Think a Rev-Share protects your interests? Think again.

What’s the best pricing model for aligning your SEM’s goals with your own goals? The answer seems obvious: revenue-sharing. Unfortunately, the intuitively obvious answer turns out to be wrong.

For retailer’s that do significant amounts of offline marketing a huge chunk of the revenue that comes through PPC advertising results from brand and domain name searches. It’s not uncommon for a cataloger with a top-notch search program to see 60% of PPC sales on their brand, with the other 40% coming from competitive search phrases – It’s this last piece that generates the all important incremental sales.

Why do people search on your brand? Because of brand awareness created by offline marketing and word-of-mouth. It’s a good idea to run ads on your brand; the click costs are low, you defend your trademark, you control the brand message. However, sharing the revenue generated by your offline marketing efforts with your SEM is overly generous, and indeed makes the cost of brand advertising quite high.

However, a larger problem looms in the shadows: revenue-sharing models create a huge incentive to pick only the low-hanging fruit. If 60% of the available sales can be generated with the first 1% of the advertising expense and effort, why go after the other 40% of the sales?

Some retailers address the first problem by keeping the rev-share percentages really low: like 3%, figuring that that limits the cost of brand advertising. It does, but it also exacerbates the second problem. If I’m the SEM and I get $3 for every $100 in sales I generate, I can’t spend more than $2 in advertising. A 2% A/S ratio doesn’t buy a lot of competitive search advertising. Indeed, about the only advertising I can do is on your brand, which I can do in about 10 minutes and never look at it again.

Upping the percentage doesn’t even change the logic much. A retailer might say: “Okay, I’ll give you a 30% rev-share to advertise more aggressively”, but the problem still remains that the SEM can collect 60% of its maximum potential fee by doing 10 minutes worth of work. They might get another 10% or so by throwing a product feed at the search engines, using product names as keywords. The conversion rates on these terms are great, so they don’t really have to watch the costs on these terms either.

The other 30% of your sales and their fees would require lots of ongoing hard work and significant out-of-pocket expense for the SEM. It’s much easier and more profitable to just pick up another client or 3 and get 70% of their potential sales and rev-share commission.

You might say “70% is a passing grade, and it’s safe and easy!” Balderdash! The first 60% was your brand, and those folks will buy from you whether you have an ad running or not. The real problem is you’re only getting ¼ of the incremental business from competitive search terms that you could be getting with an aggressive well-managed PPC program.

Next time, I’ll talk about why basing service-fees on advertising costs is a better but still flawed system.

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