Most paid social agencies I audit for DTC brands are overspending on top of funnel and underspending on retargeting, retention, and measurement. Not because the agency is malicious or incompetent. The incentives the agency operates under push them toward this pattern even when they know better. This is a contrarian look at the structure, not at individual agencies, and what operators can do about it.
Agency bills on a percentage of spend. Higher spend, higher retainer. The incentive is to scale, not to optimize.
The pattern I keep finding
When I audit a DTC brand's paid social setup, the budget split typically looks like 75-85 percent top of funnel (TOF), 10-15 percent middle of funnel (MOF), and 5-10 percent retargeting. Often retargeting is near zero. The agency's reasoning is some variation of: "We need to keep the audience full. If we don't spend on TOF, nothing feeds the funnel. Retargeting will scale itself from the traffic we're sending."
The math almost never supports this. In the engagements I have audited, retargeting campaigns typically produce MER in the 4-6x range and TOF campaigns land closer to 1.5-2.5x. Shifting roughly 15 percent of TOF spend into MOF and retargeting has lifted blended MER by 0.3-0.5x in those cases, which on a $150K/month spend illustratively works out to around $45K in additional monthly revenue at the same budget. Results vary by catalog, creative, and current MER baseline. The agency keeps funding TOF anyway.
Why? Four structural reasons. Each reinforces the others.
Structure 1: Percentage of spend fee models
Most agencies bill on a percentage of ad spend. 10-15 percent is standard. When the agency bills 12 percent of spend, scaling the ad account from $100K/month to $200K/month doubles the retainer without requiring the agency to do twice the work. The incentive is to grow spend. The fastest way to grow spend is to expand TOF audiences, because retargeting audiences are inherently capped by site traffic.
The agency is not doing anything wrong by responding to this incentive. They are running a business. But the result is a consistent bias toward recommending more TOF spend than the brand's MER actually supports.
Structure 2: TOF screenshots look cleaner in reports
A monthly report that shows a TOF campaign with 3.2x Meta-reported ROAS on a fresh audience looks like growth. Platform ROAS on TOF tends to claim credit aggressively because the attribution windows are wide and the audiences are net new. The report screenshot looks great.
A retargeting campaign with 6x ROAS but only $8K spend looks small. The screenshot is less exciting. The agency's monthly review meeting is easier if the big number on the big chart is growing, even if the blended math tells a different story. The case against platform ROAS as a north star covers this dynamic in more depth.
Structure 3: No contractual accountability for MER
Most agency contracts are structured around platform-level deliverables: "launch 12 new creative tests per month," "maintain 3x+ Meta ROAS on prospecting campaigns," "manage the ad account day to day." Few contracts explicitly tie compensation to blended MER or P&L outcomes. The brand is left to reconcile the platform metrics against the register on their own.
The result: agencies optimize what they are measured on. Platform ROAS. Creative testing volume. Day-to-day account management. They do not optimize blended MER because they are not accountable for it. The brand that does not track MER has no leverage to push the agency toward decisions that would improve it.
Structure 4: Retargeting is small and less billable
Retargeting budgets are capped by site traffic. No matter how good the retargeting creative is, you cannot retarget people who never visited. For a brand doing $300K/month in revenue, retargeting realistically maxes out around $20-30K/month of productive spend. That is not enough budget to justify the attention of a senior media buyer, so retargeting gets assigned to a junior or gets left on default settings. The creative stays basic. The segmentation stays shallow. Performance stagnates.
The agency's attention naturally flows to the scale-able part of the account, which is TOF. Retargeting gets starved not because anyone decided to starve it but because nobody champions it.
What operators can do
Three moves.
Move one: tie agency compensation to blended MER. Structure the contract so a portion of the retainer (20-30 percent) depends on hitting a blended MER target. The target should be calibrated to your gross margin. Watch the agency's behavior shift toward the levers that actually move MER, which include retargeting, retention, and measurement quality.
Move two: report blended MER in the monthly review, first. Every monthly review meeting opens with one slide: blended MER this month vs. three-month trailing average, total revenue vs. total paid spend. Platform ROAS appears further down, as diagnostic. This changes the tone of the meeting instantly.
Move three: audit retargeting quarterly. Have someone outside the agency (internal or external) look at the retargeting campaigns every quarter. Are the audiences segmented? Is the creative specific to the funnel stage? Is the budget appropriate to the site traffic? Most audits find retargeting has been on default for six months.
The exception
Some agencies get this right. The ones that do typically share three traits: they bill on a fixed retainer plus bonus tied to MER, they lead every report with blended math, and they have senior people who care about P&L outcomes rather than platform metrics. These agencies exist. They are uncommon.
If your agency fits this profile, the argument in this piece does not apply to your relationship. If your agency does not, ask yourself what incentive you are actually paying them to respond to.
“The agency is not the problem. The compensation structure is the problem. Change the compensation structure and the agency's behavior changes within a month.
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The in-house alternative
At $300K+/month paid social spend, the math often favors in-house over agency. Two in-house media buyers, a creative strategist, and a freelance data analyst cost roughly $35-45K/month fully loaded. That is what a 12-15 percent agency fee on $300K spend costs, and the in-house team does not have the structural incentive to push TOF spend.
This is not a rule. Some brands at $500K+/month still benefit from agency partnerships for specific capabilities (creative production, new platform expertise, bandwidth flex). But the default assumption that "an agency is always the right move at scale" does not hold.
My agency says MER is not their responsibility because email and SMS affect it. Is that fair?
Partially. MER includes all channels, so strictly speaking the paid social agency cannot be 100 percent responsible for MER. But a paid social agency whose work is actually pulling weight should move MER in a readable direction. Ask them to report MER with paid social excluded vs. included, and look at the delta. That is their contribution.
Should I just pause TOF to see what happens?
That is an incrementality test. Yes, periodically. Pause TOF for two weeks. Measure what happens to total revenue. If revenue drops proportionally to the spend paused, TOF was doing real work. If revenue drops less, you were overspending TOF.
What is the right retargeting spend percentage?
Depends on site traffic and AOV. For most DTC brands in the $2-10M range, I expect retargeting + MOF combined to be 20-35 percent of total paid social spend. If it is under 15 percent, you are almost certainly underspending there.
Related reading
This piece is part of the paid social for DTC operators hub. The foundational argument for using blended MER instead of platform ROAS is in ROAS is the wrong north star and MER over platform ROAS. The operational moves agencies should be making live across the learning phase piece and CBO vs ABO. For an independent audit that can validate whether your agency is pulling weight, the DTC Stack Audit covers the full paid social and measurement stack.