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March 27, 2009

Pay-for-Performance: Winning Strategies for Advertisers and Agencies at SES NYC

By Brian Cosgrove

At the end of the first day at SES NYC came this interesting panel. Many ideas were shared about the importance of restructuring payment for search services and a few of the solutions offer considerations that should be made when considering these models. The panel featured the following speakers:

Moderator

  • Matt Van Wagner: President, Find Me Faster

Speakers

  • Richard Zwicky: Founder & CEO, Enquisite
  • Ron Belanger: SES Advisory Board, Vice President of Agency Development, Yahoo!
  • Tom Cuthbert: President & Founder, Click Forensics
  • Brian Klais: Executive Vice President, Netconcepts
  • Jonathan Scott: COO, Direct Traffic Media

Zwicky began the panel by illustrating the imbalance in compensation for paid and organic search. In his statistics, approximately 88 percent of spend goes to 12 percent of the search engine traffic (paid search) and 12 percent of spend goes to 88 percent of the traffic (organic). These numbers back up his notion that organic search is not getting the compensation it deserves. According to Zwicky, top SEO specialists can deliver top ROI so they deserve to be compensated for value delivered; and everyone should be focused on real value to the end client.

Next up is Belenger. Like Zwicky,this Yahoo! employee stresses minimizing the industry buzz-speak and getting down to business value. Unlike Zwicky, Belenger calls pay for performance problematic. It's true that for Belenger, search marketers need to minimize the sorcery by taking details of the tactics out of the price negotiations and instead get into value delivered. When it comes to pay for performance, however, there are a number of reasons that it may not be a good fit.

For example, the agency may not be able to influence all factors such as:

  • Conversion flow
  • Pricing competitiveness
  • Shipping and promotional offers
  • Brand "trust"
  • Customer service

As an alternative, percent of media spend presents its own issues:

  • It provides incentives agencies to spend more for paid search than they should.
  • In some cases, it disincentives economies of scale.
  • The first 90 days of of the engagement are bleeding red for agencies.
  • Search marketing is reduced to buying more keywords.

For Belenger, an FTE (Full-Time Equivalent) model with fair rates makes the most sense. The following were points on this subject:

  • Data is the new black: pay for it and agree on its value. Use it to derive strategy and insights.
  • Add incentives for cost savings: use technology deployment, outsourcing, and only provide in-house support where applicable.
  • Reach and stretch goals: create an upside for heroic work and a win/win business climate.

Next up, Cuthbert provided some interesting statistics. Online advertising is up 11% while print is down 19%. To explain this, he references phenomena such as CPA models, targeting, measurability, an roi focused culture, the collapse of traditional media, and enhanced tools.

Following Cuthbert is Klais. Klais works with software that is used to execute pay for performance search campaigns. Like Zwicky, he reiterates that there is an inverse relationship between spend and volume with paid and organic search. When thinking of pay per performance, there are a number of factors to consider such as the following:

  • Market opportunity
  • Click-through rate
  • Acquisition costs
  • Keyword coverage
  • Non-brand reach
  • Page placement
  • Page yield
  • Incremental traffic/revenue
  • ROAS

In general, the margin can increase based on value delivered which better aligns agency/marketer interests and should ensure positive ROI/ROAS. He did, however, express some performance model drawbacks for agencies:

  • Investment of resources ahead of revenue
  • Lack of control over execution and conversion
  • Difficulty in managing channel attribution
  • The possibility of succeeding out of a job
  • The program may contain baggage

For the customer, there are also drawbacks:

  • Costs can scale indefinitely
  • Bigger payouts tempt agencies to try risky tactics

When constructing a pay for performance arrangement, consider a revenue sharing model where you define fair commission structure. In this respect, consider rates for the percent of brand or nonbrand; or for incremental increases only. Consider affiliate levels for brand merchants and figure out how to handle channel attribution. Ultimately, try to make sure that SEO and paid search are given their fair split in credit.

Another model is cost per click. After defining a fair click cost, similar considerations should be made about branded vs. non-branded, comparing SEO cost to ppc acquisition cost, and multichannel attribution.

Scott came next and echoed the idea of performance related pay. He believes the industry should embrace performance contracts because the SEO gold rush is over, and clients are demanding accountability and governance in plans.

Scott proposes a base + performance model. That is, the performance element is the carrot, the motivator. He suggests setting up incentive targets based on true KPIs where you can approximately value them and trust them. Even still there are a number of considerations that should be accounted for when developing one of these plans.

The first consideration is seasonality. On a month to month basis, consider using Adwords trends to predict the possible changes in volume that occur. On a similar note, also consider other external factors such as the state of the market by doing a year over year comparison and utilize some basic forecasting. After that, relax and caveat a bit.

In some real life examples, Scott explained how there were bands where the % of bonus became larger and these bands were routinely adjusted to account for seasonality and market factors. It's about taking the time to reach an agreement that makes life easier and avoiding an overly complicated model. In this respect, the client should feel in control, there should be a warm-up period explained, and there should be get out clauses for both parties. It's about negotiating a sense of shared risk among both parties.

That wrapped up the session.  In summary, there are many factors out of the control of search marketers which make it difficult to come to a performance based agreement but, none-the-less, organic search marketers should be paid on the value that they deliver.

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