Managing local PPC (Pay-Per-Click) campaigns for multi-location or franchise businesses involves significant risk, especially when the agency is responsible for paying Google Ads or other advertising channels directly and then billing the client afterward. This common configuration in the PPC industry poses several billing challenges that agencies must address. In this blog post, we will explore how to navigate the various decision points agencies face and outline the associated risks to help you better manage your Google Ad spend risks.
Why is Ad Spend and Billing Risk Management So Important for Agencies?
Effective ad spend and billing risk management are crucial because they directly impact an agency’s cash flow, client relationships, and long-term profitability. When an agency serves a brand at scale, managing these risks becomes even more essential, as the potential financial exposure grows with each additional franchisee or location. Each individual location may have unique billing preferences based on its budget, cash flow, and operational priorities. For example, some franchisees might prefer pre-pay billing for the security it offers, while others might lean towards post-pay billing for increased flexibility. This variation makes it imperative for agencies to understand the various billing configurations and their associated benefits and risks. By doing so, agencies can tailor their approach to meet the needs of each franchisee or location while mitigating potential financial pitfalls. In this way, agencies can foster strong, trusting relationships with their clients while ensuring their own financial stability.
The Agency Billing Model: Before or After Ad Spend?
One of the first decisions an agency must make is whether to bill the client before or after the ad spend occurs. This choice sets the tone for the agency’s cash flow, risk exposure, and client relationship.
1. Billing Before the Ad Spend
Billing the client in advance has its advantages, particularly in terms of risk management. When the client pays upfront, the agency mitigates the risk of having to cover ad costs out-of-pocket while waiting for the client’s payment. This approach ensures that the agency has funds available to pay Google Ads (or any other ad platform) and reduces the likelihood of cash flow disruptions.
However, billing in advance can lead to friction with clients, especially if the ad spend is lower than anticipated. Clients may demand refunds or apply pressure on the agency to spend the entire budget, regardless of changing market conditions or campaign performance.
Advantages:
- Reduces cash flow risks for the agency.
- Ensures funds are available to pay for the media spend.
- Can simplify financial planning for both the client and agency.
Disadvantages:
- May cause friction with clients, especially in cases of under-spending.
- Clients might perceive this as unfavorable if they feel they are being asked to pay for services not yet rendered.
- Once a planned budget is paid for by the client it typically cant be changed midway through the campaign
2. Billing After the Ad Spend
On the other hand, billing after the ad spend gives the client the assurance that they are only being charged for what was actually spent on their PPC campaigns. This transparency fosters trust between the agency and client. However, it exposes the agency to significant financial risks. If the client delays payment or defaults entirely, the agency is left holding the bag, as they are responsible for paying Google Ads directly.
Advantages:
- Builds client trust as they only pay for what was actually spent.
- Potentially leads to longer-term client relationships built on transparency.
Disadvantages:
- Significant risk of non-payment or delayed payment from the client. Study data shows that recurring payments on credit cards are typically declined 15%-24% of the time.
- The agency must cover the cost of the media spend until the client pays.
- May strain cash flow, especially if multiple clients delay payments simultaneously.
Management Fee: Flat Fee vs. Percentage of Ad Spend
Once the billing schedule is decided, agencies must also determine the structure of their management fees. Two common models are a flat fee and a percentage of ad spend.
1. Flat Fee
Charging a flat management fee simplifies billing for both the agency and the client. This fee structure allows the client to know exactly what they will pay for PPC management, regardless of fluctuations in ad spend. The agency, in turn, benefits from predictable revenue.
However, a flat fee model can become problematic if the ad spend increases significantly, as the agency might end up doing more work without corresponding increases in revenue. Conversely, if ad spend is reduced, the client may feel they are overpaying for management services.
Advantages:
- Predictable revenue for the agency.
- Simplifies billing and client expectations.
- Reduces the risk of disputes over management fees.
Disadvantages:
- Can become unprofitable for the agency if the ad spend grows significantly.
- Clients may feel they are overpaying if ad spend decreases.
2. Percentage of Ad Spend
Charging a percentage of ad spend aligns the agency’s interests with the client’s, as both parties benefit from increased ad performance and budget increases. This model can be highly lucrative for the agency when ad spend is high, as the management fee will scale with the campaign’s size.
However, this model also introduces volatility. If ad spend decreases, the agency’s revenue decreases as well, which can make it difficult to plan financially. Additionally, the percentage-based fee can sometimes lead to distrust if clients feel the agency is inflating ad spend to earn a higher fee.
Advantages:
- Aligns agency and client interests.
- Scales revenue with ad spend, potentially leading to higher earnings.
Disadvantages:
- Volatile revenue stream tied to fluctuating ad spend.
- Potential client distrust if they perceive the agency as incentivized to overspend.
3. Hybrid Model: Flat Fee Plus Percentage of Ad Spend
Another billing model agencies may consider is a hybrid approach, where the client pays both a flat fee for PPC management services and a percentage of ad spend. This combines the benefits of both the flat fee and percentage-based models, offering a more balanced approach to risk and reward. The flat fee guarantees the agency a baseline income, ensuring that the core costs of managing the campaign are covered, while the percentage of ad spend allows the agency’s revenue to grow alongside the client’s advertising investment.
Advantages:
- Predictable Revenue: Like the flat fee model, this approach provides a steady income stream that covers the essential services the agency provides, reducing the risk of volatility when ad spend fluctuates.
- Scalable Revenue: The percentage of ad spend component ensures that the agency benefits when the client’s budget increases or campaign performance improves, aligning the agency’s goals with the client’s success.
- Balanced Risk: The hybrid model spreads financial risk more evenly, as the flat fee offers some stability while the percentage of ad spend allows for growth without the high volatility of purely percentage-based models.
Disadvantages:
- Complexity: This model can be more complicated for both the agency and the client to manage, as it involves tracking both a flat fee and variable charges tied to ad spend. It may require more sophisticated invoicing and communication to ensure the client understands the billing structure.
- Perception of Overpayment: Clients may feel they are being “double-billed” if they perceive the flat fee as covering everything, leading to dissatisfaction if they don’t understand the value of the additional percentage-based charge.
- Revenue Variability: While this model offers more stability than a pure percentage-based model, revenue is still partially tied to the client’s ad spend. A significant drop in the client’s budget could reduce the agency’s income from the percentage component, though the flat fee would provide a buffer.
Scenario Matrix: Managing Billing Risks When the Agency Pays Ad Spend Directly
Now that we’ve explored the initial decision points, let’s focus on the risks associated with the agency paying for ad spend directly. Using a scenario matrix, we can examine potential outcomes:
Managing Each Scenario
- Perfect Billing: This scenario is ideal, with no risk to the agency. The client pays on time, and the ad spend is managed within the set budget.
- Negative Exhaustion: In this scenario, the agency underspends the client’s planned budget. The agency must decide whether to continue spending out the remaining unspent media budget which could extend the duration of the campaign, to rollover any unspent budget into the next season of the campaign, or to credit the unspent funds to the client.
- Positive Exhaustion: Here, the agency has overspent the allocated budget that they collected from the client. The agency must now decide if they will send an additional invoice to the client for the overspent funds, or to eat the costs themselves.
- Deficit of Payments: The worst-case scenario, where the agency spends money on ads but receives no payment from the client. This can lead to significant financial loss, especially if the client defaults entirely.
PPC ad management software like Adplorer can significantly reduce or even eliminate the high-risk scenarios outlined in the scenario matrix by offering advanced budget pacing and real-time monitoring tools. With Adplorer’s budget pacing feature, agencies can set strict spending limits for each campaign, ensuring that media spend stays within the client’s budget. This prevents underspending scenarios like the “Negative Exhaustion” case, or overspending scenarios like “Positive Exhaustion” where the agency would have to absorb extra costs or deal with uncomfortable conversations with clients. By continuously tracking ad performance and adjusting spending accordingly, the software ensures that every dollar is allocated efficiently, reducing the chances of under- or over-utilization of the budget.
Additionally, Adplorer’s real-time reporting and automated billing tools help agencies manage the timing of payments and ensure that clients are billed accurately and on time. These features help prevent scenarios such “Deficit of Payments,” where partial or no payments are received from clients after the agency has already paid the ad platforms. By automating the process and providing detailed insights into both ad spend and client payments, Adplorer allows agencies to better align their billing cycles with media spend, reducing financial risks and enhancing overall cash flow stability. This kind of proactive risk management through technology ultimately leads to smoother client relationships and greater operational efficiency.
Conclusion
Billing risks in local PPC management for multi-location or franchise businesses are a critical concern for agencies. By carefully deciding when to bill (before or after ad spend) and choosing the right management fee structure (flat fee vs. percentage, vs. hybrid flat and percentage), agencies can mitigate risks and ensure financial stability. However, even with careful planning, scenarios like overspending or non-payment can still occur, making it essential for agencies to have contingency plans and solid client contracts in place to manage these risks effectively. Additionally, we would be remiss if we did not point out one more time that we have built the Adplorer local ad management software to help reduce or eliminate the risk in all of the scenarios discussed in this article. If you’d like to learn more about how Adplorer can serve your agency’s franchise or multi-location business local PPC offering. Click the button below!
