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SEM Agencies In Crisis? Good!

David Pasternack's piece "SEM agency crisis: who's to blame" is a not so subtle attempt to thwart price erosion in the SEM business. He argues that pressure to "win" big accounts forces some agencies to drop prices below the point where they can cover the costs associated with delivering good results.
Smart SEM agencies think very carefully about where they set this fee and whether it’s negotiable: if it’s set too high, they’ll price themselves out of the market. But setting a fee level that’s too low will not provide enough income to support the resources required to deliver favorable results for the client. Why? Because running an SEM campaign that actually delivers results is an expensive, labor-intensive endeavor. Sure, campaign automation systems can take care of the grunt work, but software is just a starting point. The real challenge involves “wetware” (brainpower). Without skilled human analysis and judgment, no SEM campaign can be expected to deliver. Agencies must expend time and money to attract the smartest people, and the media management fees cover (or should cover) this expense.
It's a compelling story, but it's not accurate. We think a more honest answer to the question -- why are only 21% of companies happy with their SEM? -- is that most SEM's provide lousy service and results. We know, we've seen their clients's data. From everything we've seen Did-It provides excellent service and results, unfortunately we can't say the same for many of our competitors. Did-It knows the truth, that the real issue is competence not compensation, so why the sob story? Simple, to defend the uncapped fee structure, which is rightly coming under fire. Clients are starting to look for ROI not only from their media spend, but from the agency they hire as well, and while "wetware" is expensive, you don't need more than one really sharp analyst with great tools and algorithms to drive fabulous results for even the largest accounts. Given that, it's hard to justify the expense of uncapped fees. For retailers spending $1 million per month, what would you get from an agency with uncapped fees of say 10%? Hopefully, 6 or 7 full-time analysts. But if the real direct marketing piece can be done by a single smart analyst with superior tools, what would those other analysts do? If the goals of the program are strictly to drive online sales, the answer is "they'd waste your money." If the goals are mostly to complete large task lists to satisfy internal constituents then we'd still argue that you only need one sharp analyst and a bunch of less expensive gophers, and you can probably hire those folks directly for less. SEM agencies as a class will respond to demand, eventually. The demand for excellent service at a fair price is strong and growing. In order to compete in 2008, the agencies of 2002 will need to learn how to provide great service cost effectively. The Did-It folks are smart and will figure this out, but for some this will be a very tough new trick to learn. George For reference: A fair pricing model Why task lists hurt results How to use "wetware" efficiently
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