The answer to this question is one of the most sought after when seeking to engage an Internet Marketing firm or professional. But there is very little tangible information online on the topic, so I hope to clear things up a bit. Hopefully you can gain some confidence in the engagement you are about to make.
How much should a company spend on digital marketing?
I’m not going to provide a definite hourly rate or compensation formula here, so don’t hold your breath. However I will build a solid foundation from which you can make better decisions about compensation for digital marketing service.
First lets simplify. We need to understand that there are two different service areas that should be clearly segregated. There are those services which directly drive sales and then there are a number of services that are administrative in nature. Administrative-type services can be priced at fixed rates. But its the services that drive sales that require special attention. And if you don’t understand why you need to separate these two and compensate accordingly, you will sow the seeds of discontent or mediocrity into your (doomed) relationship.
Lets get the simple admin stuff out of the way quickly . (However, I suggest that you arrange to pay for administrative services after you determine a compensation plan that focuses on incentives to drive sales.) The administrative jobs would be:
SetUp and/or Audit Accounts: such as Google Search Console, Google My Business, Adwords, Analytics, Facebook, Bing and other online listing services – all vital, but not direct drivers of sales.
Backup Services such as maintaining account passwords, documenting processes (these are sometimes assumed services). These should not be assumed to be included. Often we see passwords and procedures disappear at termination of a relationship – with disastrous consequences.
There are other admin type services, but you get the idea. Now for the really important part: Compensating for the services that will grow your business and possibly save a lot of money along the way (wasted ad spend).
Return On Ad Spend & ROI
As a business owner, ROAS (Return On Ad Spend) or ROI are the big picture numbers that tell me how much improvement my marketing firm or consultant is making. Increase in ROAS indicates I’m getting more sales for my ad spend, and I’m happy to compensate for that. I don’t see how this is not the logical way to look at the relationship. But for perspective, lets take at a look at the norm in the industry.
The Compensation Scheme that most firms and consultants like and why: Percent of Spend
The Monthly Fee plus a Percent of Spend scheme is by far the most popular. In fact its seems to be the only scheme on offer. It entails charging a monthly fee plus a percent of monthly ad spend, which seems OK on the surface. Both numbers seem manageable. But you should be wary of anyone proposing this scheme because it is an incentive that will produce the wrong outcomes. For instance, you do not want to spend more on ads, but your consultant certainly does. The conflict of interest bulb should be flashing red! They will almost always come to the same recommendation; spend more to make more sales. That may not be a false premise, but their goal is not efficient spending, just more spending.
Why are Internet Marketing firms/professionals NOT using ROAS & ROI as benchmarks from which to base their compensation? Is it because those numbers are too difficult to attain or calculate? No! Is it because they are too intangible and don’t clearly indicate progress? No! Its because most firms and consultants can’t actually increase ROAS or ROI.
This is a well understood advertising agency business model – build a large base of clients from which a monthly revenue stream can be established, and then retain the client for as long as possible, increasing efficiency maybe possible as a secondary concern. What you normally get in these agency arrangements is good customer service and pretty month-end reports (with lots of green numbers), but maybe not so much ROAS.
An effective Internet Marketing regime will likely decrease spending where there is currently waste. That is what ROAS is meant to measure and why you will spend less for the same sales. (maybe later the budget is increased to capture more sales, but usually the spend is not increased BEFORE efficiencies are realized).
You may be a new business. You might think a new businesses would not be able to use ROAS or ROI as a measure of performance. Of course going from 0 to something would be worth compensating, right? Well not exactly, because we do know what to expect in generic performance terms. There are benchmarks that a new business can use to measure performance.
Lets look closely at ROAS to figure out what you should pay for Internet Marketing services.
Whether you are a new or established business, here is what you need to know. In your Google Ads (adwords) you find these numbers in your campaign reporting. Conversion Value per Cost is what you want to look for. Its not a default column so you have to customize your columns.
Conversion Value per Cost is your Return On Ad Spend (ROAS). If you spend $1 on ads, what are you making in return? Obviously all businesses are different, but to be profitable, this number should be higher than 1.00 to clear overhead costs and still be profitable. (1:1 would be “going out of business” True?).
What is normal for your business segment is something only you (and your consultant) can calculate, but roughly, a ROAS of 3.00 is good and anything over a ROAS of 7.00 is very good. You can use these as good generic benchmarks for digital marketing compensation purposes.
So if you hire a digital marketing firm, and they improve your Conversion Value per Cost two-fold, that means you can spend half as much as you were spending while making the same sales. As a digital marketing professional, the last thing I want to do is decrease my monthly receivables by half. Where is the incentive to do good (hard) work if I’m compensated on your decreasing monthly ad spend?
Or you can say you are now twice as successful, and now you have the confidence to increase your budget to capture more sales. But as you can see, the increase in budget (monthly spend) will come only after your ROAS has increased. And if you are compensating your consultant with a Monthly Fee plus a Percent of Spend scheme, they are not going to be too happy if you decrease your spend – and the relationship will stagnate or deteriorate.
In conclusion, you can now more comfortably discuss with your Internet Marketing firm or consultant how you can arrange a compensation model that works for both of you – for the long haul. One in which both efficiency and sales growth blend into the best possible performance.
You can also now easily determine if you are engaging a firm or consultant that believes they can move the needle or if they are simply interested in a steady long-term revenue stream (delivering great customer support and pretty reports with lots of green numbers every month).