How A.I. Will Reshape Your Revenue Model

By Tim Williams

After years of fervent discussion about the inadequacies of the time and materials approach to agency compensation, the industry is coming face to face with the fact that time-based billing is a useless concept when applied to problems that can be solved in nanoseconds by machine learning.

This is an especially complex challenge for an industry that pays so little attention to pricing in the first place. Only the most progressive agencies have devoted the necessary brainpower to developing an actual revenue model. Most just have a cost structure — a schedule of hourly rates based on the salaries and overhead.

Other modern businesses have a variety of innovative ways they price their products and services. Over the past 20 years, the business world in general has been part of a global revolution in pricing. It’s only professional service firms — advertising, law, accounting, architecture, and engineering firms — that are stuck in a cost-driven remuneration structure that dates to the industrial age. Back then, the disruptive forces surrounding pricing were driven by another technological development: the birth of the steam engine, which presented a conundrum for factory owners who couldn’t figure out how to price products produced by machines instead of human labor. Their solution was “cost plus.” Manufacturers would calculate the actual costs of production to which they would add a desired profit margin.

From costing to pricing

As production technologies matured, manufacturers learned ever-better ways of pricing, graduating from cost-based to competition-based and eventually on to the state of the art: customer-based pricing — that is, pricing based on the value to the customer, not the cost to the company.

Pricing based on value created instead of cost incurred is the inevitable choice facing agencies today. As A.l. begins to provide all or part of the solution to a problem, agencies can no longer simply add up hours on timesheets as the basis of their compensation. A.I.-powered solutions compel agencies to employ an actual revenue model.

At the very least, agencies must now charge for the value of the output instead of the cost of the input. While this represents a significant change for most firms, it’s not such an impossible transformation; it is in fact the way all other companies do business. Agencies are simply catching up to their clients, which means brand marketers needn’t be mystified by this change in remuneration. Their agency partners are simply going to be asking to be paid in the same way brands expect to be paid by their customers: for the value of the product, program, or service, not the cost of delivering it.

The impending death of hourly billing

Thanks to A.I., the death of the hourly rate is not only near — it’s now. As they bury the billable hour, agencies will increasingly price programs and products instead of people and hours.

The productization of the agency business has already been quietly underway. Multinational agencies like Huge and Weber Shandwick and independent agencies like Signal Theory and Wray Ward sell solution sets, not services. The power and potential of artificial intelligence already fits neatly within their business models, to the benefit of both the agency and their clients. Instead of serving up bullet-point lists of services that are sold by the hour, progressive agencies of all types and sizes are offering up suites of programs designed to solve specific business problems.

In a world without timesheets, professional buyers must prepare to have a different conversation with agencies. As a matter of course, procurement professionals deal every day with products and services that are priced as finished outputs, and this is how they can expect to deal with their agency partners. The practice of asking for hourly rates and time-based staffing plans will become progressively irrelevant as agencies create their own “pricing stacks” — a variety of pricing methodologies based on the value of the output instead of the cost of the input.

New and better revenue streams

In addition to output-based pricing, agency pricing strategies will also include subscriptions, arguably the most important new pricing methodology of the last decade. To many economists, subscriptions represent the future of pricing in a wide variety of business segments. In addition to subscribing to software, you can now subscribe to a car, a hotel, a doctor, an accounting firm, or a digital agency. Procurement departments already know how to assess and purchase subscriptions from technology providers. It’s not difficult to imagine how this could apply to today’s technology-driven agencies.

Brand marketers also understand how to deal with IP-based businesses that sell their products and services via licensing and usage agreements. Agencies will be engaged in similar practices, along with other pricing innovations such as dynamic pricing (pioneered by airlines and hotels), points-based pricing (already in use by some public relations firms), two-part pricing (think “razor and blades”), and of course, outcome-based pricing (where payment is based on results, not efforts).

While time-based remuneration has been dying a slow death for some years now, it’s artificial intelligence that is suddenly putting the final nails in the coffin. And it’s likely that Karl Marx, the father of the labor theory of value, will be turning in his grave.