With the marketing budgets shrinking, the need to stretch the marketing $ gets magnified. This can be achieved by close monitoring of the Online Marketing campaign and a regular analysis of the Online Marketing efforts. However, this would require significant time and effort and yet leave a lot to chance. This would also not give you adequate control to check profligate use of your Online Marketing budget.

Would it not be great, if you could hold on to that precious marketing $, up until you get measurable results in return. Most Online marketing agencies do not give you such freedom, and follow payment practices that are largely effort based.

In this newsletter we would discuss the various payment practices that are followed by Online Marketing agencies, and how a post-performance payment model outscores the existing payment models. We would also discuss the challenges associated with establishing a successful pay for performance payment model.

Successful Online Marketing promotion involves continuous research and value addition. This also requires expert management and time, due to which most web based businesses choose to let an agency, manage their online marketing campaign.

Given that Search Engine marketing is largely influenced by factors beyond the control of the Online Marketing agency, like Search Engine algorithms and competitor’s activities, most agencies hesitate to have a performance based payment plan. This leaves the web owners susceptible to receiving a lower ROI and lesser control of their Online Marketing spend.

Most of the pricing models being used by agencies are based on the efforts involved, and vary from hourly fees to a monthly retainer, and most of these are not performance based. Further, each of these have their inherent advantage and disadvantages.

Though SEM agency pricing models fall into identifiable categories, percentage of spend, pay per performance, fixed hourly, customized services, and monthly retainer, there can be many permutations. However, most agencies settle on a hybrid business model involving facets that are conducive to the clients’ needs. A few prominent pricing models are:

Hourly pricing model

Advantage: The service of the SEO expert may be used when necessary. The rates vary based on the expertise level of the professional.

Disadvantages:The more popular experts may be too expensive and not available. Such a model may turn out to be more expensive in case of an iterative process.

Customized pricing Model

Advantage: Customized to address the specific client's needs.

Disadvantages: May not be conducive for small business owners.

Retainer based Model

Advantage: Allows the freedom to plan for resources, facilitates continuous process improvement, promotes relationship development and mutual trust.

Disadvantages: An extended plan could require larger client investment. The contract continues irrespective of the quality of work delivered by the agency.

None of these pricing models lay emphasis on performance, since the payout is not linked to achievement of results. A pay for performance model addresses this deficiency.

A good pricing model should be easily accessible for small and mid-sized business, be comprehensive, easy to understand and be scalable. The pay for performance model has these qualities and more.

A good pricing model should follow certain pricing goals. It should minimize risk, maximize upside, keep the prices rational, stay competitive, be in line with the client’s budget, as well as consider what works best for the client.

Pay-for-performance pricing model adheres to most of these mandates, and is normally tied to a commission structure. Under this model the fees payout is dependent upon the outcomes of the SEM campaign.

Though the payouts on performance-based contracts are usually great, the rules should be established clearly and at the onset. For this payment model to be successful, you must first establish the baseline – which is the key to establishing the reward.

The inherent advantage of this model is that the business owners only pay for what they get. Such a model helps to generate significant revenue, and leaves nothing to chance.

However, establishing the appropriate performance criterion is the biggest challenge to establishing a workable pay for performance business model.

There are certain factors that could potentially impede the success of the pay for performance payment model. This section addresses a few of these potential roadblocks.

In the Online Marketing business, there is a lot that can be done to a client's site, which is likely to give them success. However, even in the best of circumstances, there are always limitations, to what can be performed on the site. Further, answers to the following questions would also determine the success of the model.

» Does the agency have a free range over the entire site or just a few pages?

» Does the agency have freedom to re-design the site, reword content significantly or change the    navigational structure?

» Can the agency influence the client on how to answer their phone or respond to email inquiries?

Another significant issue with pay for performance is tracking what influences performance. Answers to the following questions would address this part.

» Does the agency have complete access to all sales statistics, including costs, profits and overhead?

» If payment model is based on profits, rather than just sales, does the agency have a say in how the clients spend their revenue?

» Does the agency also have a say in regard to pricing? This, too, can have a great effect on conversions.

There's been a lot of debate about the feasibility of performance based pricing, for professional search engine marketing. The biggest challenge to developing a successful model is the control, tracking and establishment of performance parameters.

However, these can be arrived after due deliberation between the client and the agency. And if both the agency and the client are willing to take that on and set parameters that are agreeable between them, then certainly a fair agreement can be reached.

The most appropriate Pay for Performance payment model, in the given limitations is that there be a hybrid model which lays more emphasis on the performance, and has a fixed component to cover the rudimentary costs of the agency. This is however, subjective and can be customized to each Online Marketing campaign. Such a model is scalable, can be monitored by the client, and does not leave the results to chance.