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Pricing Models for the Small SEM Shop

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How do you go about establishing prices for your search marketing efforts? What kind of contracts do you need to protect your business? A group of experienced search marketers offer advice.

A special report from the Search Engine Strategies conference, August 7-10, 2006, San Jose, CA.

One of the biggest stumbling blocks for small search engine marketing (SEM) shops is learning the mechanics of running a business. SEMs may know optimization inside out, but like many entrepreneurs, not have a grasp on the business end of their operations. This is where many companies get sidelined because a big part of running a successful business is developing pricing models and contracts that work well.

At the San Jose Search Engine Strategies conference, veteran entrepreneurs Ken Jurina, Todd Friesen, Jessie Stricchiola and Greg Boser shared their experiences in a new session called "Pricing and Contracts for the Small SEM Shop."

The first speaker was Ken Jurina from Canada-based Epiar. Jurina described the pros and cons of several typical industry pricing models. The first involved a retainer and monthly fee along with a six- to 18-month contract. Jurina outlined this as a hunt-and-peck model without clearly defined deliverables or a phased, targeted approach.

The second contract approach in Jurina's presentation was the fee-for-service model. Under this approach there are clearly defined projects with a finite scope of work. Citing that his own company followed this business model 75% of the time, Jurina presented the method as one that delivers core services for a specified fee.

Two other pricing models that Jurina highlighted were pay-for-performance and hourly consultation. Pay-for-performance is normally tied to a commission structure and dependent upon the outcomes of the SEM campaign. The hourly consultation model is frequently used as a quick-fix approach when offering suggestions for improving optimization. Jurina also mentioned that some firms practice a combination of all models in order to ensure maximum flexibility.

As Jurina continued his presentation, a discussion of customer profiling emerged. In an effort for small SEMs to pursue clients that are a good fit with their organizations, Jurina recommended defining a particular target market and focusing on it. While small companies are usually quicker to be convinced of the value of search marketing, they often can't afford the services. On the other hand, while larger companies are more able to afford the services, buy-ins take longer because they often have to cross various departments. As a happy medium, the small SEM may want to consider working with mid-sized companies in order to deal directly with the primary decision-maker.

Pricing and perception were also included in Jurina's presentation. Speaking from personal experience, Jurina relayed a story about how his company's initial pricing structure caused sticker shock. Recognizing that the client was being turned away by price alone, the entire sales presentation was restructured to show the various phases of the SEM process and the corresponding ROIs from beginning to end.

In order to protect the SEM firm and give the appearance of professionalism, small shops would be wise to draw up proposals and legal contracts. What does Jurina's firm use? Their contracts evolved from a monstrous 25-page novel to a comprehensive five- to seven-page document that clearly defines the work without being bound to a guarantee. Spelling out services in phases throughout the proposal helps clients better understand the process and the deliverables. However, keep in mind that pricing is based on what the market can bear. If SEM shops aren't working with clients located in major markets (New York, Los Angeles, etc.), premium pricing may be a hard sell.

Todd Friesen from Range Online was next to take the stage, providing practical advice on key clauses that should be included in contracts. Small SEMs can be vulnerable, so legal protection becomes an important issue. Friesen listed five clauses on which no SEM shop should ever compromise. These clauses include:

  • Indemnification - Covers you in the event of errors.

  • Termination - Specifies a time period (longer than two weeks) for the ending the contract, if needed.

  • Intellectual Property Rights - Makes sure all tools, programs or other intellectual property remain solely in the possession of the SEM.

  • Confidentiality - Keeps the confidences of your clients and requires them to do the same for you.

  • Dispute Resolution - Keeps resolution proceedings in the state of the SEM, not in the client's state.
As Friesen's presentation moved forward, the topic of performance-based contracts was approached. While the payouts on performance-based contracts can be great, rules need to be defined clearly and up front. You must first establish the baseline - that is key to establishing your reward. Friesen recommended that companies work off gross revenue figures since the SEM has no control over the clients' costs. He also encouraged SEMs to ask for a reasonable percentage in order to build a long-term and fair relationship with each client.

Next to present was Jessie Stricchiola of Alchemist Media who discussed the transition from in-house search engine optimization (SEO) to running an SEM shop. Small companies don't have a large marketing budget, so they have to rely on word-of-mouth marketing quite a bit. This can make small firms more dependent on strong client relationships. Stricchiola gave a on-target reminder that while big companies could lose a few clients and not suffer, small companies take every loss hard.

To avoid client dissatisfaction, client relationship management must be a priority that starts even before the client becomes a client. Echoing Ken Jurina's recommendation of targeting clients that are best fits with your firm, Stricchiola suggested prescreening potential clients including:
  • Evaluating the client's understanding of the SEM industry.

  • Asking about prior SEM engagements/commitments (a company with more than three prior SEM firms might be considered a red flag & require further investigation).

  • Discussing the client's financial stability and accounting policies.
Don't take anything for granted. Some firms have received signed contracts from the IT or marketing department heads only to find later that the accounting department had much different terms than expected. Stricchiola gave excellent, practical advice in this area, recommending that the SEM request a direct accounting contact who could explain the client's payment processes before contracts are signed.

The final speaker was Greg Boser of WebGuerrilla who gave additional details about performance-based contracts (PBC). Citing PBCs as the model of the future, Boser believes this approach benefits small SEOs more than other contract models.

In negotiating a performance-based contract, Boser recommended working out agreements with client companies to get a percentage of sales (or profits, etc.) as payment after the SEO delivered the desired results. Clearly, if pay is dependent on performance, any SEO will have a vested interest in the clients' success. But what about clients that refuse to take the action a SEO might suggest?

Whether it's a difference of opinion or an underhanded client hoping to reduce his/her costs, Boser has a solution. Set the contract up to automatically extend if the client doesn't fulfill his/her part of the agreement. That way the client can't wait for the contract to expire and then implement the optimization recommendations without paying when those suggestions succeed.

The SEM industry is maturing quickly, but is still made up largely of small shops. This session provided great, practical advice that any SEM entrepreneur could use. Through real-life experiences and in-the-trenches recommendations, SEMs were able to gain a wealth of new ideas from this session that could aid in protecting and prospering their businesses.

Christine Churchill is President of KeyRelevance.com, a full service search engine marketing firm.

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