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John literally helped define the concepts of Internet marketing and SEO. A true Internet pioneer, John founded one of the first interactive agencies in 1995. He currently handles Finance & Operations at AudetteMedia. More about John here.

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For my entire life I have wanted to be in a business that sells something tangible, something that I can hand or ship to a customer in exchange for their money. Weber barbecue grills, for example.

What a great product! And I would know exactly what I’m selling — and the customer would know exactly what they’re buying.

It was not to be. I’ve spent time as a stockbroker (glad that’s over); time as a Systems Integrator (glad that’s over); and many years providing Internet marketing services (still underway - I’ll keep you posted). Always dealing with intangibles. It’s gotten so bad that I’ve coined a new word - tangibilize - in my desperate need.

Anyway, here I am, still dealing with intangibles…

One of the challenges in getting paid for intangible services, including Internet marketing services is, well, how?

1. What do you base your fees on?
2. How do you keep track and allocate your resources?
3. How do you measure your client deliverables?

Faith-based Billing

Faith-based billing is pretty common in the Internet marketing business at the moment, especially with individual consultants and smaller companies. Here’s the deal: You give us some money, trust us to work hard and deliver results for you, and if it feels right you keep giving us more money and we keep working. We might provide some tracking and reporting but probably not enough data for either of us to figure out exactly what your ROI is.

This approach has some serious limitations:

• You don’t know how to measure the amount of effort and resources that are being put into each campaign
• You don’t know what resources to plan for moving along
• Employees are only vaguely accountable for their level of production
• You’re only vaguely accountable for your level of effectiveness
• Deliverables from the client’s point of view are somewhat vague

Faith works well in some contexts, but it’s probably not the best way to structure an agency/client relationship.

Results Billing Based on Top Line Metrics

PPC is one example of paying on the basis of traffic. An advantage is that it’s very easy to track. A disadvantage is that it’s impossible to judge the value of the traffic without additional metrics, such as conversion rates. We always track conversions so we can get a baseline on not only traffic but actions performed, but are continually surprised at how many companies fail to do this.

Results Billing Based on Bottom Line Profits

As we know – and preach – tracking Internet marketing results is doable. At least theoretically it might be possible to take on a campaign and be compensated by the results that we generate, as measured by increase in revenues.

This is attractive in some ways. Certainly many attorneys, such as John Edwards (his house pictured here), have become rich with contingency fee-based plaintiff lawsuits. One challenge is that it is difficult to track and performance-based relationships require an inordinate amount of trust on both sides of the equation.

Billing based on ROI could be done, but it would probably work best in a very small setting, such as an individual consultant working directly with a client.

Hourly Billing

An Internet marketing agency is fundamentally a knowledge-based consulting firm. Probably the most definable unit of measurement for fees is by the hour (other than a commission fee for media buys, such as PPC). We’re really very similar to the Big Four accountancy and professional services firms: PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte Touche Tohmatsu. These companies essentially all bill on an hourly basis, as do most knowledge-based consultancies. All we have to sell is our knowledge and our time, and the most efficient way to denominate appears to be with hours.

At an interactive agency that I started in the dark ages of 1995, Multimedia Marketing Group (MMG), we employed the retired president of the Canadian division of Ernst & Young as consultant to teach us how to establish hourly billing. I don’t have my notes and I’m trying to remember as much as I can, as he was certainly a pro at it. Here’s what I recall:

Random Principles of Hourly Billing

• Each employee must carefully record their time. With the various tools available, this can be simple and should not require much time.
• Each employee has a set quota for number of billable hours on a weekly basis. They work 40 hours gross, but of course billable hours are always less than this. This can be used as one measure of employee productivity.
• Every employee in the company, other than accounting, should be required to post billable hours every week – an effective way to identify where there might be some dead-weight.
• Billing should always be fair, but should not be understated.
• Most firms have the practice of adding premium hours when they have done a great job. We didn’t do this at MMG, but it merits discussion.

As you can see by the two pictures, it appears that a contingency fee based on bottom line profits might have the most upside. But at this point we are using hourly billing at AudetteMedia. It might limit the upside, but it has its advantages - and it does tangibilize things a bit.