Understanding Ad Agency Fee Models and Why a Hybrid Can Be Just Right

Ordering a meal from a delivery app, you think it costs one number, but get to the checkout, and surprise! It’s now double what you expected thanks to additional charges. Suddenly that leftover casserole in your fridge looks a bit more appetizing…

We all prefer to know what something is going to cost ahead of time, and that’s no different in the agency space. To help new clients unfamiliar with digital advertising, we use the analogy that there is essentially a “parts and labor” system, much like with an auto mechanic.

The “parts” component is paying for ad space on platforms such as Google Ads and Meta Ads, which we call the ad spend. It doesn’t go to the agency, it goes to the platforms, just as the mechanic shop buys the brake pads to install on your car.

The “labor” component is the work to make it happen, like the rate or fixed price the mechanic charges to complete the job. In the same way, agencies charge a fee for their services to the client based on the scope of work. Some agencies operate with an hourly rate, some a fixed monthly price, and there are many other fee models as well.

Here at IBA, we introduced a hybrid fee model for our managed advertising services, which combines a flat base plus a variable rate using a percentage of ad spend. The flat base ensures that all clients - regardless of budget size - receive our boutique service level, strategy, creative, management, and reporting. The variable ensures that we can spend more resources on our clients’ efforts the greater their investment is at a given time.

No need for the Goldilocks sales gimmick of showing you one number on the low end that barely gets you anything, one number on the high end that seems excessive, and one in the middle that sounds just right by comparison. We use one package, providing a balance of predictability & flexibility.

Nuances of How Different Fee Models Work

There was a time when most of our clients were on a monthly flat fee model, which works great if their budget is consistent and the scope of their needs is predictable. Set tiers were based on ranges of ad spend, spaced out such that minor fluctuations did not merit a new package, making it one less thing to worry about. If/when clients drastically changed their budget (up or down), that usually meant a larger discussion about their needs, and moving to a different fee tier makes sense when paired with a different situation.

The method is simple to understand and allows us to outline exactly what is included at each tier. However, there are flaws with that fee model.

Sometimes clients would increase their ad spend but not change anything else, meaning we would essentially “turn up the volume” on existing campaigns. That does mean more data to work with on our end, requiring more testing, more attention to performance, etc, but the labor required to operate with a small spend increase doesn’t necessarily increase by the same proportion as the fee does in jumping up a tier.

For example, say a client’s monthly ad spend was $7,400 and their current (hypothetical) fee tier was $1,500 for ad spend between $5,000 and $7,499. If the next fee tier was $2,000 for ad spend between $7,500 and $10,000, an increase of $200 in ad spend would be relatively small but would cross the threshold and bump them up into the next fee tier.

That $200 ad spend increase would come with a $500 fee increase, simply due to how the flat fee model operates with intervals. That didn’t always seem justified, plus it meant more contracts to sign, potential confusion with their accounts payable, and suddenly a system that seemed flexible at first can actually be more rigid as time goes on and their needs change.

In other words, the gaps between fee tiers felt like large, jarring steps, and something to be avoided. The mentality of “we would get great results if we added on this small amount of spend, but that would bump us up into the next tier, so let’s not do it” prevents clients from seizing opportunities and growing.

That is where a flexible hybrid model has an advantage: it’s conducive to growth because the fee amount becomes a lower proportion of their total investment as they increase their ad spend.

Benefits of a Hybrid Fee Model

Here is an illustration of the total monthly cost with different ad spend amounts showing the percentage of the total investment that the fee represents when using our hybrid flat-plus-variable model. We use a flat of $599 plus 10% of spend as the variable:

Ad Spend	Fee ($599 + 10% of Ad Spend)	Total Fee as % of Ad Spend*
$4,000	$999	25%
$6,000	$1,199	20%
$8,000	$1,399	17%

*Figures rounded

As you can see, the fee as a proportion of the total investment actually decreases as ad spend increases.

Compare that to a fee model based purely on a variable, where the agency charges solely a percentage of spend, which is also common in the industry. Here is variable in action, using 25% of spend to illustrate:

Ad Spend	Fee (25% of Ad Spend)	Total Fee as % of Ad Spend*
$4,000	$1,000	25%
$6,000	$1,500	20%
$8,000	$2,000	17%

The disadvantage of a purely variable fee model like this example is that it can incentivize more ad spend from the agency’s perspective, even when it’s not clear how much more labor is required with an increase. So while it does scale and has no contractual changes, it can cause the same hesitation as with the flat fee model when deciding whether to invest more in a successful campaign.

The hybrid model makes that less of a factor by using a smaller variable component than if the package was based purely on a percentage of spend model.

So What?

We touched on three unique fee models here, but there are others as well, and it can get confusing if you’re not sure what you need from your agency. They each have their pros and cons, and you can read our post about understanding the differences between agency fee models for more information.

The hybrid fee model works nicely for our clients because it covers the essentials and provides more involvement as their investment grows. We do also discuss custom packages for those clients facing exceptional situations, and those are two-way conversations involving both parties laying out exactly what they need.

Transparency is a core value of ours, which is why we are forthcoming on this topic and don’t just dangle the “contact us to discuss pricing” like many agencies do. Our fee is laid out up front on our pricing page.

If you have questions or would like to brainstorm what a successful partnership with IBA would be like for you, reach out any time!