The Retainer Trap: Why Percentage-of-Spend Agencies Want You to Spend More

The Incentive Misalignment Nobody Discusses

Most Google Ads agencies charge a percentage of your ad spend. Typically 10% to 20%. The more you spend, the more they earn.

This creates a structural incentive problem that is so obvious it is remarkable how rarely it gets discussed.

How the Model Works Against You

If your agency charges 15% of spend and you are spending £50,000 per month, they earn £7,500. If they recommend increasing spend to £80,000, they earn £12,000. That is a 60% pay rise for your agency.

Now, increasing spend might be the right recommendation. But it might not be. The problem is that the agency's financial incentive always points in one direction: spend more.

When "Scale" Really Means "Pay Rise"

Listen carefully to how your agency frames budget recommendations:

• "We are limited by budget" (we want you to spend more)
• "There is untapped opportunity" (we want you to spend more)
• "Competitors are outspending you" (we want you to spend more)
• "We could scale this if you increased budget" (we want you to spend more)

Some of these may be genuinely true. But when every recommendation ends with "increase budget," the pattern becomes suspicious.

The Diminishing Returns Problem

Every Google Ads account has a diminishing returns curve. The first £20,000 you spend generates your most efficient conversions. The next £20,000 is less efficient. By £80,000, you may be paying 40-60% more per conversion than you were at £40,000.

A percentage-of-spend agency is financially incentivised to push you beyond the point of diminishing returns. They earn more even as your efficiency drops.

A fixed-fee agency has no such incentive. Their recommendation to increase or decrease spend is based purely on whether it serves your commercial interests.

The Transparency Test

Ask your agency these questions:

1. At what spend level do we hit diminishing returns? If they cannot answer, they have not modelled it. If they will not answer, they do not want you to know.

2. Would you recommend we spend less? An agency that has never recommended reducing spend is an agency optimising for their revenue, not yours.

3. What is your fee if we reduce spend by 30%? This reveals whether budget conversations are commercial discussions or salary negotiations.

The Fixed-Fee Alternative

Fixed-fee pricing removes the incentive problem entirely. Your agency earns the same whether you spend £30,000 or £100,000. This means:

• Budget recommendations are commercially motivated
• Reducing spend is not a pay cut for the agency
• Scaling is recommended only when the economics justify it
• The agency's interests align with yours: maximum profit from optimal spend

The Objection

"But percentage-of-spend means the agency shares in our growth."

This sounds reasonable until you examine it. They share in your spend growth, not your profit growth. An agency that scales your spend from £50k to £100k while your profit margin halves has doubled their income while reducing yours.

Shared success should be measured by shared outcomes. Revenue is not an outcome. Profit is.

What to Look For

When evaluating agency pricing models, ask:

• Does the fee structure incentivise the right behaviours?
• Can the agency recommend spending less without it affecting their income?
• Is the relationship designed around your P&L or their revenue?

The best agency relationships are ones where the financial incentives point in the same direction for both parties. If your agency earns more when you spend more regardless of profitability, you do not have a partner. You have a cost centre with a commission structure.