There are really 3 main types of Search Engine Marketing Agencies that will help your company build and run search engine marketing campaigns: Traditional SEM Agencies, Hybrid SEM Agencies, and Performance SEM Agencies.
Traditional SEM Agencies
A traditional search engine marketing agencies acts like a standard advertising agency, charging a percentage of the advertising spend. (Typical charges are around 15%). This means the company pays for 100% of the advertising budget that the SEM firm manages, plus a 15% management fee. The traditional SEM firm will then build and manage a keyword portfolio with the goal of driving as much traffic as possible while keeping to a target cost per acquisition for the client.
The traditional SEM firm often talks about blended performance of a campaign which enables them to target high cost and high volume generic terms, that often don't convert very well, by blending these together with your companies trademark terms that have much lower costs and higher conversion rates. When they combine the numbers they are able to show a reasonable blended CPA rate for their campaigns while still getting the volume the need to be profitable at their negotiated percentage of ad spend.
The traditional firm will typically run a small set of high-traffic keywords (100-1,000) because they often use 3rd party bid management platforms that charge them based on the number of terms being managed. This structure often makes it unprofitable for the traditional agency to target some of the low volume, but high-converting terms.
Research has shown that search engine marketing can be important for branding, and studies have shown that visible on a high-volume generic term can be very important in the beginning of the buying cycle. For example, being number one for sneakers, might may have an impact on which company the customer will short list when they ultimately search for "size 10 converse all star specialty ox sneakers". Traditional SEM firms are great and running these types of branding campaigns.
Hybrid SEM Agencies
Companies have gotten more sophisticated in dealing with traditional search engine marketing agencies, and have started to push to have a portion of the agency's' fees based on performance. The Hybrid agencies will take a portion of their fees based on how their campaign converts into sales and leads for their clients.
In this model, the company still pays 100% of the advertising costs to the search engines, but instead of a straight percentage of ad-spend as the management fee, the Hybrid agency might negotiate a smaller percentage (to insure a profit) and then take performance incentives on top, giving them unlimited upside potential should their campaigns meet or exceed the target CPA's that the client and the Hybrid SEM company have negotiated.
The Hybrid model can cause some client/agency tension because there may be certain high-volume low converting terms that the company might want the agency to place high for, that the Hybrid SEM firm won't want to spend money on because it will increase their CPAs and reduce the amount of their performance bonuses.
Because of the performance incentive, Hybrid SEM agencies might be more inclined to build larger keyword lists targeting some of the high converting and lower volume terms.
Companies that decide to work on a Hybrid model need to make sure that they structure the incentives to make sure the agency and the company's goals are aligned.
Performance SEM Agencies
Performance search engine marketing agencies are relatively new to the scene and work very differently. These SEM agencies build and manage their own keyword campaigns on behalf of the companies they are working for. The Performance SEM agency typically pays for 100% of the advertising costs and gets paid only of they generate sales and leads for the company.
Paying only on performance can be great for the company because they are able to know exactly how much a sale or lead is going to cost them. In times when advertising budgets are biding cut, these companies are often able to budget the expenses associated with these campaigns as cost of goods sold, as opposed to pulling from the advertising budget.
Before working with a performance SEM agency, companies should be careful to work with the agency to set clear expectations on brand guidelines for ad copy, and go over any keywords that you don't want the agency to out bid your internal efforts on. Stay clear of fully restricting terms, because if your ad budgets run out or the search engine decides your ads don't warrant full delivery on your terms, it is better to have your agency take those spots than your competitors.
Good communication is the key to building a strong relationship with your performance search marketing agency. These firms are taking on 100% of the expense risk, so you might be seeing strong sales on your end, but the agency might actually be losing money. Having good communications will insure that your commissions structures support their marketing efforts as opposed to finding out that they have shut down their ads because they were losing money.
Performance SEM firms typically have their own proprietary technologies to build and manage large scale keyword lists. They are often able to build keyword lists of between 100,000 and 1,000,000 terms for a company, depending on the number of products that your company sells.
The Performance SEM will typically not bid on the high volume low converting generic terms that might be important for your company's branding efforts, so if you decide to work strictly with a Pay-for-performance search agency, you may want to either run an internal campaign for some of these terms, higher a traditional SEM agency to manage them, or talk with your performance SEM firm to see if they might be willing to run a separate campaign for these terms with a media contribution for the company to cover the costs of running and managing the generic term list.
No matter which type of SEM agency you decide to employ, it is important to understand their strengths and weaknesses. Many companies have found that actually working with a mixture of both a traditional and a performance SEM agency actually produces the highest number of sales and the best overall CPA for the company.
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