At least once per week I get approached by a potential client who wants us to run a pay for performance search engine optimization (SEO) campaign for their site.  I always entertain the idea and I usually try to figure out a model that would make sense for both parties. However, most of the time we decline to take these types of deals…even though the potential upside is huge. I know that Best Rank isn’t the only company that struggles with how to efficiently formulate a pay for performance SEO model…so, I thought I’d throw the discussion out to the community.

Below is a study of the pros and cons of pay for performance SEO pricing models. This post is meant to be more thought provoking and not necessarily a guideline for why or why not…so, all comments and suggestions are welcome.

Pros for Client:

  • The Client’s risk is significantly reduced with a pay for performance model. SEO service is not a very tangible product…it’s hard to predict results and even harder to base a pricing model around those results. So, traditionally, clients are asked to assume a lot of the risk by paying a monthly retainer.  A purely performance based SEO campaign places the majority of the risk squarely on the Company’s shoulders.
  • The Client pays for performance!  That’s a pro in and of itself.  They pay whenever some type of predefined action occurs. For example, traffic from an organic search for a targeted word, a sale conversion, a newsletter sign-up, a phone call, etc…  There are different acronyms used for these models, for example: CPA (cost per acquisition/action); CPL (cost per lead); CPC (cost per click/call).
  • The Company is highly incentivized to show you results. If a company enters into this type of agreement, then you can bet the farm that they are going to try their hardest to get you results.

Cons for Client:

  • The Client is now tied to the Company. This may not sound too bad initially, however, depending on the deal structure, this could be a nightmare later. Imagine signing a performance based contract with a company, and the relationship doesn’t work out for whatever reason…but the company still gets a piece of every sale.  This can make for a very stressful situation; one which must be accounted for in the negotiation phase.  Keep in mind that the Company must be incentivized for offering its services on a performance base, so they will be more likely to want an ongoing piece of the revenue.  Do you really want that company tied to you for the next XX number of years?
  • Fraud!!  Many unscrupulous companies will generate fraudulent clicks, calls, form submissions, or whatever in order to get their performance based fee. A company will never admit to doing this…so, it’s on the Client’s shoulders to monitor and track the conversions (or whatever the performance trigger is).

Pros for Company:

  • The Client assumes less risk, which means that they aren’t as stressed out and probably aren’t really hounding the Company (versus a retainer based model) to show results, so that takes a lot of pressure off the Company…which is good! 
  • There can be significant upside in terms of revenue from a performance based model.  If the deal is structured properly, then the Company can get a large percentage of the overall profits from every sale.  If the campaign does extremely well, then the Company can get much more revenue than they would have in a retainer model.

Cons for Company:

  • Tracking!!  Clients may not be able to track conversions correctly, which will lead to bickering over money at the end of each month. This is especially true for service based businesses where it’s difficult to track the source of a lead/sale. Ecommerce is much easier to track.  Clients have also been known to fudge numbers so that they don’t have to pay the performance fee. This is another point that must be addressed in the negotiation stage…how both parties are going to track and monitor the performance triggers.
  • The Company assumes the bulk of the risk. The Company must be very confident in its skills and forecasting ability in order to enter into this type of agreement. The Company must allocate labor and marketing dollars in the beginning of the campaign; it can take 3-6 months before a site gets any traction in the search engines, which means the Company is shelling out cash (in the form of labor and direct costs) to get results, with no promise that the results will actually yield conversions.

Cons for Both:

  • Traffic vs. conversions. An SEO company’s main focus is to drive relevant traffic to the Client’s site via the search engines.  If the site is not set up for conversion, then all the traffic in the world may not garner any results.  If the Client is not willing to invest in a website upgrade, then all of the Company’s efforts may be futile.  Most companies cannot justify rolling the cost of the website upgrade into the performance based model…it must be compensated for directly since the Client owns the site.
  • Privacy issues!!  There has to be a lot of transparency of both companies to properly formulate a pay for performance model. Both companies will need to be more transparent with their accounting, back-end systems, and tracking in order to facilitate a good working relationship.  If either company is nervous about this, then a solid non-disclosure agreement (NDA) is needed.

Other Thoughts

Hybrid pricing models – Direct compensation coupled with a performance based arm is starting to gain some traction in SEO.  Since so much work goes into the initial campaign, SEO companies should be directly compensated for that work. Then the SEO Company can craft a performance based piece for the ongoing campaign.  There are still lots of pros and cons to the performance piece, but at least most of the up front work has been compensated for.

Performance based SEO is still in its infancy…for that matter, SEO is still in its infancy.  Many companies are actively trying to figure out how to accurately structure a performance based SEO model. However, there’s one inherent flaw…all of the predictions in the world are predicated upon the fact that you must get the Client’s site to the first page of major search engines in order to drive the traffic.  There is no accurate model that can predict the exact timing and effort required to get first page results. Thus, there can be no accurate performance based pricing model. 

SEO is complex in nature and it takes a lot of up front work in order to do properly. The benefits of this work are ongoing for the Client’s site. So, until a solid software platform is developed (similar to Enquisite) where SEO companies can accurately map out the revenue they can expect to receive (based on performance), then retainer based models will continue to be the norm.

What do you think? Do you know of good performance based models that are fair for both parties?

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