One legitimate concern that potential PPC clients have when choosing a search firm to manage their PPC, is the agency's fees. These prospects may be considering managing campaigns themselves and while they may not achieve the same results as an Agency, removing a layer of fees might seem to trump the gains of a seasoned SEM professional.
My colleague Joanne, recently wrote a blog on helping e-commerce clients determine if they are profitable when they include SEER's fees. She uses her calculator and the method she describes in her blog for the e-commerce clients (Page currently not available) she manages and in doing so she helps our client sleep better at night because they know even with SEER's fees and their variable costs she is able to achieve increasing profitability.
The SEER team has recently enhanced this calculator to help both lead generation clients and e commerce clients determine profitability when all cost and fees are taken into consideration. The excel file is linked here, but will eventually be made into a widget on the SEER site.
The goal of this calculator is to help clients and potential clients determine with all fees included whether or not their paid search campaign is returning a profit.
To use this calculator you need the following information:
- Monthly Budget
- Set Up Fee (if applicable)
- Commission or Flat Fee paid to the Agency
- The average CPC for the account
- The Lead to Conversion rate (leads/clicks)
- Sales to Lead Ratio — for e commerce clients this will be 100%. For lead generation clients knowing this ratio is essential for evaluating the profitability of the account
- Average Order Value
- Variable Cost or Profit Margin
All other fields can be calculated with this given information.
- Profit/Sale = Average Order Value — Average Variable Cost
- Clicks = Total Budget/ CPC
- Leads = Leads to Conversion Rate * Clicks
- Sales = Sales to Lead Ratio * Leads
- Revenue = Sales * Profit per Sale
- Monthly Fees to Agency = Flat Fee or Commission + “Setup Fee/12”
- Total Cost = Monthly Budget + Cost to Agency + Variable Cost
- Profit = Revenue(E) — Total Cost(G)
Let's look at how this calculator can be used, with the following assumptions held constant.
- Sales to Lead ratio = 25%,
- Average order value = $3,500
- Profit margin = 25% or $2625
Scenario 1: No Agency
Monthly Budget = 5K, Set Up Fee = 0 Agency Fee = 0 Avg. CPC = $5 Lead Conv. Rate = 3%
Plugging in these assumptions into the calculator, as seen below the client is doing ok and able to generate $1,562 in profit a month on his own without an agency.
Scenario 2 No Change in Performance with Agency
Monthly Budget = 5K, Set Up Fee = $6,000 Agency Fee = $2,000 Flat fee Avg. CPC = $5 Lead Conv. Rate = 3%
In the example below you can see that total profit for the month fell from $1,562 to $63 by adding agency fees with no improvement in performance. The conclusion from this example is that an agency better increase performance to justify their fees.
But as the following examples will demonstrate, if you were to choose a strong agency that can increase performance metrics, the results will improve your profitability.
Scenario 3: Agency with Improvement in Conversion Rate
Monthly Budget = 5K, Avg. CPC = $5 Lead Conv. Rate from 3% to 5% Agency Fees = 1k Flat fee Set Up Fee = 6K
This example illustrates how improving the lead to conversion ratio from 3% to 5% can change the profitability.
How can an agency increase conversion rate? At the onset, they will help you re-organize the account and will do extensive keyword research to identify keywords that have the potential to convert. They will then make sure that they organize these keywords into tightly themed groups, with ad copy that speaks to the keywords that you are targeting. They will also work with you to find the best pages to land these clicks on or recommend that landing pages be developed to target these keywords directly and ensure their ad copy includes any offers or benefits emphasized on the landing page.
Also, a strong agency will watch your account like a hawk and identify any keywords that have very low conversion rates using Google tracking or high bounce rates using Google Analytics. They may lower bids on these terms, or suggest a new landing page, or even eliminate these terms so more of your budget is available for the higher converting terms. Additionally, they will use Search Query reports to eliminate irrelevant terms you are being matched to by adding negatives to your account. Combined, this continual tweaking should influence your conversion rate in a positive way. They may also suggest landing page improvements and test these changes using the website optimizer to help develop the page that has the highest overall conversion rate.
These steps will not only impact your conversion rate, but may also increase your Quality Score, which in turn will influence the CPC you will have to pay for any given position. In other words, with a better quality score you may be paying less than your competitor for a better position. The impacts of quality score are not factored into the calculator example below, but is just another reason why not using an agency may be costing you money.
Plugging in the increase in conversion rate into the PPC calculator, illustrates how increasing your conversion rate, which results in more leads, which results in more PROFITABLE sales, may take your monthly profitability from $1,563 in our original non agency scenario to $4,438 with fees included
Scenario 4: Agency w/ Improvement in Conversion Rate and Account Expansion
Monthly Budget from 5k to10K, Avg. CPC = $5 Lead Conv. Rate = 5% Agency Fees = 1k Flat Fee Set Up Fee = 6K
Now, in our final scenario your agency not only helps you increase your conversion rate but they also help you expand your campaign which pushes your Monthly Budget to 10K. Again is this realistic? The answer again, is yes VERY. An agency can help you expand into engines you were not using like Yahoo and MSN. This is a no brainer for many clients because if every lead is profitable to you, than the more leads the more profit, so why not expand what you know works in Google into Yahoo and MSN. Additionally, a strong agency should have a plan and set goals on how they plan to profitably expand your account. They should look tirelessly for new keyword ideas, using Google Analytics for what types of terms are working organically. Additionally, they should look at Search Query Reports on a regular basis to find additional terms that you are being matched to with broad matches, which may spur on new keyword recommendations. An agency will help you expand profitably because they will be monitoring the account daily and providing reports on a weekly or bi weekly schedule, which will help them catch quickly what is not working.
Plugging the increase in budget into the PPC calculator, with all other factors remaining constant, illustrates how increasing your budget, which results in more clicks, which results in more leads, which results in more PROFITABLE sales could take your monthly profitability from $1,563 in our original non agency scenario to $10,375, fees included!
The next question you may ask, is now that I know all this, why should I use an agency? This question could be its own blog and there has been a lot written on this topic. Below are some posts that help answer this question.
- Why You Need to Outsource
- Search Engine Watch Forum - Outsource PPC
- Why Outsource your PPC Advertising (Page currently not available)
Now, even if you choose the right agency these performance enhancements cannot be expected over night. Typically it takes about three months of tweaking and testing for an agency to achieve the efficiencies that were described in this post. Moreover, not every client is the same, so expanding the account without your CPA increasing dramatically may not be possible in your industry. However, the PPC calculator helps you see what type of improvements an agency needs to make to cover their fees. As seen in the scenarios explained, in many instances you cannot afford not to test working with an agency. Not only will you save time by not having to manage the account yourself, but you may also be missing out on huge profits that a seasoned professional can help you achieve.