Today’s Toughest Challenge

I set out to write about today’s toughest agency challenges and got a bit carried away with the first one I came up with.

Of course, it’s about the value agencies create and how they charge for it.

This is something that’s so foundational and yet so misunderstood that it seems to be the root cause of most agency challenges.

• Not sure about pricing? Start with value.
• Who to hire? What’s the real value you’re delivering?
• Should you add a service? How’s it impact the value you provide?

It’s almost annoying how critical this concept is.

So, instead of listing out a bunch of agency challenges, we’re going to focus on this one. Maybe I’ll get to the rest in another newsletter.

Value and Dollars

The billable hour has been circling the drain for well over a decade now, with many proclaiming its imminent demise along the way, but two-thirds of the agencies in our surveys still use Time & Materials as a key part of their pricing methodology.

Obviously, AI put this method under even more scrutiny, and it’s forced agency leaders to reevaluate the value they provide and how they’re compensated for that value.

To appreciate this, it’s helpful to go back to why agencies exist in the first place:

Agencies are created when someone sees commercial value in a new tech or process that traditional brands (or even other agencies) miss.

That individual thinks they can do a much better job and earn a lot more by delivering the new tech or process outside the confines of the organization.

They get a few friends together and start their own thing.

This process has played out thousands of times and has grown into the agency industry we have today.

As these agencies grow, they tend to attract barnacle activities. Activities that stick to their hulls of value and create turbulence. Some of these are driven by how clients buy, others by shiny-object syndrome, and some because they made sense at the time but haven’t been pruned.

This results in an environment where most agencies are an amalgamation of different services and sub-services, which muddy the value picture.

Value-based pricing solved a lot of this, but it wasn’t simple to implement.

Agencies could tell a client that this is their special process, and they needed to buy X services, and they’d get uniquely valuable results that only that agency could deliver.

Clients didn’t love this, and procurement teams would have aneurysms over it, but it worked well for the few agencies that could pull it off.

But problems arise when we have a tech shift like AI.

All of a sudden, the commoditization curve for multiple service lines shifted faster than ever. Instead of a gradual slide into a commodity, services like social media, content creation, design, prototype webdev, etc. all look like they can be done to an adequate level by just about anyone now.

It’s forcing agency leaders to reevaluate all of their firm’s activities at once while trying to forecast what AI will eat next.

While leaders are going through this exercise, clients are seeing what’s happening and asking for discounts. It doesn’t really matter if agencies have actually pulled any efficiency gains out of AI, clients read about everything being solved, and procurement teams started salivating.

So now agency teams are at a point where they have to be honest with themselves about the value they deliver. For some larger agency teams I’ve spoken with, quantifying this across various parts of the agency is damn near impossible.

It isn’t much easier for the little guys either, and there’s still fear in the marketplace about aligning an agency along a certain specialization, only to be upset by AI next year.

Go Back to Why Your Agency Exists

• What’s out there that you are uniquely positioned to solve?
• What insight do you have into a specific problem space?
• How valuable is your solution?

Sometimes it’s an issue where a team isn’t thinking big enough. Other times, adjacent services or activities can round out the solution and drastically increase the value.

We’re in a weird spot right now, but returning to the basic principle of why your agency exists makes it easier to chart a path forward. That path typically leads away from hourly billing once leaders see what kind of value is possible.