LinkedIn Q&A :: Search Engine Marketing Firms Operating Margins

Brandon Shapiro a consultant at Bain & Company asks the question:

Does anyone have a good sense for what operating margins are for search engine marketing firms (SEMs) that offer paid placement and SEO services?  I imagine margins are very different for the two types of services but…

My response:

Profitability of SEO and Paid Search Marketing is dependent on the level of service provided and the business model that is adopted.

SEO Agencies typically operate on a retainer basis ranging from a few hundred dollars per month up to $20K to $25K per month based upon client objectives and the size of the website to be optimized. Other business models are also utilized.

There are a number of services provided under the SEO umbrella including:

1. SEO Consulting – many agencies provide consulting services only which usually includes an audit of the website/s, education, writing of best practice functional specifications and overall direction of how to implement the SEO strategy recommended. This is the most profitable service provided with hourly fees of agencies ranging from $125 to $300 per hour. Salaries of SEO consultants are the largest component of costs, however are quite controlled.SEO Agencies may also offer the following services:
2. Technical Optimization – programmers who are able to make technical changes to a website to ensure spiders are able to access content and pass PageRank throughout the site.
3. Keyword Strategy – keyword strategists researching, analyzing and preparing an overall keyword strategy to direct content optimization and creation.
4. Content Optimization – content writers who are also able to massage keywords into the right places of the copy.
5. Link Building and Social Media Marketing – the generation of quality back links to a site.
6. Analytics – ongoing data mining, analytics and reporting.

These additional services are time consuming and the return on investment for the client is highly dependent on the expertise of the SEO team employed. Since these tasks are ongoing and never ending, it is easy for the team to spend more time than afforded within the budget allocated.

The level of competition in online markets also affects profitability. The greater the competition, the higher the level of SEO implementation is required in order to achieve results.

Various business models are adopted by SEO agencies including:

• Time and materials
• Monthly retainer
• Cost Per Click – yes, some agencies do charge on a per click basis for natural search traffic.
  E.g. GravityStream.com
• Commission for sales
• Cost Per Lead or Action

A smart SEO Agency will charge fees based on perceived value and results achieved, not necessarily the hours provided to the client.

Paid Search Marketing agencies usually provide services based on a flat agency fee (between 10% to 20% of media fee), however more are invoicing additional value added services such as creative, landing page development, data mining and analytics.

The profitability of paid search marketing agencies is dependent on the number of clients serviced by a single Search Marketing Consultant/Analyst. Some may load too many clients onto a single person to manage which increases overall profitability, however campaign performance is likely to be affected.

Jacqui.