Commentary
How AI Will Force Agencies To Rethink Pricing Models
- by Richard Whitman , Columnist, 11 hours ago
Time is money as the saying goes and for some agencies billing by the hour, for decades has been quite lucrative.
But clients and agencies both have been looking for improved returns on marketing and advertising investments in recent years.
Will AI be the catalyst for an industry-wide rethink on pricing models?
The subject came up during S4 Capital’s first quarter earnings call as analysts questioned company officials about the efficiencies wrought by AI and how clients and agencies would benefit.
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S4 chief Martin Sorrell commented that AI is reducing the cost of creating and producing content and that the firm is looking at pricing models “based on outputs” versus time spent on creation and production.
Analysts wondered how agencies and clients would split the value of improved efficiencies, but it didn’t appear that S4 is far enough along in the process to address the issue specifically. Although Sorrell did note that some clients are looking to reduce the cost of creating and producing content with the idea of putting the savings in the media spending pot.
“The model has to change,” said Sorrell, noting that the quality of AI-generated work is improving daily. Quality work, he added “demands a premium.”
But it won’t happen overnight, especially with worrisome macroeconomic issues muddying the waters.
But in what Sorrell termed a “small-growth world,” there will be increasing pressure on client revenue which translates in part to fees paid to agencies. The question, he added, is “can we create a model that copes with that in an effective way?”
S4 isn’t the first agency to reconsider agency remuneration and won’t be the last. Two years ago digital agency Huge repositioned as a creative consultancy, focusing on product development (AI tools in particular) and weaning off project work. Other agencies have adopted models based on performance.
Richard, ad agencies helping clients to develop new products is nothing new. BBDO was doing that way back in the 1960s and with some success--Campbell's Chunky Soup and Gillette's "Soft & Dry" were two examples.
But when we talk about "outcomes" what exactly do we mean? Sales? For years, ad agencies have tried to snatch clients by promising to share in their profits but otherwise they would not get paid. Usually, this is a sign of desperation and it deosn't work as a business model because 85-90% of most marketer's sales are not a direct function of advertising. And the ad agency has no control over these factors--product distribution and quality being the main ones.
There's lot of talk about advertisers and agencies changing emphasis and focusing on "outcomes" with AI being the driving force not only in media buying but also in creating ad campaigns. . Sounds great but isn't it also necessary for the client side to dramatically alter it's own operations --with most brand managers and CMOs replaced by AI---or is it only the agency business models that need changing?
I think that AI will cost a lot of people their jobs at first--until it is realized that AI should help people to do their jobs better---not replace them. After all aren't most consumers people? Do we really want machines to sell us everything we need--or don't need?
Bravo Ed. Spot on.
The difference between a good creative agency and AI is that AI is primarily based on information that is easily accessible that anyone dig into the pool.
A creative ad agency (the ad and the placement strategy) produces a new communication to the market. Yep, once such strategies are public they will flow into AI. If you can't afford originality with your product ... just knick the ideas your liked and do it via AI.