May 102007

Navigating vs. Steering: How The Client - Agency Relationship Affects Profits

Good management is often deciding what NOT to do. For retailers, there is no end to the number of marketing opportunities available. Indeed, even within the much narrower field of PPC advertising the number of moving parts to tinker with and engines to try can easily eat as many full time employees as any company cares to feed to those tasks.

The key to effective management is to focus on those tasks that have the most impact on performance, and to skip those whose benefits aren’t worth the cost of doing them.

As an agency, we don’t control our client’s priorities. Often, our clients direct us as to what they want to see done, when, and how much time we devote to which kinds of projects. That’s fine! As former retailers, we understand that when the person in the corner office says: “I want the ad copy to read like this…” then that has to happen, even if “this” might not test out to be the most effective choice. And, as former retailers, we understand that at times other considerations trump maximizing site profits. Absolutely. We’re a service organization. We’ll spend our time serving each client as that client wishes us to.

However, some of our analysts observed that, among our paid search clients seeking to maximize web profits, it seemed that those clients who let us set the priorities for which projects we worked on each week tended to get better results than those clients who give us long “to do” lists each week.

That observation struck me as fascinating, so I pulled the thread.

First, I classified our clients into two groups. One group consisted of clients who give us strategic goals and metrics, and then typically accept our recommendations on the best way to meet those goals. The second group consisted of clients who give us detailed tactical “to do” lists to execute each week. While my classification is subjective, I asked some colleagues to make the same classification, and they independently grouped our clients similarly.

Next, I restricted my analysis to clients who we’ve been serving for over a year. I wanted to compare apples to apples, comparing year-over-year monthly lifts for months where RKG was managing the campaigns in both the current and prior year. For each such month, I calculated a percentage lift from one year to the next. I excluding partial months, and I excluded outlier situations -- like when a client radically changed their goals -- to make sure these few anomalies didn’t sway the analysis.

I found the results pretty astonishing:

  • The average year over year lift for clients who worked with us tactically, giving us detailed “to do” lists each week, was 18%.
  • The average year over year lift for clients who gave us strategic goals and allowed us to leeway to select our tasks to best meet those goals was 68%.

These differences are statistically significant.

68% versus 18% year-over-year lifts. In other words, our clients who allowed us to spend our time on what we believed to be the highest value activities enjoyed almost four times greater year-over-year gains versus those clients who opted to manage us via detailed task lists.

Causality is hard, nee impossible to establish conclusively, but I’d suggest humbly that the above disparity is a function of focusing on what matters. In terms of hours of effort each week, we certainly work just as hard for the clients who “let us drive” as we do for those who “tell us how to move the steering wheel.” But the combination of hard work and knowing where to allocate finite management attention seems to produce better results than chasing the project of the moment.

Our favorite way to work with clients is when a client provides us with lots of information about their strategic goals, promotion calendars, merchandise seasonality, their economics and margins, their customers, their site analytics, etc – and then listens to our paid search recommendations as to the best way for us to allocate our time and their ad budget to reach their goals. We prefer this “collaborative partnership” approach over the “complete client’s weekly task list” approach. Why do we prefer the former? Because the numbers suggest that collaborative partnership typically yields better results for the client. As much as four times better.

Our 68% vs. 18% finding isn’t some universal constant, like Avogadro’s number or the speed of light. These stats reflect our experience with our clients. Others agencies and clients might experience different results. Heck, the numbers could even be reversed for retailers working with less-than-stellar SEMs – if an agency lacked the experience or technology, giving them more autonomy could yield worse results.

If you’re a client working with a SEM agency, ask your agency to break out the tasks they’re spending their time on working for you each week. Then ask them for their opinion on which allocation of effort and tasks they think would generate the greatest return for you. If you get different answers, give their approach a try for a month. Who knows – you might enjoy a nice bump in your PPC results.

In a coming post, I’ll offer my opinions on which activities a PPC agency should spend most of their time doing. I’ll also offer my opinion on which activities are distractions, chewing up time while hampering growth. Stay tuned.


3 Responses to "Navigating vs. Steering: How The Client - Agency Relationship Affects Profits"
Interesting post George. I agree with your comment, "Heck, the numbers could even be reversed for retailers working with less-than-stellar SEMs – if an agency lacked the experience or technology, giving them more autonomy could yield worse results." But, this idea might even create a more apprehensive atmosphere for advertisers looking for an SEM agency. How do they know who to trust or what to look for to keep the agency accountable? I think it is very important for the advertisers to "keep their eye on the ball". There is really only one metric that matters, Profit. To the extent that all the other metrics provide insight and allow you to increase profit, they are significant. However, to focus on something other than profit could cause you to miss opportunities and fall victim to excessive advertising waste. I would require a detailed report that focuses on the profitability of each advertising channel from my agency. An agency that is able to employ technology appropriately should be able to produce valuable insight into your ppc advertising within 1-2 months, if they can provide value at all. As long as you hold them to profit, you will not miss the boat. If they can not provide accurate profit reporting, I would not use them as my SEM agency. A note on profit; when I use the term profit, I mean actual profit. I am not using profit in place of ROI, ROAS, or any other of the popular metrics out there. Looking forward to your next post George!
Hi Doug, I agree with you in principle, that an agency should be measured by results. However, profit maximization isn't always the goal. Some of our clients are willing to spend to break even or below as a customer acquisition play. Others with significant retail footprints or businesses that generate a great deal of call center traffic from their websites may need more subtle metrics than observed profitability. There are limits to how clearly any of us can really "see" the truth. The key to separating the Good Agencies from the Bad is to recognized whether they're helping to get at the truth, or instead trying to cloud the truth. If they suggest that the answer to every difficult question should be to spend more money through them, you should question their motives and the quality of partnership you're in. Figuring out who's good and who's not before you start working with them is harder. We think the best way to get at the truth is to talk to a number of their clients, and ask them hard questions.
I posted a similar reply over the weekend...for some reason, it didn't show up? Anyway...George, you make some very good points in response to my first comment. I assumed a couple of details that I should have included. When I asserted that advertisers should use profit as the key metric, I assumed that an agency would provide the means to track both call center/phone sales, as well as customer acquisition (or lifetime value) and relate those events specifically to the web advertising that generated them. George, what I think you are saying is that a perceived "loss" or "break-even" play in one medium is leveraged by profits in another. For example, I'll take a loss on the web if I can see an increase in phone sales, etc. What I am asserting is that if you can connect those mediums, you can more accurately determine if you are actually in a loss or break-even play. Hopefully, it's neither. The development of technology has produced solutions that allow online advertisers to track the effectiveness of online advertising through many channels (ppc, cse, affiliate, rss feeds, email campaigns, etc) with a high level of detail. With respect to the phone solutions, these types of solutions potentially require customization and /or integration with a CRM. The cost can be significant. Not all businesses can justify the expense, so, they aren't for everyone. On the other hand, if your business does most or all sales off-line, this type of solution can be invaluable. "If they suggest that the answer to every difficult question should be to spend more money through them, you should question their motives and the quality of partnership you’re in." This alludes to a pricing model issue to me. Looks like A.R.K. already posted on this subject here: I guess my opinion on this issue is dependent upon nature of the "difficult question" and the possible resolutions and existing agreements, etc. Thanks for the discussion, George!

Leave A Comment