I’m fascinated by Online Marketing Incentives. We all use them, online and offline, everyday, to try and manipulate other peoples’ behaviour.

“If you behave, we’ll give you a treat later” is a popular incentive used by parents to try and control their kids (myself included).

Do this to get this – is the tacit level agreement that incentives operate on.

As a marketer we use incentives all the time to get people to take action.

Buy this product and you’ll feel this way.

The government uses it all the time to try and manipulate society’s behaviour. Think of the incentives involved with having children in exchange for money from the government as our workforce is expanded for instance.

But I digress.

Let me show you an example of a seemingly good deal that incentivises poor behaviour.

Most digital marketing agencies work on the following –

An agency will typically charge 15% of ad spend to manage an AdWords campaign. So, if client A spends $10,000 a month on Google, the agency pockets $1500. Client B spends on $5000 a month on Google ads, so the agency gets $750.

Certainly, this fee structure is nice and simple. But the downside (if you’re a client) is the incentive at play here.

As an entrepreneur your goal is to get the best return possible for your marketing money.

Your agency’s pay is contingent upon the amount of (your) money they spend, thus the more they spend, the more money they make.

Is this a smart incentive?

I say it’s not.

Your agency should be rewarded for maximising your marketing dollars, and for making you the most money possible, right?

As an entrepreneur myself, this is what I’d want anyway.

Plus –

Let’s say Client A’s account, with a $10,000/month spend, is a mature account that is ticking over nicely and requires only minor tweaking each month. Client B’s account, with a $5000 spend, is still in startup mode and requires many hours of testing keywords, ads, landing pages etc.

If anything, the agency should be charging more for client B’s account, due to the added work being done.

But this is not the worst part of the “percentage of ad spend” pricing model. As I said the biggest downside is that it provides no incentive for the agency to reduce waste spending. In fact, it actually encourages waste spending!

Given that a typical conversion rate for AdWords campaigns is 2% to 3%, it means 97% of all clicks are wasted. The aim of a good AdWords agency is to reduce this wasted spend as much as possible. But if the agency is pocketing a percentage of ad spend, why would they be worried if the client spends more with Google? The more the client spends, the better it is for the agency!

That’s why our digital marketing agency operates on a flat fee arrangement, we are thus incentivised to maximise your money and your profit. Who knows, in the future I may instigate a % of the profits we produce for our clients (we typically triple the profits of the businesses we work on), but for now this is the incentive structure that makes most sense to me as an entrepreneur.

What do you think?

Neil