NEW RESEARCH: Search Marketing Agencies Still a Cottage Industry: Stats from MarketingSherpa

In preparation for the release of its 2005 Buyer's Guides, this spring MarketingSherpa's research team gathered business data from 127 SEO firms and 61 paid search ad agencies with a total of 10,877 active clients. If you're considering becoming a client of, or investing in a search marketing firm, read on for some surprising data about the industry.

The Big Debate: How to Charge for PPC Ad Management

While everyone on the agency side agrees there's huge growth potential in running paid search ad (PPC) campaigns for clients, the big debate has been how the heck do you charge for it?

Search engine optimization (SEO) firms figured this out a few years ago; most charge a monthly fee determined by the size and complexity of a client's Web site. This might range roughly from $500 to $10,000 per month.

However, the problem with paid search ad campaigns, as everyone's discovered, is they change so darn quickly. One month a client may want you to manage 100 keywords, and next quarter it might be 5,000 or 10,000. Plus there's a lot more daily management needed.

Agencies have come up with three basic pricing models -- and here, according to our research, is the winner:

Pricing model #1. Consulting fees by the hour or project

75.4% offer services on a consulting fee and/or retainer basis. We're thrilled with this result, because it's the best from a client's perspective. (To find out why, see the Buyer's Guide itself. Link below.)

Pricing model #2. Percent of media spend

64% of PPC agencies offer this option -- and 10% of all agencies require it. Fashioned on the old-fashioned advertising model, in this scenario the client pays based on how much money the agency is spending to place the ads online.

Given that traditional ad agencies mainly stopped relying on that pricing model as their sole source of income years ago, we suspect it probably won't be a winner online either.

Pricing model #3. Pay for performance

42.6% of PPC agencies ask their clients to use the affiliate marketing model and simply pay them on results. Results might be anything from leads generated to customers or sales acquired.

5% of the agencies we interviewed require this as their only payment option. We suspect that just as they have in the affiliate world, clients using this payment model will either take no-brainer CPA wins (brand and site name) off the table or renegotiate for lowered commissions on them. Why hand anyone a stack of money for a search campaign your intern could handle?

Finally, at 64%, the majority of paid search firms put deciding payment structure in the client's lap. Good luck with it!

Do Economy-Level Clients Stand a Chance?

According to MarketingSherpa's Buyer's Guides, while email services are available for marketers of all shapes and sizes, professional search marketing has not yet become a low-cost commodity.

And perhaps it never will be. Low-cost email services are merely offering basic technology, while search marketers have to offer consulting -- which means man-hours. And experienced man-hours always will cost money.

Only 3% of surveyed SEO firms told us they offered "economy prices for extremely cost-conscious marketers." And zero percent of the paid search ad agencies offered economy pricing.

That said, there were plenty of choices for mid-level and top-of-the-line clients in both categories. So if you can afford a half-decent budget, you'll be fending off potential vendors with a stick.

The Key Metric: Client-to-Staffer Ratio

So, how can you decide which search agency to use? MarketingSherpa's editors have determined, among other factors such as niche specialization, the absolute key metric is the client-to-expert staff ratio.

Important -- don't let a sales rep fool you by including nonrelevant staffers (such as sales reps and admin people) or outsourced freelancers in the count. How? After they've told you how many people are in the company (or the search division), then ask, "OK how many are in-house and specifically work on campaigns day-to-day?" Unless it's a mom-and-pop shop, those numbers better not match.

According to our data, average ratios for firms that have been in business for at least 18 months are:

Optimization services: 7.5 clients per expert staffer*; PPC search services: 4.2 clients per expert staffer

*Note: We disregarded data from two SEO firms with insanely high client-to-staffer ratios to arrive at a more meaningful average. To see which firms these were, check out the Buyer's Guides.

Search Is Still a Cottage Industry Despite Rocketing Growth

27% of SEO firms and 38% of paid search ad agencies we surveyed were quite literally mom-and-pops (or small departments of bigger firms) with only one or two search marketing employees total.

Only a handful had more than 20 search marketing staffers. Only one paid search agency had more than 40 experts on staff. Only one SEO firm claimed more than 40 experts on staff.

(If you're wondering if our sampling was skewed toward smaller agencies, we can assure you based on survey reach and client names, it wasn't.)

There are very, very few search marketing "factories" out there. This is definitely a cottage-dominated industry with a welter of small and tiny shops. That said, the client names are impressive -- including most of the huge eretailers, financial services, travel, and Fortune 500 brands. (Yes, we included a client-name index in the Guides.)

Also, it's worth noting industry growth is skyrocketing. As noted above, we only allowed PPC agencies with 18 months or more experience to be included. (The field is overrun with latecomers and newbies.) These "oldsters" saw their client list grow by 73% on average in the past year.

Given how small most firms' staff sizes are, we suspect growing pains in terms of staffing and basic account management are common.

Despite this, the average PPC search firm typical account has more than 5,000 active campaigns going at any one time. Even with superior campaign management software, that's a lot to handle.