When AI Does the Work, What Do Agencies Actually Sell?

By Tim Williams

If AI is doing 30% of the work in your agency, how do you capture that value in an hourly rate model? The simple answer is that you can’t. 

The transformative effects of artificial intelligence is finally forcing agencies to confront the question of that they’re really selling. The answer is not — and never has been — “time.” Clients don’t buy our efforts and activities. They don’t really even buy our outputs. The deliverables agencies produce are simply a means to an end: solutions to important business and marketing problems. 

The fact that agencies have allowed themselves to be pushed down the value chain to become producers of marketing deliverables has put them in the unenviable position of “low cost provider” of commonly-available outputs. As we often advise agencies who are tired of being lined up on spreadsheets, to get out of the procurement rat race, stop selling things that can be procured. 

In other words, now is the time to transform your business model to focus exclusively on things that clients can’t easily do for themselves. Otherwise, you will only continue to reinforce your perceived position as an expensive production house. 

More magic, less logic

The list of things that clients can do in-house (or via other lower-cost producers) keeps growing by the day, thanks to the immense power of AI. One useful framework is what we call “Magic and Logic.” “Magic” offerings are those that involve strategic thinking, innovation, and high doses of human creativity. “Logic” work involves production, execution, implementation, distribution, etc.

The idea is to do more “Magic” and less “Logic” (unless your model is to be a low-cost, high-efficiency marketing implementation firm, which is a viable business model — just not what most agencies aspire to be). 

Thanks largely to AI, the line between Magic and Logic keeps shifting — rapidly. What used to be Magic (such as professional quality videos) is increasingly moving into the land of Logic. AI tools can now replicate much of the work of talented creative directors, media planners, and analytics professionals. 

So the task of agency leaders is to identify the things that are out of the reach of technology platforms and frame them as the agency’s core offerings. More Magic, less Logic. 

Should cost drive price, or the other way around?

However, even Magic offerings will usually involve the use of AI, which brings up the question of the most effective way to monetize the value of AI. The unfortunate instinct of most agency professionals is to view every agency offering through the lens of cost, as in “Let’s first determine the cost of development so we can determine the price.” That approach and instinct is exactly backwards from the way pricing professionals approach this question.

Professional pricers first ask the question, “For this particular customer, what is the value of this offering?” Based on this evaluation, they then set a desired price. Then they determine the cost. If the target price adequately exceeds the cost, they decide that the product or service is worth developing. In other words, price comes before cost. Exactly the opposite of how most agencies approach the question of compensation. 

This framework is precisely what’s required to develop an effective pricing structure for the AI-optimized agency. 

Pricing the product instead of the person

The independent media agency Butler/Till recently launched an AI-powered media buying agent that reduces media supply chain costs by more than 80%. These savings produce a 40% lift in impressions and a 30% decrease in CPM rates. Should Butler/Till employ a “time and materials” compensation model to capture the value of this remarkable platform? We all know the answer. The value of AI-assisted work must be monetized by charging for the value created, not the costs incurred. 

George Popstefanov, CEO of independent agency PMG, notes that an AI-powered agency cannot succeed commercially if it continues to function like a traditional agency burdened by an FTE-heavy cost structure. PMG’s AI-powered suite of platforms branded as “The Alli marketplace” are offered using product-based pricing, not time-based. 

In a recent Digiday article, Popstefanov observes that while most agencies price labor — people billing hours — PMG’s compensation is tied to hitting predetermined targets. Clients pay for what the platform produces, scaling up when results improve and down when they don’t. “I’m not selling you hours,” says Popstefanov. “We’ve always been based on growth and outcomes.“​​​​​​​​​​​​​​​​

The billable hour isn’t invincible after all

As my friend and colleague Ron Baker says, “If AI doesn’t kill hourly billing, then the hourly rate truly is invincible.”

As professional service firms continue to gain experience with the transformative power of AI within their firms, they are finally learning — one by one — that the hourly rate isn’t immortal after all. Instead, they’re seeing that AI truly is the final nail in the coffin of a time-based business model.