I recently had an interaction on Reddit, that I decided to save since my response got long and, well, blog-like! I've talked on pricing before, but the Profit-based PPC agency fees discussion seems to come up a lot, especially with small business owners so I thought including this for you all to see here so it doesn't get lost forever on Reddit was a good idea. I hope it's helpful to you.

It will be written from the standpoint of addressing the statement of someone suggesting that commission/profit based fees for PPC was the best way to price our services.

Here were my thoughts with minor editing so it would be more readable from the blog reader's perspective:

To address your pricing based on commission comment, I think it's a little more complicated than that being the perfect PPC pricing model, and worth spending more time on here.TL;DR: Pricing based upon % of profits sounds great, but has glaring weaknesses upon closer scrutiny.

Transparency: I first started freelancing with profit-based percentage for exactly the reason you noted. Business owner is happy with growth, I get paid more, what could go wrong??? I quickly learned there were some gaping holes with this pricing and I ended up ditching it. Here are my issues with profit-based performance for PPC fees:

(1) Who is truly responsible for the sales themselves?

Profit-shared fees assume the primary purpose of PPC is to make sales, whereas the true purpose of PPC is to identify and send people most likely to convert at different stages of the buying funnel. Even though it may not seem like much on first-read, this is a pretty crucial difference.The reason is that (most) PPC agencies do not control all aspects of your sales funnel.

Sure, we can give CRO advice, and heck, even control a Landing Page, but that is completely different than helping to run all aspects of a business to set it up for creating a product/service that is truly desirable and priced correctly in a fluctuating market, training a sales staff that will finish, and ensuring all aspects of the online presence are always primed for perfect sales. When you tie fees directly to the profit, you are assuming the PPC agency has a hand in the entire selling process that is really the client’s responsibility.

As one (real-life-happened-to-me) example, what happens when the dev team pushes an update to the website on a Friday afternoon that accidentally prevents people from checking out for an entire weekend because everyone went home. PPC ads are still running and spend is still accruing, but revenue is 0. With a profit-shared model that would work against the PPC agency for a client issue that had nothing to do with the PPCer.

Just one example of many.Another quick example is in a lead gen company I worked with. I hit and exceeded their goals of sending phone call leads, but they had such call-center issues that they consistently had hang-ups when the phone was not answered. In that case, I was doing my part (sending phone calls), but they were not closing them well. Could we just use a commission off of those phone calls sent? Sure, but then are you saying the value is strictly in phone calls sent and not the quality of those calls?

At some point you admittedly want to go past just leads to actual sales. So in that case, the (good) desire to hold the PPC agency responsible for actual sales hits another roadblock.To me, a good agency will work with the client to figure out true goals, track leads to sales, continually optimize for more leads and sending better traffic. However, because of the difficulties listed above, they are held responsible for their work based upon that partnership and not actual tracked $$$ since as I’ve hopefully shown, those “actual $$$” are basically arbitrary anyways for the purpose of tracking 100% direct revenue to the PPC influence.

(2) How do you accurately track attribution in this model?

Another major weakness for me with this model, is that it assumes that the last click attribution model is the best way to track leads. This is continually seen as short-sighted and irresponsible. Your PPC/Organic/Social/Referral/Direct channels all work-together in far more complex ways than we ever used to imagine. However, a % of profit model for PPC pricing forces us to only consider last click sales since you need some verified and agreed upon manner to track revenue driven by PPC.

Admittedly, as we get more advanced tools (even Google Analytics has the Attribution Model comparison report now), it will possible to utilize these numbers in profit calculations. That is at least better than going specifically with last click attribution. However, even then attribution is still a lot of fuzzy math. There is still A TON of guesswork in models for what click should get what percentage of credit. In that case, you are moving beyond simple reporting for the sake of optimization decisions, and forcing the fuzzy math to solidify for the sake of your profit calculation.

What I mean by that is let’s say, you choose to use the Time delay model of Google Analytics for your agreement with your PPC pricing agency. Well, those numbers made up for what percentage of revenue goes where are COMPLETELY MADE UP. Seriously, they give us a means of tracking some sort of attribution and credit, but they are not real.

This is a huge point for me. If I as an agency am going to be forced to base my commission on profit, I sure as heck want those numbers to be real. Attribution is a HUGE problem for the profit-shared pricing model, IMO.Practically, one last thing I will note is that I find the agency has to fight the temptation to actually begin working against the rest of the marketing channels when their fee is tied to profit.

For instance, let’s say your agency you are paying based on profit tells you how much they are going to raise your revenue by using remarketing. And they do it!! They implement remarketing and raise your revenue.

Awesome right????

Well, remarketing is the last natural stage of the funnel. Often you are just confirming a person’s desire who would have come through social or email in the past after they have visited you and been convinced of purchasing previously. In this case, the agency unfairly increased their fees by purposefully investing your limited budget in a place that wouldn’t truly grow your sales incrementally, but just guaranteed that all of those sales were tracked as PPC for them.

It’s not impossibly to game the last click system like this, which means you actually should be hesitant about profit percentage fees as well.I find that profit-sharing actually causes a PPCer to work against other marketing channels rather than with (since their fees are directly tied to their last click success). In this case, it’s actually harmful for your business.

(3) How do you get past the data tracking issues?

Finally, the last reason I am hesitant to use a profit model of PPC pricing is because, frankly, whose data are you going to use and why would either of you trust it? This may not seem like a huge deal, but I have found that just trying to reach an agreement on exactly how to track what constitutes a sale, how to track it fairly, and how to incorporate that into an actual fee is much more complicated than appears at first blush. It sounds great until you actually start getting into the weeds.

If you are going to use a 3rd party provider like Google Analytics for data tracking, then what happens when you have tracking issues, or a data drop? How do you account for that in your fragile, yet complex model?

Also, if you are using an online provider for your data, then what about all of the other means of tracking value? How will you track phone call leads as well in your model? Should all calls be tracked, or just some? Some that lead to a sale? How much value will you assign to each call, will you manually track every single revenue dollar that comes from all calls so you can accurately include that in your pricing model? As your PPC agency, I would never agree to a profit agreement that was online only if calls were a part of your business since phone calls sometimes are the most guaranteed way of getting big sales.

If you don’t use a 3rd party source like Analytics, then frankly, why would the agency trust you if it was all your data being used and you (the one paying them) were telling them what revenue was raised based upon their efforts (and coincidentally exactly what their fee would be… all based upon your own database and reports).So, that got long….Honestly, figuring out PPC pricing has been somewhat of a passion for mine, and I find that most business owners immediately run to the profit model as being the golden ticket for PPC pricing, but hopefully this has shown it’s a lot more complicated than that.