SearchTHIS: The Search Agency Burden

Google dropped its agency commission plan recently. Perhaps a bit more appropriate way to describe the change is something of a reformation. The announcement came during ad:tech’s debut in London and, dare I say, it caused quite a stir in the search community.

Are you surprised? Many search marketers were unaware that an agency compensation model even existed. If you haven’t been practicing search beyond American borders you would have no reason to believe that such compensation models exist. In short, it is commonly accepted that agencies would receive a five to 15 percent “commission” on search advertising dollars.

The news of Google’s intent to create a more effective way to compensate third parties had more than one search marketer’s shorts in a bunch and the emails I received complaining about the compensation model shift prompted me to ask a series of questions. 

In the world of serving the client, which compensation model for third parties is best? What might happen if we continued down the path of a commission structure? Is any of this whining really necessary?

Google love

While admiration for the search giant would seem to be in short supply these days, the removal of flat compensation would seem to be a smart move on many levels. Removing compensation plans for big spenders will enable smaller players to compete. Instead of a blind focus on increasing revenue, third parties will now have a focus executing best practices in search. Of course, said best practices are determined by Google, which raises another interesting question.

Who should be determining best practices?

According to Google’s press release, dated September 28, 2005, the new European Third Party Program will offer training, tools and support to third parties. While the “best practice funding” model allows for greater flexibility and advertiser diversity, it is still left to the search provider to control the interpretation of the ideal course of action in program management for third parties.

Compensation models

For many purveyors of search marketing the concept of compensation is restricted to a surcharge on media placement, time and materials (in the more traditional model) or performance-based revenue sharing. Assuming all return or desired action requirements are met, budgets increase and search marketing continues on its growth path. Everyone is happy.

Oversimplified, a surcharge on paid search spending allows third parties to cover operating and service costs and usually falls in the five to 18 percent range, depending on the scope of work and spending threshold. Some would argue this model would present a conflict of interest. It is in the best interest of the third party to increase budgets and therefore compensation. Many search marketing third parties are moving to flat fee structures or they may place a ceiling on compensation.

The affiliate world made revenue sharing popular, and the dangers of revenue sharing are painfully obvious. Typically, a third party will accept as compensation a percentage of sales generated by search initiatives. It is generally understood that search is driven by other forms of awareness-driven marketing so search may receive undue credit for generating sales.

Expanding on this problem is the inherent success in measuring search-driven revenue. In this scenario, if a search initiative generates 10 million dollars in revenue per month and the third party receives a 10 percent revenue share, the “management fee” may equal many times what the service is actually worth.

The least biased form of search marketing compensation might be the tried and true variant of simply compensating the third party for the amount of time and resources dedicated to the initiative. However, establishing and managing search initiatives may require resources at multiple levels. Additionally, the time commitments vary tremendously in search management and few search firms have experience with this type of compensation model.

With all of the complications that exist with pricing models a generic “agency discount” sounds pretty harmless. Or does it?

In the beginning…

God created the yellow pages. Or maybe it was that guy from "Saturday Night Live." Merchants everywhere clamored to buy an ad in these wonderful advertising books with telephone numbers. The dangers of flat agency compensation might best be illustrated in an abridged history of the yellow pages third-party compensation model.

Shortly after phone book ads were created, large advertisers sought to have a presence for their national brands. Out of this need, the first national yellow pages ad, the trademark listing, was born. A trademark ad was little more than a logo with a small address listing below, placed alphabetically. It is still found in telephone directories today.

Since many yellow pages publishers existed and phone books were published at varying times throughout the year, these large accounts were designated as “national,” and an industry segment of third parties sprouted up to serve only national yellow pages advertisers. These third parties were compensated with a sales commission of around 30 percent.

Later, one or two third parties got the bright idea of operating on much smaller margins and began a wholesale discounting initiative. Publishers eventually figured since some agencies were operating on much smaller margins the rest should as well. The practice of "discounting" publisher rates is now commonplace and third-party compensation continues a steady decline.

Philosophical differences

Search marketing is undergoing a transition right before our eyes. In a lot of ways the change resembles the evolution of compensation from similar industries that have developed and matured in the last few decades. Today, many negotiations for a third-party relationship in the national yellow pages sales channel begin with questions about what types of discounts are offered. Services offered are a distant second to pricing and many publishers enforce a “sales quota” for third parties.

Third-party control of the advertiser relationship has been compromised. Advertising services have been commoditized and many of these third-party agencies have been reduced to little more than glorified sales agents. The publisher sales force for local ads and national third parties are constantly at odds with one another.

Perhaps severe philosophical differences of opinions might be the impetus for dynamic, and possibility dramatic, change in search compensation. Finding the right model is still left to individual negotiations and while many of these models are flawed, leaving compensation in the hands of providers -- in this case search engines -- empowers them to control the industry in ways that will lead the very idea of a neutral third party down the wrong path.

iMedia Search Editor Kevin Ryan’s current and former client roster reads like a “who’s who” in big brands; Rolex Watch, USA, State Farm Insurance, Farmers Insurance, Minolta Corporation, Samsung Electronics America, Toyota Motor Sales, USA, Panasonic Services, and the Hilton Hotels brands, to name a few. Ryan believes in sound guidance, creative thought, accountable actions and collaborative execution as applied to search, or any form of marketing. His principled approach and staunch commitment to the industry have made him one of the most sought after personalities in online marketing. Ryan volunteers his time with the Interactive Advertising Bureau, Search Engine Marketing Professional Organization, and several regional non-profit organizations.

Mr. Ryan is managing partner at Kinetic Results.