There is, however, a silver lining to all this. I’ve been really fortunate to surround myself at PPC Associates with several insightful, experienced team members who also happen to be incredible writers. Translation: while Blogation is going away, I’m excited to announce a bigger, better blog, where you can not only get my posts, but posts from a great team of SEM gurus. The link to the new PPC Associates blog is here.

In the next week or so, I’ll figure out how to make Blogation re-direct to the new PPC Associates blog. I hope all of you will follow me over there – trust me, it will be worth your time.

I truly appreciate everyone who took some time to read my posts for all these years (special props to Steve and Jeremy, Blogation super-fans!). So long, and thanks for all the fish!

“You must, upon request, provide advertisers with a report on their ad spend, and your report must itemize how much advertisers spend on Facebook ads and fees for your service.”

There are several very successful Facebook advertising companies (most of which I named in the headline of this post) that charge clients on a cost per action (CPA) basis. In other words, they guarantee a conversion/sale/sign-up for a flat-fee and hope to make money on the difference between the amount they actually paid Facebook for the conversion and what they charged their client.

Depending upon how savvy the client is, this difference can be massive. Consider this hypothetical scenario: if a client buys 50,000 sign-ups at $5 CPA and each sign-up actually only cost the agency a $3 CPA, the agency is netting $100,000 a month in revenue from this client on spend of $150,000, or a 66% management fee! These days, a management fee of 15% is hard to come by for most agencies and anyone trying to charge 66% would probably be laughed out of a meeting.

My guess is that a lot of these CPA deals on Facebook have very high margins like this. Facebook’s policy now requires these Facebook agencies to disclose this margin – if requested by the advertiser – to their clients. Granted, few clients are likely to know that this policy exists (unless everyone who reads this post spreads it far and wide . . .), but any client that actually does make this request might be shocked – to the point that they either cancel their relationship with the CPA company or immediately demand a major discount off their CPA.

Facebook could decide, of course, to be much more aggressive with this policy and require agencies to disclose the differential between the CPA and the actual cost to acquire a customer, though I’m not sure how they would really enforce this. Who knows, this initial change in the terms may just be a first step. Facebook realizes how much money they are losing to these agencies – forcing agencies to disclose this info will likely result in lower margins for the agencies, which means a higher percentage of overall marketing investment going to actual Facebook advertising over agency profit.

Naturally, I was curious to know who made it on to the panel in my stead. Here’s the list of panelists, and the moderator who organized the panel:

• Moderator:
  Mikel Chertudi, SES Advisory Board & Senior Director of Marketing, Adobe
• Speakers:
  Ben Brutsch, Sr. Manager Marketing, Adobe Systems
  Matt Van Wagner, President, Find Me Faster

Of these three folks, I only really know Matt, and he’s a darn bright guy who is a good, well-prepared speaker. I don’t know Mikel or Ben, but it does strike me as strange that Mikel decided that the best “panel” for this session was to have himself, one of his team members, and one other guy. It seems to me that having two people from the same company on the same panel is not the best way to advance advanced paid search marketing.

For the record, after my diatribe against SMX earlier this year, I did return to and speak at SMX Advanced (with Matt Van Wagner as the moderator), and I was truly impressed with the preparation that Matt put into the panel (though, for the record, some of the panelists never bothered to send in their presentations in advance or deign to participate on a pre-conference call). So perhaps my accusations of cronyism and laziness are now unwarranted for SMX. SES, it appears, may still have some issues.

Am I the best person to speak on an advanced SEM panel? Well, of course I think so, but I could also accept participation from many great SEM minds (Brad Geddes? George Michie? Frequent Blogation reader Terry Whalen?). Having two people from the same company and a three person panel – c’mon people, you can do better than that.

This is his first time in trouble with the law and he’s freaked out. The DA has said that he is going not going to give any mercy because my friend is a first-time offender, which means the sentence could be up to 10 years in jail if convicted. I abhor drunk driving as much as anyone, and there is absolutely no excuse for driving drunk, but this guy is a genuinely good citizen. He volunteers for charity, he’s well-liked, he’s got a stable job. Frankly, he doesn’t deserve to rot in prison for ten years – it would be a disservice to society.

Since he knows that I’m a law school grad, he’s asked me for help in finding him a DUI lawyer. I’ve thought this through and I think I know the profile of the type of lawyer he needs. Please read the profile carefully and if you know someone that fits this description, send me an introduction:

• Must be a very smart person
• Must be hard working
• Must be inexpensive – no top guns that are going to charge $300/hr, I’m thinking that perhaps a recent grad or even someone who is still in law school will fit the bill
• Specific knowledge of DUI law is a nice to have, but not a necessity
• Courtroom or trial experience is also a nice to have

If you know anyone that fits this description, please email me ASAP.

Now, before you accuse me of being a bad friend, the above story is completely fictional. 100% made-up. I don’t have a friend with a DUI charge, and I don’t need a lawyer. And if I did have a friend in trouble, the last thing I would do would be to try to find him an inexperienced, non-DUI expert to represent him in what might be the most important moment in his life.

And yes, in the SEM world, this is apparently the attitude of some people looking for SEM help. If you don’t believe me, just take a read of a recent blog post over at Search Engine Land. Here are a few the key points the author makes in support of his argument that you don’t need SEM experts to run your SEM campaigns:

The right person for PPC management on your team does not necessarily have to be an expert in PPC. I have found that it is better to have personnel with the right skills sets (strong copy writing, math, analysis, and research skills) which broadens the job pool and decreases expert leverage for salary requirements.

I have hired three people to do PPC management for my large campaigns. None of them had PPC experience. There is a learning curve, of course, but it worked out better and saved money in the long run.

I responded to the author in a comment (well, actually several comments) on the original thread. In relevant part:

The thing about SEM is that it *looks* easy. And, in fact, just adding keywords, negative keywords, ad text, and basic bidding are easy. Its the rest of the stuff – the stuff that can actually drive huge profit – that isn’t easy.

Poker is an easy game to understand and learn. Trying going up against a pro and you’ll understand that a game that seems “not that complex” is anything but. But every day in Vegas folks come in for the weekend convinced that their mad skillz they’ve perfected playing their buddies in the basement are going to make them big bucks in Sin City. Usually doesn’t work out that way.

Its the same thing with SEM. There’s a lot of ‘dumb money’ on AdWords – completely mismanaged campaigns by folks who have read the AdWords Learning Center and are convinced they know all they need to know about SEM. They may even make a little profit too, assuming they are either in a low competition vertical or happen to have a very cool product that sells itself.

For the most part, however, they are 25-40% under-optimized. Google makes a lot of money that way. Again, not saying that this is you, but I am saying that true SEM experts can crush anyone who thinks SEM is straightforward and can be handled by a bunch of smart, non-experts.

No one would consider hiring a “smart amateur” to represent them in court, perform surgery on a loved one, or dispute an audit with the IRS. Google, however, has done an amazing job of convincing laymen that AdWords management is an exception to the rule that hiring professionals is necessary for great results. No doubt this makes money for Google, in that it encourages more advertisers to try their luck at SEM, and it also pushes dumb money into the system. A side effect of these advertisers is increased costs for smart advertisers, as dumb advertisers over-bid and/or spend money on keywords they shouldn’t be buying at all.

A lot of life is admitting that “you don’t know what you don’t know.” I’d never sell myself as an SEO expert, even though I think I know quite a lot about SEO. For that matter, despite going to law school (and graduating with honors, thank you very much!), I’d never pretend to know enough to represent someone in court. Tons of experience, expertise, and intelligence is what turns someone into an expert. And a good expert is worth every penny, which is why they tend to charge a lot. So if you want to save money, go ahead and hire that recent college grad to manage hundreds of thousands of dollars for you on AdWords. Oh, and if you are planning to go skydiving any time soon, I hear you can get some great deals on slightly defective parachutes at the outlet mall!

• Babysitter
• Gardener
• House cleaner
• Nanny
• Massage therapist
• Taxi driver
• Valet
• Accountant
• Doctor
• Lawyer
• Dentist
• Car detailer
• Business coach
• Graphic designer
• Handyman
• Painter
• Realtor
• Mortgage broker
• Fishing guide
• Banker
• Mechanic
• Tow truck driver

This doesn’t even include some of the everyday service people I use, like waiters, baristas, BART drivers, and janitors. And I’m not including business service providers, like HR, payroll, etc. The bottom line is this: if you think about how much you use service providers, you’ll realize how important this sector of the economy is!

You’d think that anyone in the services business would be responsive, friendly, and organized when it comes to attracting new business, but I’ve recently been amazed at how pathetic many service providers are at the basic of good sales. A few examples come to mind (all of these in the last two months):

• Being asked for a proposal and not providing one for six weeks!
• Scheduling a demo and then forgetting to actually show up!
• Scheduling an in-person meeting and then canceling five minutes before the start of the meeting!
• Receiving a request for pricing and never bothering to respond!
• Running a sales call from a loud street or with a lot of noise in the background!

I could go on and on. It goes without saying that a service person/company that can’t even provide good service during the actual sales process is unlikely to do much better when it comes to the actual “service” part that you’re buying. For me, a lack of professionalism in the sales stage is a very easy way to eliminate a potential service provider from contention for my business.

I should note that this happens both in personal and business settings, but it’s even more amazing when it happens in the business world. My agency is not the 800 pound gorilla of online marketing (yet), but our clients collectively spend between $50 and $70M a year on online marketing, so it’s not like we’re chopped liver. And yet, I routinely run into shocking incompetent sales organizations that seem to go out of their way to prevent me from giving them sales.

I don’t really know why this is the case. Obviously there are lazy and inept people in the world, so that explains part of it. There are also some companies that are just in really high demand and apparently this means that their salespeople can take a laissez-faire approach to selling. But a lot of the examples I discuss above don’t seem to fall into either of these categories; the salespeople seem smart and savvy and the businesses seem to be doing well, but not so well that they can just drop sales left and right.

What am I missing here?

In addition to the warm fuzzies you’ll get from helping out a friend, for every new hire you help me find, I’ll fly you and a friend to Thailand, put you up in nice hotels, and even pay for meals. More on this below, but first, here’s the types of people I’m looking for:

- Senior SEM Account Managers: Generally at least 3 years of SEM experience. Location can be anywhere in the world – we offer 100% telecommuting! Agency experience a plus, but not required.

- Display Media Buyer: Someone with experience on DSPs, ad exchanges, Google Display, ad serving, creative briefs, media buy negotiation and ad creative testing. 1+ years of experience. Location preferably in San Francisco but will consider telecommuters if they are, like, totally awesome.

So now back to the Thailand trip. Here’s a description of this amazing vacation that I want to buy you:

Even the most sophisticated travelers long to visit Thailand, with its beautiful beaches and islands, fascinating culture, exotic architecture, and ancient ruins. This tour showcases some of the highlights of this magnificent country, including the bustling capital city of Bangkok, the ancient city of Ayutthaya, and the historic River Kwai—all for an amazingly affordable price, despite the huge fluctuations in exchange rates between the U.S. Dollar and Thai Baht that have caused tour prices to Asia’s favorite destination to skyrocket. At prices this low, you can be sure that this tour will sell out quickly, so hurry to reserve your space soon!

- Round-trip airfare from Los Angeles via China Airlines including fuel surcharges
- Intra-Thailand transportation and transfers
- Accommodations at Superior First Class hotels
- Full buffet breakfast daily and 1 dinner
- Sightseeing tours
- Professional, English-speaking tour guides
- Optional extensions to Angkor Wat and Phuket Island

This trip has a retail value of $2300! Note: I’ll actually give you the $2300 and you can do whatever you want with it, but I figured it would sound more enticing if the incentive was a trip to Thailand.

If you know anyone great, just email me their resume at david at ppcassociates.com or make an intro!

Thanks,

David

Now I wasn’t a math major in college (and actually, I typically got a lot of C’s in math in high school), but if 45 minutes for $39 is 98%, that means the actual cost would normally be around $2700/hr. Assuming a 200 day work year, that works out to an annual rate of $5.4M. I’m pretty sure you could combine the annual salaries of the CMOs of Amazon, Google, eBay, and Microsoft and their salaries wouldn’t exceed $5.4M.

Josh, the founder of the marketing consultancy in this deal, recently responded to my post, which you can read here. To summarize his comment, he notes that he actually spends far more than 45 minutes on every client (thus reducing the per hour cost from $2700 to closer to $333) and also adds that he provides tremendous value, thereby justifying the cost of his service. He has also written a blog post on his own site about the value of marketing services in general.

My post today is not really a response to Josh, but I’ll add two quick points (speaking directly to Josh here!). First, I still believe the offer by Startups.com was disingenuous, because it implied that the $39 was for 45 minutes of time at 98% off. So the fact that you actually spend a lot more time on each client (which I commend you for) doesn’t actually make the advertisement any more factual. If anything, you should have said $39 for three hours of consulting, or something like that! Not blaming you here, mostly criticizing Startups.com. Second, I am sure that you do add a lot of value through your services. I don’t know you personally, but I do know a member of your team and I know him to be a quality, smart guy.

A more interesting issue here, however, is determining the true value of marketing services. As Josh writes in his post:

Ultimately, there is no such thing as the RIGHT price, especially in services businesses, but there is the right match for you. Expense is relative; performance is everything. There is no “real” price tag for the time of an online marketing consult.

I disagree with this point. I would argue that service business pricing is based on four quantifiable values: scarcity, value, cost, and risk. Let’s go through each of these individually.

Scarcity

Scarcity in an economic sense means that there is more demand than there is supply. Scarcity causes commodity prices to increase, hot Christmas gifts to get sold above retail on eBay, and top experts to charge hundreds or thousands of dollars for their services.

From a supply perspective, the market for marketing services happens to be an inefficient market, meaning that not all buyers and sellers are transparent to each other in one giant marketplace. Most buyers of marketing services don’t know all of their choices; indeed, they usually only know what they can discover through search engines, webinars, or word-of-mouth. This leads to information asymmetry, almost on a buyer-by-buyer basis. One buyer may have a list of 100 marketing consultants, and can thus get a very good sense of the true value of a consultant’s time. Another may only have access to one or two consultants (for example, someone who’s only exposure to the marketplace is an email from Startups.com). The greater the supply scarcity (again caused by information asymmetry), the greater the value of the services.

From a demand perspective, scarcity exists because marketing service providers can only handle a certain number of clients at once. As more potential clients ask for a consultant’s time, the consultant can raise his rate. Hence, a consultant already working 40 hours a week might be approached by a new client and decide that he’ll only take on this client if he is paid double his current rate, but a consultant with no work at all places much lower value on his time, and will probably work for a bargain price, just to get some income.

Suffice to say, it is up to the service provider to understand the supply and demand equilibrium and price his services accordingly. When I first started my agency in 2008, I charged a minimum fee of $500/month. I had no clients and every dollar mattered. Today, I charge a minimum fee of $5000/month. This pricing is due in large part to scarcity – there are too many clients that want to work with my team (always a great problem to have), so I have to be more selective about who we bring into the fold. At some point, if the supply of potential clients continues to grow, I may increase this further. If the supply dwindles, I would reduce it.

One final point about scarcity is the concept of substitute products. At some point, if scarcity drives the price of marketing consultants too high, buyers will start to consider bringing a marketing person on full-time, in-house. The tipping point for every buyer varies (in SEM, it is often correlated to the amount of spend under management, and hence the fee for this spend).

A rule of thumb someone gave me when I first started consulting was to charge double what my hourly rate would be if I was in-house. This dollar amount takes into account the fact that as a consultant you pay for your own benefits and you are often not fully booked a 40 hour week. Given that the average American works 2000 hours a year (50 weeks X 40 hours), you can come up with a pretty good proxy for your hourly rate by figuring out what your potential clients are paying for F/T in-house team members. Hence, if a client would hire you for $100,000, that works out to $50/hr, which means that you should charge that client $100. If you wanted to charge $200, the substitute product rule would probably come into effect and, assuming there are decent candidates willing to work in-house, the client would probably go the in-house route.

Value

Value refers to the economic impact you provide to a client. The more the impact, the more you get paid. Why do hedge fund managers make millions of dollars while strawberry pickers get $10/hr if they are lucky? In part due to scarcity (most hedge fund managers could pick strawberries, most strawberry pickers couldn’t be hedge fund managers), but also straight economic output.

In the marketing services world, especially the online marketing world, value can be clearly quantified. One agency might drive 20% ROI on your campaigns and another might drive 5000%. Apples to apples comparisons can be quite easy to obtain.  Not surprisingly, the greater the value a service provider drives, the greater the demand for that provider’s services, and the greater the service provider can charge. The fact that my agency has increased our minimum fees by 10X in just three years is in large part due to the fact that we drive immense value to our clients, especially compared to many other agencies!

Cost

Different marketing service providers have different cost structures. Some companies hire independent contractors overseas to do all their work at $5/hr. Others hire 10+ year veterans, have fancy offices, sophisticated technology, and generally high overhead. It goes without saying that the rate you charge clients has to consider the cost to service those clients!

Risk

Lastly, there’s the notion of risk. Some marketing service providers assume a lot of risk when taking on a new client. For example, a performance marketing company might not charge their client anything unless they hit a certain cost per sale goal. Traditional agencies take no risk – they require an upfront retainer and get paid regardless of the results of their work (within reason). As a general rule, the greater the risk, the greater the upside.

To provide a hypothetical around this, let’s say that Widgets.com sells blue widgets. If they sell a widget for $20, they make $10 of profit. A performance agency offers them this deal: we’ll market your widgets for you and you only have to pay us if we get sales for less than $10 each. Widgets.com agrees and the agency sells 50,000 widgets with a marketing cost of $4 each, which means that the agency gets $6 ($10-$4) times 50,000 sales, or $300,000. A traditional agency has the exact same performance, but elects to charge Widgets.com 10% of spend regardless of whether they hit the $10 per sale metric. In this case, since they spent $200,000 on media, they end up charging Widgets.com $20,000 (10% of $200K).

Putting it All Together

You can charge whatever you want for your marketing services, but to really grow a meaningful business, you need to take the above factors into account. It’s true that you might occasionally find a client who is willing to pay you way more than scarcity demands, has little concern for whether you provide value, doesn’t care about your cost structure and is willing to take on all the risk, but that is more of a lottery ticket approach to business than a sound business plan.

Now I wasn’t a math major in college (and actually, I typically got a lot of C’s in math in high school), but if 45 minutes for $39 is 98%, that means the actual cost would normally be around $2700/hr. Assuming a 200 day work year, that works out to an annual rate of $5.4M. I’m pretty sure you could combine the annual salaries of the CMOs of Amazon, Google, eBay, and Microsoft and their salaries wouldn’t exceed $5.4M. So either Clever Zebo is an elite cadre of Fortune 50 CMOs (and they are all simultaneously talking to me for 45 minutes, which might actually be too many cooks in the kitchen anyways), or this deal is more than a wee-bit overpriced.

I checked out Clever Zebo’s team, and I’m going with the latter. Indeed, I actually know one of their team members, and while I can vouch for him as a very smart, talented guy, I’ll stop short of saying his advice is worth $5.4M a year.

Given some of the blowback Groupon has received from offering discounts on inflated pricing, I would think that other daily deal sites would be a little gun-shy about such tactics. Apparently not. In the meantime, I am offering a few daily deals of my own. Loyal readers, I’m pleased to announce Blogation’s “Sucker Born Every Minute” Deal Site! Today’s deals:

• Snickers Bar: Regularly $1000, now just $1.50 (98% off)
• Startups.com Membership: Regularly $500, now just $1 (98% off)
• PPC Associates Consulting: Regularly $1M, now just $100K a month (90% off)

The idea behind +1 for AdWords ads is to improve ad relevancy through collaborative filtering. For advertisers, the benefit is allegedly that this will help bring more relevant users. To quote the Google announcement directly:

We expect that personalized annotations will help users know when your ads and organic search results are relevant to them, increasing the chances that they’ll end up on your site. You don’t have to make adjustments to your advertising strategy based on +1 buttons, and the way we calculate Quality Score isn’t changing

This concept, by the way, is also borrowed from Facebook. Facebook shows ads that include the name of a friend that liked the ad (or at least the advertiser’s fan page) and measures these as “social clicks” and “social impressions.” Facebook’s internal research suggests up to a 4X improvement in CTR when a friend’s name is mentioned as liking an ad (no link here but I saw this in a Facebook PPT).

The difference, here, however, is that Facebook gleans all of its social proof from fan pages, articles, or app downloads, and not from the actual ad itself. This makes sense to me – consumers may be willing to “like” a fan page or an interesting article, but why would consumers spend their time actually liking ads? Indeed, consumers generally hate ads – or at least claim they do. TiVo exists for a reason!

I could imagine a scenario where consumers +1 a funny ad, but then, does that really create additional relevancy for the advertiser? I suppose for brand advertisers or for companies that just want to create virality, perhaps the +1 element enables them to attempt this sort of viral strategy on AdWords. The ability to actual achieve this at scale, however, is going to be a challenge, simply because direct marketers will likely outbid any cheeky attempts at virality.

My best guess for where this is actually going is that Google will start to co-mingle +1 ratings of web sites with +1 friend data in ads. In other words, let’s say I +1 the Apple.com site because I am a Mac geek (I’m not, but suspend your disbelief for the sake of the argument). Google could then show my name in all of Apple’s ads when any of my Google-connected friends do a search for which Apple has a keyword. A bit misleading, but basically the same concept that Facebook now uses.

Of course, right now, I have about 14 friends with which I am socially connected via Google (going on 24 hours on Plus.Google.com, thanks to Tim S!) and I have yet to personally +1 anything. So the only way this will really work is if Google is successful at getting a lot of people to either switch from “likes” to +1, or at least use them both interchangeably. Given Google’s prior failures in social media (Buzz, Orkut, Wave), success is not a foregone conclusion here. I will say, however, that the reception to Google Plus has been much more positive than any of these other forays into social media. This one might stick.

The final point I want to make about +1 and AdWords is the notion that +1 won’t affect Quality Score. This seems to me to be a preposterous notion. Assuming +1 really does act as a signal for relevancy, and assuming that Google gleans data about user perceptions of both ads and pages, it would be nonsensical for Google not to use +1 to influence Quality Score. Indeed, I would argue that for auctions where there are enough +1 rankings, QS should be disregarded entirely! Think about this, if I do a search for “ipad” and 100 of my friends have +1′d a penny auction site that has great deals on iPads, why should QS (an opaque combination of generic CTR and Google’s qualitative opinion of a site’s merit) trump what my social circle has recommended?

My assumption is that Google’s claim here is for one of two reasons: first, so that people don’t try to game the system by +1ing their ads to increase QS. Second, because +1 would probably be more transparent than QS, which could enable advertisers to crack Google’s murky pricing (which would cost Google money). Google now offers “relative CTR” on Google Content, enabling advertisers to see how their CTR compares against the competition. I can imagine a future where an advertiser complains “I’ve got a relative CTR 5X higher than the competition, one million +1′s, and you’re telling me my average QS is 2?”

All of this is pretty confusing to me right now, and I apologize if this post was a bit scatterbrained. +1 another wrinkle for us online marketers to figure out!