We live in a time of disruption. The constant turning of the wheel of change is what fuels the entire creative and media industry. Clients can never stand still. They are either adapting to change or driving change. And to smooth the path to achieve both, they rely on agencies to provide skills, insight, expertise, messages and resources they simply could not afford to have in-house. It’s fair to say that agencies exist for change.
It's strange then that this comfort that agencies have with living at the leading edge of change doesn’t translate into how most agencies think about their own commercial models.
This is probably because agencies are people businesses. Their success depends on attracting and selling the very best talent the industry has to offer. It has always made sense to tie the cost of these talented people to the revenue they deliver. For most agencies this means charging people out on day rates. Even fixed price services and retainers are calculated on assumptions about headcount costs and hours of utilisation. But times are changing.
First, in its efforts to improve margins, the whole industry drove a race to the bottom by outsourcing a lot the effort of production to low wage geographies. This resulted in declining prices and at the same time, wages in these regions have steadily risen. Second, technology has caught up, and now we face the risk of many of these activities being automated through use of AI and machine learning, with clients having the same level of access to the same capabilities.
The last time the creative and advertising industry faced this degree of major disruption was with the arrival of search and online advertising. Suddenly the entire process of advertising became standardised and technology took over a large chunk of the work that had previously been done by agencies. Pricing (and margins) suddenly became much more transparent, and there was less scope for agencies to make as much margin out of media buying. The response from agencies was to move upstream. Understand what outcome the client is trying to achieve and become experts in leveraging advertising technology better than most clients can. They bundled together the expertise and the execution into a complete service that maximises results using the technology in the best way possible.
Now think about the potential impact that AI and machine learning will have on our industry. There are two routes that this change can take. The first is accepting a huge erosion of current revenue streams as billable people are replaced with technology. The second is to once again move upstream and to take a leadership position in solving customer challenges and incorporating the technology into that solution.
This choice is a bit of a no-brainer, but one of the obstacles to taking the solution approach is the issue of day rates. First, they expose which parts of the process involve actual people v’s the parts that use tools a client believes they could use themselves. Most importantly however, by being focused on pricing for inputs (people’s time), it’s very hard to shift the client’s mind to paying for outputs and outcomes.
For sure, making this sort of change is easier said than done. It’s not easy to move to new pricing models, and sudden change brings a lot of risk that the new model won’t appeal to clients or won’t generate the same revenue or margin as the old model. Which is why we need to think about making a start now to test and implement new pricing models for our services that don’t only adhere to charging day rates. Of course, this is not just about pricing, it's also about how you package your offers into defined service offerings, with clear propositions and differentiated quality or service tiers. But right now agencies should be applying their minds to how they might package up a new generation of services that don’t entirely depend on billing people out.
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