I’ve worked with dozens of marketing agencies over the years. Their fee structures have varied widely. Here’s my two cents on what’s worked best from my–the brand’s–perspective.

There are many ways to skin a cat, as they say, but below are four agency fee structures I’ve actually used along with their pluses and minuses. I declare a winner at the end.

  1. Percentage of Marketing Spend

Pros: Good Ol’ Faithful, almost certainly the most common fee structure. Paying higher fees with greater spend both compensates the agency for having to manage a more complex account and rewards them for growing the account.

Cons: This approach incentivizes the agency to overspend on marketing past the point where it’s profitable for the brand. Not that an agency would ever do that… Also, the amount of time to manage an account isn’t proportional to the spend so fees can really run up relative to the work being done.

  1. Flat Fee

Pros: You as a brand know what your costs are each month and they will not explode as spend increases.

Cons: The agency isn’t really incentivized to actually grow your account or care about your brand other than doing the bare minimum to not get fired.

  1. Variable Percentage of Marketing Spend

Pros: The idea here is you pay the agency a higher percentage of spend if they hit certain targets (e.g., a certain minimum ROAS). This obviously has the benefit of incentivizing the agency to hit whatever targets you set.

Cons: Sometimes it’s not in your brand’s interest to incentivize the same things all the time. For example, if you have excess inventory and need to offload it, you might be willing to accept lower ROAS to drive volume and convert your inventory to cash.

  1. Payment Per Customer Acquired

Pros: The most interesting version of this approach is where the agency fronts the marketing dollars and later charges you a flat fee per customer acquired. Sort of like an affiliate deal so there’s no risk to the brand. If the agency can acquire customers increasingly efficiently, they pocket the savings. And you know exactly what you are going to pay per acquisition.

Cons: The benefit of more efficient spend flows entirely to the agency, not the brand. And the risk benefits are overstated. If the agency isn’t acquiring efficiently, they’ll just turn down spend, effectively eliminating their risk.

In general, I like the vanilla Percentage of Marketing Spend option the most. It aligns incentives well and you can limit the downsides. For example, if you this route should only allow agencies to increase their spend when they are consistently hitting your ROAS targets. This restricts the ‘spend more to make more’ incentive massively.

Still, I think it’s possible to get any of these structures to work and, with the right agency, any can.

Any innovative fee structures I missed? What have you seen that’s worked well? Let me know in the comments!