The price of things has informational value that equates high price with high quality or value. As consumers, oftentimes we see something that is expensive and just assume it is better than the other “somethings” in the same category. I mean, why else would it be so expensive? It has to be better. Right?
Comparatively, we may look at the other “somethings” that are in the lowest price range and infer cheapness. If the price is that low, then the product or service must be of poorer quality.
Law Of Diminishing Returns
In many cases, the above analysis can be accurate. However, there can be times when the law of diminishing returns comes into play. In the case of buying services, diminishing returns refers to a point at which the level of profits or benefits gained is less than the amount of money or energy invested.
When it comes to PPC management services, the law of diminishing returns is prevalent. We have worked with many clients over the years. We have taken on new accounts that come from larger agencies who tend to charge relatively high PPC management fees.
After having countless conversations with clients about their previous ppc agencies, I can see the law of diminishing returns in full effect. Many of these clients can get equivalent (or highly similar) value from a company who charges a smaller fee. That savings in PPC fees can be put to better use and help the bottom line.
To illustrate this further, let’s put these clients into three groups.
Too Much, Too Little & Just Right
Too Much Money
We have taken on new clients who like the results they were getting from their previous vendor, but simply did not think the agency fees aligned with the value they were getting.
Too Little Value
We have taken on clients who have paid a range of high and low fees but were not getting the results they desired. The value they were getting simply was not there. They were willing to pay higher fees but were struggling to find a competent agency to get them the results they needed.
We have also taken on clients who found the right mix between fees and performance but needed a new vendor for some other reason. These clients felt the value they were getting warranted the management fees they were paying.
The win-win for everyone is group 3 – Just Right. This is the group that tends to result in long-term relationships where everyone is happy. In some cases, outlying circumstances that may not even be negative, leads to the business relationship ending.
The ‘Too Little Value’ group still happens way too often. There can be a myriad of reasons for poor performance and is beyond the scope of this article.
The ‘Too Much Money’ group is better than the ‘Too Little Value’ group because the client is getting the results they want. The downside is the price. I see this happen with larger PPC agencies and in cases where clients just assumed a high fee was warranted in order to get those results.
Just because you pay more for a service, doesn’t mean you get the corresponding increase in value that would be needed in order to justify the higher PPC pricing. This holds true with PPC management.
Is It The Value Or The Expenses?
Consider the following two questions.
Are you paying more because the service you are getting is better? Or, are you paying more because the agency you hired has high expenses they need to cover and they need their clients to pay more in order to turn a profit?
I know many agencies who need to charge higher fees solely because they have lots of overhead and expenses they need to cover. They have to. It’s not necessarily an issue of greed and It is not because they are able to provide a higher value of service than other PPC agencies. I assure you, there are plenty of excellent companies out there that can provide you excellent service at a lower cost than the big agencies. I expand more on this in my Jumpfly review post. Jumpfly is one of the bigger agencies in the PPC space.
To drive home the point of costs and expenses, I’ll quote a few passages from an article the CEO of Adventure Media wrote. They are another big PPC agency in this space. He talks about his reasoning for increasing management fees for their PPC clients.
“As our business got bigger and as expenses grew, it became important to really delve into the financial structure upon which we were operating. After doing some of my own rather obscure analysis, I figured that it was costing me $50 per hour, per employee to keep our doors open.
“Based on the amount of time it took to service a client each month, it became clear that we were losing money on clients paying us $399 / mo.”
He is acknowledging the fees for clients needed to go up due to expenses. Note, it wasn’t due to the increasing value they found out they were providing clients. It was simply cost-driven. I have heard they are a good agency and provide good value to their clients. The point being, there was not some kind of increased value they all of the sudden were able to create for their clients that warranted the fee increase. It was purely expense-driven. He decided to raise the minimum fee to $699 per month.
He then goes on to say the following in the article:
“About 6 months ago, I decided to start quoting each client based on the value we were bringing them (and a number of other factors). Aside from transitioning to a more value-based proposal system, I decided our minimum monthly management fee would be upped to $1,600, more than double what our current minimum was.”
That’s a big jump in fees!
This is just another example of a larger PPC company needing to raise pricing due to increasing business expenses. This is typical in almost all industries and is just part of growth for bigger businesses. As they grow, their expenses go up. How do they increase revenue to scale with increasing expenses? They increase their number of clients and increase the pricing for clients.
Now, I’m all for companies kicking butt and making money. Provide people with great products and services and be rewarded financially. Go for it. That’s what I’m doing 🙂
My point is this. Be weary of paying PPC agency fees that seem to be on the high end. You might be paying a higher rate and not getting the equivalent higher level in value. You might just be experiencing the law of diminishing returns.
Additionally, a higher percentage of your management fee may just be going to cover the agency’s large overhead and expenses. Put another way, less of your fee is actually going to the actual management and improvement of your PPC campaigns.
PPC Agency Pricing Thoughts
If someone is charging you $1500 and you are spending 10K a month or less, then you are probably paying too much in agency fees.
If you are currently working with a large PPC agency, you might be paying too much in fees. It may be time to shop around.
I assure you, there are plenty of smaller PPC companies out there with highly intelligent PPC professionals who can provide you the same (if not better) value at a lower rate.
Just because your ad spend is high, doesn’t inherently mean the management of your campaigns are more complex, thus requiring you to pay a higher PPC management fee.