Marketing Procurement

How AI Will Disrupt Agency Compensation Models

Everyone is talking AI – how to utilise and where to implement most effectively, and how much and where to invest in it. Among the traditional holding companies that have openly disclosed such matters, public announcements place the investments from a quarter to a half billion dollars each.

What no one appears to be talking about however, is how to monetise these investments — as well as any other additional costs which agencies have and will be incurring — to optimise their service delivery to clients.

What has been clear the past 30 years, is the predominance of labour-based compensation models, whether reflected as standard fee retainers or project fees, derived either from inputs of time or outputs of deliverables.

Consequently, agencies are inherently more pre-occupied, from a defensive point-of-view, in continuing to justify selling people (time), when there is a clear and present danger that a certain proportion of billable staff may increasingly be replaced by ever-more intelligent machines.

With this backdrop, JFE International Consultants (JFE) fielded research at the C-suite level of 20 independent Marketing Services firms across all major industry disciplines.

The study consisted of three straightforward open-ended questions:

1. How is your company currently using AI?
2. Are you investing in AI, and if so in what forms?
3. How are you, or planning to, monetize this investment?

RESEARCH STUDY EXECUTIVE SUMMARY

The findings – while widely divergent irrespective of discipline – were both fascinating and eye opening. Undoubtedly, as compared to the plethora of shiny new objects of the past couple of decades, these technologies are the real deal.

Founder and Chairman of Imaginuity, Charlie Calise opened his survey interview response with a PowerPoint, stating emphatically “AI represents the most ground breaking advancement in the advertising industry since the introduction of computers.”

Not all respondents felt as bullish as Imaginuity, and the Market Research discipline best revealed the dichotomy between views on AI.

On the one hand, a respondent stated they wanted to be viewed as the non-AI provider; and that their “old school” human-led research approach, with its historical proprietary data set, is the Intellectual Property (IP) they monetise, and is precisely what their customers want.

Conversely, another Market Research participant convincingly advised that AI is thoroughly embedded in all aspects of their scopes of work, execution of deliverables, and pricing, therefore an integral and differentiating part of their go-to-market strategy.

This latter firm, Merrill Research, has cornered the market by incorporating the analysis of non-verbal intelligence (both micro-expressions and body language) into all of their interviews and focus group activities.

As Founder and CEO David Schneer professed, “with AI, we can now develop and map a longitudinal EKG of what market research participants actually say versus what they truly mean.”

Creative and Production also present a wide spectrum of opinion and experience. Is AI potentially damaging to true creativity and brand-building, engendering a “good-enough” attitude, allowing anyone to become a creator or photographer?

Or is this significantly trumped by the ability to now do exponentially more work, providing many more options, all in much less time?

The Media discipline in particular, given the explosion of Programmatic buying, represents the Marketing Services category that was the earliest to significantly adopt AI.

Their uses, investment, and monetisation practices are more established and could serve as a sort of bellwether for the industry, rather than merely adopting a laissez-faire “cost of doing business” mentality.

Without exception, agencies NEVER invest any significant monies, whether it’s for talent, tools or technology, without some plan for recuperating these costs; and preferably with expectations of a fair and reasonable margin.

With that in mind, what follows is the key issue which JFE addressed in its research – the ways in which Marketing Services agencies can productively and profitably monetise their ongoing AI investments.

MONETISING AI – PRICING MODELS

Historically, and as supported by the major trade associations, there have been only three prevailing pricing models in the Marketing Services industry – Spend-based (variable commissions and markups); Labour-based (as alluded to above, fixed fee or reconcilable); and Value-based (relating to performance, outcome, or perceived / measurable benefit).

Typically, commercial relationships between marketers and agencies consist of hybrid arrangements across all three basic models.

As Omnicom Group CEO, John Wren, so aptly stated some years ago at the Advertising Financial Management conference, when interviewed by ANA CEO Bob Liodice, “we have 5,000 clients worldwide and 3,000 different compensation arrangements.”

Based on this initial, small sample research, it is clear that AI is already disrupting and re-defining these traditional models and exploding the options for companies to recover their AI investments, enhance revenue, and in many cases, increase their overall profitability.

Agency remuneration attributable to the use of and investment in AI fall primarily into five distinct approaches, in order of frequency, including several non-traditional models:

1. Tech Fees Surcharge – anywhere from 1-3% of Agency fees

• Applied across the board or on all new relationships; and not just Media agencies.

2. Efficiency-Based Enhanced Profitability – fixed fee pricing

• Less time/cost for greater outputs; no corresponding reduction in revenue.

3. Amplify Traditional Pricing Models – all except Spend-based

• Inputs – charge for additional, higher-level staff; two-tiered rate structure.
• Outputs – revenue from new, augmented Creative / Production deliverables
• Outcomes– opportunity to evolve into value models, given clear-cut alignment

4. State-of-the Art AI Pricing Model – embed AI in all scope, service delivery, and pricing

5. Other Non-Traditional Pricing Models – mostly an IP play

• Subscription – annual software renewals (internally developed Large Language Models)
• Licensing – specific “patented” prompts, creation of an “efficiency” bot
• Sponsorships – incremental revenue for exceeding established goals

BOLDLY LEAD INTO THE FUTURE

The case is quite clear for Marketing Services providers.

Since the mid 1990’s downfall of the previously ubiquitous Spend-based 15% Media commission – with its accompanying 17.65% mark-up on Production – industry consultants, and increasingly client Procurement, have been dictating how agencies are to be paid.

Marketing Communications may be the only space in the business world where the buyer, NOT the seller, principally determines how the providers’ wares are to be sold in the marketplace.

Most fortune-tellers are nothing more than “fortune-sellers.” The AI revolution presents the unique, and perhaps short-lived, opportunity for agencies to change the above dynamics by taking back the reins on how they are to be compensated.

In that way, rather than trying to “read the future” of how AI will impact their business models, they can lead into the future by adopting new, creative alternatives that their clients have yet to consider.

It is my firm conviction that without this type of radical evolution in currently entrenched business models, pricing discussions between client Procurement and agency Finance are doomed to remain contentious.

By taking steps to immerse their business practices in AI and then confidently pricing their services to reflect the true value they deliver, agencies can finally shift the dynamics away from the hours to do the work to the results they and their clients have aligned themselves, and thus the success and value they actually provide.

Marketing Services providers – the ball is clearly in your court …