Paid Search Performance Pricing – Making It Work for You

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Chances are that if you are a search marketer, you do not need me to tell you about the competition in search today. There is no shortage of it. Throw economic uncertainty into the mix, and you have a competitive marketplace like no other. Given that, marketers are looking high and low to get a leg up on the competition in any way they can. And while it may seem like an unlikely candidate to get you there, paid search performance pricing might help you do just that, as it can certainly drive results.

Maybe you have thought about trying this type of pricing model before, but held back because you were unsure of what’s involved. Or perhaps you tried to pursue it in the past, but had trouble making it work for you and your vendor. Either way, you are not alone, as most marketers grapple with this decision as they try to assess which type of pricing model works best to maximize results.

Understanding the Model

Performance pricing is an incentive-based compensation model formulated by the marketer and vendor based on the achievement of clearly defined goals. The chief benefit of the model is that it provides the opportunity to develop a mutually beneficial plan where both parties’ goals are aligned. Ultimately, it is designed to create incentive for your partner, drive overall campaign performance, and be a win/win for the marketer and vendor alike.

And how does it work? The underlying premise is that if your search marketing vendor drives more revenue for you this month than the established historical benchmark from last year, they receive additional compensation beyond the minimum monthly management fee. Naturally, this would be a boon for both parties – you receive more revenue for your company, while your search partner is compensated for generating the additional revenue for you. However, if your partner does not increase your results over the established baseline, then they will not receive any additional compensation.

What You Need to Know

If the concept has piqued your interest, investing in this model could well be worth your effort. But before you run off to develop your plan, keep reading – there are a few things you need to know.

First off, realize that developing a win/win performance compensation model can be complex. It requires considerable planning and analysis, and is not an undertaking for the data-challenged individual. For instance, you must have a clear understanding of the metrics that drive your business. On top of that, you need data to help establish benchmarks, and you need to know the value of your most important metrics. Beyond that, you have to know the value of an incremental conversion and what you can afford to pay for it. Next, you must factor in all your costs – cost of goods sold, minimum monthly management fees, etc. – to ensure that your ROI will be positive as you receive incremental revenue and pay out additional performance fees.

But complexity isn’t this model’s only challenge – change plays a huge role as well. In fact, it is anything but a “set it and forget it” model. You should think of it as a continual work in progress, as even the most well-constructed plan will face challenges from both parties during the course of the agreement. Business goals will change, and as a result, invalidate the parameters of the deal. For example, if you have a benchmark established for maximizing total revenue from the paid search campaign, and you are hit with a sizeable budget decrease, then the established benchmark is nullified.

Lastly, while this type of model could work for either paid or organic search, it naturally lends itself to the paid side. Here’s why – search marketing vendors have full responsibility for execution with this discipline. Because of that, it is easier to establish compensation criteria for a performance compensation model since the outcomes generated are a direct reflection of the vendor’s efforts. Using it for SEO engagements can be more difficult since the responsibility for execution is shared by the marketer (for implementing site changes, etc.).

Making It Work – Seven Critical Factors

From my experience, creating a successful performance compensation model requires considerable planning and analysis. Below are seven critical factors that can help you make this model work for you.

1. Goals

Ultimately, you want to create an incentive structure aligned with your goals that will not lead to a negative ROI once all of the management fees, incentive fees, and your cost of goods sold are calculated. To that end, think about your business and its goals. Could they change over the course of the next 12 months? Whether your answer is definitely, possibly, or highly unlikely, it is better to develop a plan that will accommodate change, as this may impact the compensation you pay your search vendor.

2. Benchmarking

Leverage historical data to establish solid benchmarks. You need to have at least 12 months of accurate data so that you take seasonal trends into account. Sufficient historical data is vital to decisions guiding performance metrics and the compensation you pay your vendor. If you don’t have the data, don’t use this model. Instead, use a percentage-of-spend model until you have a full year of historical data.

3. Performance Metrics

Establish success metrics aligned with your goals. If your key conversion point is downloading an application form, then base the performance metric on the number of applications downloaded each month that are over baseline. Alternatively, if your key conversion point is an actual sale – and you can track revenue for each conversion through paid search – then your metric could be total revenue per month delivered through paid search.

4. Scenario Analysis

Play the “what if” game to assess how change may affect your vendor’s compensation. For example, what if your paid search budget is reduced because the funds are needed to support another channel? Not only could this significantly impact your search marketing partner’s ability to achieve your goals, it may also adversely impact their compensation, through no fault of their own. Conversely, what if you had a significant monthly budget increase? How would that impact the original Return On Advertising Spend (ROAS) goal that the vendor’s compensation is based on? Most likely, the ROAS would decrease, as the vendor may not immediately be able to deliver more conversions at the same cost per acquisition with the increased budget.

5. Alternatives

Remember, the goal is to create a win/win model – it will only work if it’s fair to both parties. Given that, it’s important to build in metrics that not only reward performance, but also account for change. The best way to do that is to include alternative success metrics. For example, if you have a benchmark for the total number of downloads, then you should also have one based on ROAS. That way, if your budget decreases and your search marketing partner cannot attain your download goal (because they no longer have the spend to deliver), they still have a shot at achieving the ROAS goal.

6. Tracking

Ensure that you have the means to track campaign results on a monthly basis. You need to be able to run a report at the end of each month that speaks to each performance metric. For instance, if one of your success metrics is downloads, you need to be able to assess how many occurred in May 2008 versus May 2007. If you do not have the means to do so, discuss it with your search marketing partner upfront, and come to some agreement on how to track the results and who will take responsibility for the tracking.

7. Alerts

Discuss including a “safety valve” in the compensation plan. It should function to alert you when, for example, you are close to hitting a threshold (budget) that may have a considerable effect on the results of the campaign, and therefore on the compensation you pay your vendor. Ultimately, this alert should be designed to keep you on top of events with the potential to impact your campaign so they can be recognized and addressed immediately.

Worth the Effort

Overall, a performance-based compensation model can truly be a win/win for you and your search engine marketing partner. Not only will it help to drive results and bring your partner’s goals in alignment with your own, it will allow you to reward your partner for superior performance while keeping your overall ROI in mind. Doing it right takes a bit of time, effort, and planning – but well worth the effort in the end. My advice? Don’t just settle for a leg up on your competition. Instead, use paid search performance pricing to blow by them completely. Once the dust settles, they will still be trying to figure out what happened.

About the Author

Paul Wilson is Chief Revenue Officer for iProspect and oversees the firm's sales and business development teams. iProspect helps many of the world's most successful brands maximize their online marketing ROI through search engine marketing services, and can be reached at www.iprospect.com.

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