am getting for this client, if it was my money, would I keep working with PPC Associates? If not, make changes fast.
  8. Be Honest: If you made a mistake, admit it (but also correct it beforehand); if you think a strategic shift is needed, share it. Clients want us to move their business forward, which means sharing both good news and bad news.

What would you add to the list?

2 Comments

  1. Alan Mitchell May 15th, 2010

    Hi David,

    Interesting thoughts on performance pricing. I recently did some analysis on the economic incentives for both client and agency of the percentage of spend, perfomance and profit share pricing models, but factoring in committment from both parties is essential.

    Great tips too on the fundamentals of delivering excellent client service. Couldn’t agree more with your points on proactivity, communication and going above and beyond expectations.

    Cheers,
    Alan

  2. davidzhawk May 16th, 2010

    Alan,

    Thanks for reading and for your comments. I read your posts and philosophically (and I guess economically, though I am not an econ-wiz) it makes sense. From an agency perspective, the basic problem with performance pricing is ‘externalities’ (hopefully I’m using this econ term accurately).

    In my post, I discussed the externality of a lack of commitment from the client, and I ended up admitting that this really shouldn’t be a factor whether pricing is performance-based or percentage of spend based. But what about things like: competitor behavior, economic conditions, bad business decisions by the client, or even acts of God? There are many, many things that an agency simply can’t control, regardless of whether its incentives are aligned with the client or whether it is doing everything in its power to do right by the client.

    In other words, there is simply a higher risk associated with a performance model, and some of this risk is not correlated to anything the agency can actually control. If the agency is accepting more risk, then it only seems fair that the agency should also be rewarded with more return. I would therefore argue that any performance model needs to have much higher upside for the agency than a percentage of spend.

    And that’s where I get nervous. Let’s say a client is paying me 10% of spend and they want to move to a performance model. In the next three months performance is incredible but as a result of the strong performance, the client now needs to pay me what is effectively a 15% of spend fee. Suddenly the client feels like they made a bad deal – perhaps, they might argue, the lift in performance wasn’t due to my efforts but due to the economy, decreased competition, or good business decisions. So now I’ve taken on extra risk but the client suddenly doesn’t want to reward this risk with extra return. Heads I lose, tails you win.

    Ultimately, the conclusion I come to is this: whether the model is percentage of spend or performance, the underlying success of an agency-client relationship has to be based on trust. If either party feels like the other is not committed to fairness and hard work, the relationship breaks down. In the case of percentage of spend, the client doesn’t trust that the agency is doing everything it can to boost performance; in the case of a performance relationship, the agency doesn’t trust that it will actually be rewarded for all its hard work and increased risk!

    What do you think?

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David Rodnitzky
David Rodnitzky is founder and CEO of 3Q Digital (formerly PPC Associates), a position he has held since the Company's inception in 2008. Prior to 3Q Digital, he held senior marketing roles at several Internet companies, including Rentals.com (2000-2001), FindLaw (2001-2004), Adteractive (2004-2006), and Mercantila (2007-2008). David currently serves on advisory boards for several companies, including Marin Software, MediaBoost, Mediacause, and a stealth travel start-up. David is a regular speaker at major digital marketing conferences and has contributed to numerous influential publications, including Venture Capital Journal, CNN Radio, Newsweek, Advertising Age, and NPR's Marketplace. David has a B.A. with honors from the University of Chicago and a J.D. with honors from the University of Iowa. In his spare time, David enjoys salmon fishing, hiking, spending time with his family, and watching the Iowa Hawkeyes, not necessarily in that order.