From the first day of 2009, Google’s Best Practice Funding scheme (a euphemism for agency commissions) will have ended. Yahoo too will be changing the way it rewards big spending agencies by moving to a tiered scheme. We’ve been thinking hard about how that will affect clients, agencies and the search engines themselves. And the answer is that, for agencies and their clients, there will be real impact. Google, in the meantime can roll on regardless.
Since Google accounts for at least 90% of all UK search spend (and therefore half of all UK online ad spend), we’re focusing here on them but Yahoo’s decision (it will begin to pay back four per cent to spenders of between £50,000 to £100,000 a month and nine per cent to spenders of £100,000-plus) will have an impact too.
BPF was Google’s replacement for direct agency discounts and was pitched as a way to encourage growth and ‘best practice’ among agencies. Where agencies invested the money they saved through the scheme in delivering better search (for example, systems, technology and people), that’s just what it did. But, many used it as their route to margin, particularly the traditional buying agencies that were used to receiving large discounts on offline media.
Under the last iteration of the scheme, agencies that spent more than £15m a year got more than seven per cent of it (£1m-plus) back. That is a large sum of money to remove from whichever line in your P&L account you put it but if you’d been putting it right at the bottom, you now face a real issue with profitability.
At iCrossing, we put our BPF cash into our own search technology and our team, not our bottom line. But, even for us that is still money that will be missed since lost business revenue can only ever be replaced in three ways – reduced investment, higher prices or lower costs. None of those is an attractive prospect and agencies will be looking for understanding from their clients as they look for ways to offset BPF while at the same time increasing (not just maintaining) the quality of their service.
In short:
1. Pitch time: agencies who were simply using BPF to bolster their P & L or passing this back to clients as a point of differentiation to win search accounts are going to be hit hard. Serious, fundamental renegotiation of large contracts will serve as a stimulus for many clients to consider their options and indeed other agencies
2. The experts will win out: those that invested BPF in developing real search expertise and technology, can make natural and paid search work together to develop efficiency, and use ‘native’ digital planning techniques (e.g. linguistic profiling and genuine customer journey insight) will be the ones that deliver real value and therefore should hold on to clients and pick up business in the new swathe of pitches – as long as those clients hire on value rather than just cost.
3. CPCs unaffected: it’s been speculated that CPCs might decrease since agencies will have less to spend on keywords. But, BPF average payout is probably more like 3-4%, rather than 7-8% and individual accounts still represent the majority of Google’s spend (not agencies) so we’ll see little impact in the price of search
4. Google steams on: the sheer dominance of Google as the country’s most popular search engine negates the normal dynamics of buying and selling. Since buyers are unable to choose alternatives, where Google leads, we must follow. That Yahoo has changed its agency commissions too demonstrates this
So, there’s our thoughts, what are yours? Do you think that the effects of the change will be manifest themselves in different ways? We’d love to hear from you. And if you’re interested in any more insight into how BPF might affect your own search campaigns and strategy, give us a call.
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December 11th, 2008 at 4:47 pm
Completely agree with your comments here Tom, particularly 1 and 2. The big media agencies that “tacked on” PPC as part of a wider buy will need to up their game considerably to be able to compete with the agencies that invested the BPF into technology and people. I feel we’re in a strong position as we’re not losing our skill set so we’re in a good place if accounts go out to pitch as a result of this.
December 17th, 2008 at 1:00 pm
Nice post Tom. I think there’s a lot more movement under the surface that needs to be considered as well. I’ve covered our view on this over on our site .
I agree there may be some switching of clients due to increased fees, however a couple of large search agencies have said this won’t happen. As you highlight, this is more likely to affect the media buying agencies.
I’m not sure we’ll see the huge pitch rush through Q1 as we expected, but moreover it will filter constantly throughout the year. Additionally, we’re seeing a number of large clients taking on search staff in-house which also may change the landscape for agency services offered.
For me the biggest area to watch out for is what will happen to the small/medium size clients. Many of these will not be financially viable to now service by larger agencies so will potentially move to smaller agencies thereby spreading the search client base. I see this as a good thing really as this generates innovation and industry growth through increased competition and revenue spread.
It’s good to see you’re already working on this with how ppc and seo can work together. Looking at PPC as an individual channel is no longer an option in order to really maximise online business.
December 17th, 2008 at 2:48 pm
Sounds like good news for the smaller PPC agencies that never qualified for this program anyway. I’m all up for anything that helps level the playing field.
December 18th, 2008 at 4:56 pm
Thanks for the comments, Justin.
Definitely take your view on that pitches are going to be spread throughout the year. I think a key point here is that the owners of brands who have traditionally worked with media buying agencies are going to be much more open to considering a search specialist who can generate much more bang for their buck.
Throw into the mix 2009’s harsh economic climate and all of a sudden it’s not going to look as attractive to a client to place a million pounds worth of search spend with an agency that can’t walk the walk when it comes to demonstrating ROI.
December 18th, 2008 at 6:32 pm
Having seen some of the PPC work the big London agencies have done the end of the BPF can’t come soon enough!.. as much as we’ll miss the nice wedge Google kicks back I’m sure that with a level playing field it will give more of a chance to the smaller and non London based agencies.
We’ve taken over big spending, brand name accounts from big agencies and been horrified with the quality of the PPC campaigns in there sometimes, One well known agency .. turning over £15+ million last year set up an account for a client at 50p per click for every keyword, broad match, one advert per adgroup, with no negatives and then used generic adcopy, and on top of that they didn’t even impleiment any kind of conversion tracking!! .. not exactly a quality job!
Whilst it will sting a bit we never relied on the BPF money so the end of BPF isn’t going to affect us really, I’ve a feeling we’ll gain new business as a result so it should even out.
We pitched against hurra (http://www.hurra.com/en/) a couple of years ago for a client, Hurra had offered to do PPC totally free and live off the kickback.. not quite what it was designed for, we won the client anyway so I wasn’t too bothered at the time but the no doubt behaviour like that is one reason the BPF was shelved, Google should have refused to pay them, I’m pretty sure they were aware of how they were operating at the time.
Hopefully those that behaved like this will find it unfeasable to continue, although I’m guessing they’ll just jack up their fees, print some glossier brochures and jazz up their websites and carry on as usual for the short term at least.
The vibe I get from Google is that from their point of view the BPF will be replaced with better quality resources for agencies, training and back up etc. (hopefully they’ll train their own staff up a bit beter too as some are like robots reading a flow chart and lack real world knowledge IMO), although the odd freebie wouldn’t go amiss, a new car, holiday in the maldives etc. every month lol.. ahh well we can but hope.
Having been involved in PPC and Adwords since 2001 and seen the industry evolve I feel 2009 will defintiely be a year of oppotuinity for all, Adwords is getting harder to manage for those without extensive knowledge and now print, tv, radio etc. budgets are being cut in favour of more transparent and tangible results from web based marketing we are all well placed to gain new business so good luck to all next year
December 26th, 2008 at 9:20 pm
Good post Tom, The end of the Google BPF mixed with the credit crunch could well spell the end for management fees and mainstream introduction of CPA deals for digital media agencies. It would be interesting to see whether agencies respond to the new video advertising discount system Google is to introduce with more diligence!
Also Shane, i agree that clients may transfer offline marketing budgets to online in 2009, I don’t think it’s anything for digital only agencies to be happy about as i think once clients realise the true impact of offline advertisement on their brand vs online they will reverse the offline vs online marketing budget.
January 8th, 2009 at 5:04 pm
Hi Ali,
I think you’ve made a really good point regarding CPA deals. Now, more than ever, clients are looking for commercial deals which offer them good value and incentivise the agency; CPA (cost per action or acquisition) deals offer just that.
Of course these type of deals take more skill to run than more basic percentage media spend commercial models and so can only effectively be run by agencies with a high level of paid search experience.
January 8th, 2009 at 5:11 pm
Hi Shane,
Sorry for the delayed reply – Christmas has a habit of getting in the way of things!
Like you, I’ve seen some shocking work done by some of the supposed biggest brands in search. I think a real positive thing for the industry this year should be in that given an ever more competitive marketplace, mediocrity will not be tolerated. This has got to be a good thing for raising standards for client, agencies and the industry as a whole.