The agency / client conundrum - what would you do?

Let me set the scene (fellow agencies and freelancers might recognise all or some of this story)
 
You've built a good website for your client and they're happy hurrah! You get paid - you're happy. You then move into the marketing phase; SEO is a difficult pitch (at this stage) so you opt for a PPC campaign with Google. A test budget of £1000 is agreed and you do your job well; setup conversion tracking, do your research and manage the spend diligently. In fact you've done your job well enough for the client to double the spend for the next month - so far so good.
 
But, and here's the conundrum, because you manage a number of similar accounts you are not happy with a 1.79% click to conversion. The truth is you think this is just the early stages and you heartily recommend they invest in additional design time allowing you to develop a landing page with the goal to increase conversion. [Secretly you want to go all out and start A>B testing and in the back of your mind you are yearning to get into multivariate testing]
 
It is at this point that, for the first time, you do not have a meeting of minds. The client wants you to manage the increased spend but does not buy into the additional costs to develop a landing page?
 
At this point I would love to know - What you would do?
 
Please take 5 seconds to cast your vote: http://twtpoll.com/pjl17x
 
This was a scenario we (i-KOS) faced in July 2009 - I will share exactly what we did in a follow-up post in one week; along with the results from the poll.
 
You can follow my riffs, and ramblings on running an agency @mylesdavidson (http://www.twitter.com/mylesdavidson)

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