Crazy Businessman

Most Internet Marketing Agencies will charge a management fee as the charge to a client for the management of paid advertising (Google Adwords, Facebook, LinkedIn, etc.)

A management fee is fundamentally a markup, a markup is the difference between the cost of your online marketing spend and the overall cost charged by the agency.

Markup Example

In our example, the client wants to spend £1000 per month on Google Adwords plus a £200 management fee resulting in an overall cost of £1200 per month. The markup fee is often shown as a percentage, therefore in our example there is a 20% markup (£200 divided by £1000) on the cost of Google Adwords spend for the service of management a 20% management fee.

Margin Example

In our example the total cost is £1200 of which £1000 is the cost of Google Adwords, therefore the margin is the difference, £200. To express this as a percentage, as is done in most cases you divide the £200 margin by the total cost (£200 divided by £1200) Margin is 16.66%

So, for the example we are using markup is 20% but margin is 16.66%

So why is this important?

If you work with a Google Adwords agency which operates by retaining a margin of your advertising spend, in direct comparison with an agency who use the management fee, the % you are being charged is more then interesting.

Some Agencies have a margin, which can be as high or even higher then 50%

How does this look as a markup/management fee ?
£1000 spend with 50% margin means only £500 is spent on Google Adwords. Using the Markup calculation if Google Adwords cost is £500 and the markup is £500 this is a management fee of 100%

Now, take a walk with me down the road of the ridiculous. Imagine if an online marketing agency had a margin of 60% and then also charged a markup of 10% (they could call is a service charge/management fee), how would that look.

£1000 advertising + 10% service charge = £1100

We know the margin is 60% therefore only £400 is being spent on Google Adwords. Lets see what the markup is, as before we divide the difference in the Google Adwords spend to the overall cost by the Google Adwords spend (£700 divided by £400).
So what is the markup? What is the overall cost of management (true management fee?
The answer is 175% Management Fee, compare this to the industry average of 20%

Math lesson over. Spanish lesson starts, Loco means insane – I agree!

What Do You Think About Crazy Management Fees ? Comments below….