The advertising industry is approaching a “potential tipping point” over agency pricing structures, according to a new report from the Institute of Practitioners in Advertising (IPA). The report, entitled ‘The Price Isn’t Right: Why agencies should change the way they price’, follows an IPA survey which found that only 27 percent of agencies feel they receive a “fair” price for the work they do, while 58 percent feel there has been little or no progress when it comes to reforming commercial agreements.
The IPA notes there is widespread recognition among agencies and intermediaries that traditional time-and-resource (FTE-based) pricing models are outdated and misaligned with the services that modern agencies provide. And yet change has been minimal, according to the report, due to a combination of factors on the part of both agencies and their clients. As one agency leader puts it: “Nothing has changed since 1985!”
Based on 63 qualitative interviews with creative and media agencies, clients and intermediaries, the report proposes new models for an agency pricing structure “that moves beyond simply accounting for hours”, including output- or outcome-based fees, subscription-like arrangements, or intellectual property licensing.
“Ultimately, overcoming the inertia demands courage from both sides: agencies must be bolder in proposing new commercial models, and clients must be open to exploring alternatives that genuinely align agency incentives with their own success,” says the report. “Only then can the industry unlock the full potential of agency-client partnerships and move towards a pricing landscape that truly reflects the sophisticated, outcome-driven value of modern marketing.”
“Killed at the pitch stage”
The IPA argues that this inertia stems from clients not pushing to change the long-established FTE model, whose administrative efficiency and global consistency have entrenched the mechanism in the pitching process, when it allows them to fairly compare competing submissions. Meanwhile, macroeconomic uncertainty has created short-termism around budgets and processes, creating a challenging environment for clients to commit to more creative pricing structures.
One respondent from a media agency commented that “innovation in pricing often gets killed at the pitch stage,” while another respondent from the intermediary and procurement expertise side said agencies are often “penalised for suggesting new pricing approaches.” This means it is easier for agencies to play safe and win the business than attempt to bring new models to the table.
But the report calls for the FTE model to be modernised without dismantling its established advantages, by recognising the strategic and consulting roles that agencies play, their use of advanced data and analytics, and the integration of AI and automation. “While AI may reduce manual hours for certain tasks, it simultaneously elevates the strategic thinking, data interpretation, and human oversight required to leverage these technologies effectively,” says the report. “A modernised FTE model must account for the value derived from this technological leverage, rather than penalising efficiency.”
From hours to outcomes
The changing nature of agency services therefore requires pricing models to shift their focus from time spent to value delivered, according to the report, using outcome-based pricing, performance-related fees tied to KPIs, or IP-based licenses for ideas and content. And because the requirements of each client will vary by project or region, the IPA suggests agencies build a portfolio of pricing models they can deploy in pitches, with proposed options including:
- Agency markup: fees charged for the management of third-party services delivered to the client
- Retainer: agreed fee to retain a dedicated team, or proportion of a fixed resource, payable in equal instalments across the year
- Deliverable-based: flat fee for a fixed scope of work, with clear deliverables set
- Subscription: a rolling contract for access or usage of a predefined set of services
- Intellectual property licensing: the agency permits the client to use its creative ideas under agreed terms, in exchange for payment
- Business performance: variable remuneration based on success metrics
- Equity: minimal upfront fee and payment in the form of equity stake in the business
The report notes that these models are being tested by smaller agencies, but the industry needs common infrastructure around consistent KPI frameworks, transparent data access and shared measurement tools to help agencies and clients navigate the options.
Meanwhile the role of AI in the future of agency remuneration remains up for grabs – on the one hand promising the performance attribution required to unlock outcome-based pricing; on the other, the potential to further drive down fees based on billable hours.
“That would be a missed opportunity,” says the report. “If AI helps agencies deliver better work, it should underpin value-based remuneration, not just speed-based discounts.”
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