SEM Pricing: Bundled Services or A La Carte?

In my first two posts on SEM Pricing models, SEM Pricing: Revenue Sharing and SEM Pricing: percent of Ad Spend, I discussed the relative merits of revenue sharing vs percentage of ad cost models. I concluded that basing the fees on ad costs, with clear efficiency limits applied to the competitive search terms and well-constructed maximum caps provided the best incentives to align the SEM’s interests with the retailer’s.

Let’s turn to the next question: is it best to bundle services into one pricing bag, or have individual services that can be priced separately? Are you better off with a pricing structure that encompasses Adwords, Yahoo, MSN, Ask, and the myriad tiny search platforms with the Comparison Shopping platforms, with your affiliate marketing management and Search Engine Optimization (SEO) work as well?

Bundled pricing seems simple and appealing. Like an All-You-Can-Eat Buffet, it might stand to reason that the prices are fixed such that the light eaters subsidize the heavy eaters. Buffets are then a good deal for the heavy eaters; not such a good deal for others.

Unfortunately the online advertising world is not that simple. The cost of providing food to a buffet is linear: the guy who eats two steaks costs twice as much to serve as the guy who eats one. In advertising, the bundle contains a mixture of services of varying costs to the provider, and varying value to the retailer. The high cost products are not always the high value ones and therein lies the rub.

Bundled pricing takes away the retailer’s ability to pick and choose which services are worth the cost, forcing retailers to pay for some of the high cost/ low value services that they might prefer to drop given a more transparent pricing model.

Dare I name some of these products/services that cost a great deal to provide, but generally provide little value to the retailer? You Bet!

Second and Third Tier Search Engines. Huge amount of work to support and a trivial amount of quality traffic available. “But my SEM provides this service for free as part of the package!” – No it doesn’t, it simply charges more for the package to cover the cost of the service. If they “do everything” for a reasonable price, the issue may be: how much of your attention goes to the important first tier engines and is that enough?

Comparison Shopping Engines. Datafeeds are easy to send, but difficult to manage. The CSEs have no coherent systems for reporting clicks and costs, thus the IT cost of pulling the data is high and requires ongoing expensive maintenance. For non-sku based retailers the sales volume from the CSE’s is miniscule compared to the cost of providing the service. For SKU-based merchants CSE’s can be valuable, but a la carte pricing for the full service might even raise questions for those folks.

Affiliate Network Management. Managing and controlling a huge network of affiliates costs a great deal of money…at least in theory. It would if the Networks actually did control and manage the affiliates. Anyhow, retailers pay a great deal for Affiliate advertising, but anyone who has looked under the hood knows that very little of the traffic is incremental. Mostly you’re paying commissions on sales you’d get anyway.

Search Engine Optimization. Oh my gosh, did I say that? Yep, I did. Here we have an entire industry based on two false premises: 1) That a large percentage of web sales come from “natural/organic” search – not true when you correctly exclude brand searches; and 2) that outside firms can meaningfully impact your rank on important competitive retail terms.

“But I’m seeing growth in my Natural Search sales.” Cool, does the growth translate to overall growth in site sales, or are you simply giving credit to your SEO firm for orders that used to be free? If the total site sales are growing, that’s great, but everyone’s site sales are growing as more people become comfortable shopping online. The real measure is: has the growth rate increased as a result of SEO efforts? The answer may be disappointing considering the price tag.

I’ll rant in more detail about SEO in my next post, and better define what SEO services can and cannot do for you.

The power of a la carte pricing is the transparency that comes with it. Seeing exactly how much you’re paying, for exactly which service, and tracking the incremental value of those services is the best way to keep your online management firm on the straight and narrow.

Technorati Tags: Comparison Shopping, Google, Microsoft, SEM, SEO, Yahoo

George Michie