Is The Advertising Agency Dead?
During the so-called golden days, the Mad Men era, advertising agencies were wildly profitable. It was an industry that boasted average profit margins of 30%, allowing firms to attract the sharpest minds and most ambitious talent. If you wanted a career in marketing, Madison Avenue was the destination.
Today, that world is a distant memory. The average agency profit margin has plummeted below 10%, a steady, decades-long decline that points to a model in crisis. The business is, for all intents and purposes, unsustainable.
In a recent conversation with The Futur’s Chris Do, positioning and pricing expert Tim Williams delivered a stark prediction. “I'll make this bold prediction today,” said Williams, founder of Ignition Consulting Group. “certainly within 10 years, and probably five, there won't be a single agency left on the planet billing by hours.”
He calls the practice malpractice. An incredibly bad idea.
The question of whether advertising is dead has become fashionable cocktail party chatter. But Williams, a career agency insider, cuts through the noise. The craft isn't dead. The creativity isn't dead. But the business model? It's been on life support for years. And AI, he argues, is about to pull the plug.
The Original Sin of the Billable Hour
How did an industry once defined by explosive growth and creativity find itself trapped in a race to the bottom? The answer lies in a single, fateful decision made decades ago.
Back in its heyday, agency profitability was fueled by media commissions. When a client bought ad space, the agency got a cut. This model funded everything, from strategy to creative execution. But as the industry matured, media buying was unbundled into separate, specialized companies. Suddenly, agencies needed a new way to get paid for their thinking.
It was David Ogilvy, the iconic founder of Ogilvy & Mather, who looked to another profession for a solution: law. He adopted the billable hour and the timesheet, importing a model designed for a different kind of work into the creative world. An industry that creates intangible value began the grim work of selling time.
Williams notes the painful irony. “David Ogilvy later in life repented for on his deathbed he said he regretted ever having introduced that idea,” he explains. The regret was well-founded. The billable hour cascaded into a system that corroded agency value, pitted firms against their clients, and triggered the downward spiral in revenue and profit we see today.
The evidence of this decay is everywhere. You see it in the headlines announcing massive consolidation. Legendary names that defined Madison Avenue for a century, like J. Walter Thompson and Young & Rubicam, have been merged into obscurity, their brands dissolved into more digitally-focused acronyms. Agencies are trying to save their way to success, a strategy that never works.
The core problem is simple. The model rewards inefficiency and penalizes brilliance. It is, as Williams states, philosophically rooted in Karl Marx’s labor theory of value, the idea that the worth of something is determined by the effort it took to create it. This is a fundamentally flawed way to measure knowledge work.
Stop Billing for Inputs, Start Pricing for Outputs
The solution requires a fundamental change in thinking. It’s not about finding a new way to count hours. It's about stopping counting them altogether.
“What clients buy is not efforts and activities,” Williams insists. “What clients buy are solutions to business problems.”
This is the essential paradigm shift. You must move away from the concept of billing for inputs and start billing for outputs. Instead of charging for the person and their time, you charge for the deliverable and the solution. You price the program, not the hour.
This is not a radical or untested idea. It’s how the rest of the business world operates. “When we buy any product or service, it's usually a fixed price for what it is we're buying,” Williams points out. “You don't walk onto a BMW showroom and say, ‘I really love this new X5, but how many hours did it take to build it?’”
You are given a price for a product with a defined set of features. The equivalent in the creative business is a fixed price for a fixed scope.
Resistance to this idea is often fierce, but it’s rooted in habit, not logic. Creatives and agency leaders throw up their hands, claiming clients dictate the terms. Chris Do finds that maybe 20-30% of creatives think value-based pricing is some form of capitalist evil. But this is a fiction the industry tells itself.
“This is our system,” Williams counters. “We made the decision to migrate to the billable hour. We have taught that to our clients so well that procurement departments have constructed all their internal processes completely around it.”
If you taught them this system, you can unteach them. You can teach them a better way.
The Myth of Client Pushback
The greatest fear holding creatives back is the phantom of client rejection. They believe that proposing a fixed fee without a line-item breakdown of hours will get them disqualified immediately.
Experience proves this fear is unfounded.
Chris Do shared a personal story from his time running a production company. His agency clients demanded complex, line-by-line bids for every project. They wanted to see precisely how every dollar was spent, as if they intended to manage the project themselves. Frustrated, Do instructed his producer to make a change.
“I want you to give a one-page estimate based on scope,” he demanded. “This is the price. If they want to know the hourly rates... then they have to agree that if we go over, they'll pay the extra.”
His producer was terrified. “Chris, this will never work,” he warned. They submitted the new, opaque, single-price proposal and braced for impact.
The drumroll, as Do puts it, was for nothing. “They didn't even ask. They did not even push back.”
That became their new way of working. The imagined catastrophe never materialized. Williams confirms this is the rule, not the exception. “Agencies are continually shocked and amazed at the lack of pushback that they get,” he says. “They expect it to be the end of the world.”
By showing clients exactly what they get for their money, not the arbitrary time spent, you anchor the conversation in value. A fixed price for a fixed scope is a promise of certainty, something most organizations prefer.
A Practical Playbook for Your Next Proposal
Shifting away from the billable hour doesn't require you to blow up your business overnight. It begins with changing how you scope and present your next project. It starts with a few key principles.
The first addresses the most common objection: “How can you price something with an undefined scope?”
The answer is you don’t. You refuse to enter into the trap of the “all-you-can-eat buffet,” the open-ended retainer that Williams calls “the scourge of our business.” Instead, you work in phases.
- Phase One: Discovery. This is a paid engagement designed to uncover objectives, define the problem, and map the scope of the actual solution. You cannot know the price of the project until this work is done.
- Phase Two: Design & Strategy. Based on the findings from Phase One, you can now provide a fixed price for the core strategic and creative work.
- Phase Three: Execution & Development. Once the solution is designed, you can scope and price the final implementation.
The second principle is to never present a single price. A take-it-or-leave-it proposal forces a yes or no decision. Instead, you must always offer options. This “Goldilocks” approach leverages basic human psychology.
As Williams explains, world-class marketers from McKenzie to Apple understand this. When you give a client a choice of small, medium, and large, you accomplish several things:
- It changes the conversation. The discussion is no longer about cost but about which solution is the best fit.
- It provides context. The options frame the value of your offer, showing what the client gets (and doesn't get) at each level of investment. They are no longer comparing you to other vendors, but your options against each other.
- It encourages upselling. When presented with three choices, what do people pick 70% of the time? The middle option. It feels safest and provides the best perceived value.
Williams suggests a powerful tactic: take the budget the client has hinted at and make that your lowest-priced option. Show them what they can get for that money, then build your middle and premium tiers to demonstrate what a greater investment unlocks. “They will leave that economy option completely alone,” he says. Clients upsell themselves.
Time Is Not a Cost
To truly break free, however, requires a deeper philosophical uncoupling. You must stop seeing time as a cost. This is the argument at the heart of the value pricing movement, championed by thought leaders like Ron Baker, a mutual friend of Do and Williams and a guest on a previous masterclass on the subject.
“Time is not a cost,” Williams states directly. “Office supplies is a cost. Rent is a cost. Time is a constraint.”
Read that again.
Creative firms run a fixed-cost business. You have a fixed staff and a fixed set of overhead expenses. You don’t need timesheets to tell you what your costs are. Williams scoffs at the idea that a 40-year-old agency doesn’t know what a social campaign costs to produce. “Look in your database,” he says. “You've got the history. You know what your costs are.”
The argument that you won't know if you were profitable on a project without timesheets is equally flimsy. You know your costs on average. Sometimes you’ll come in under, sometimes over. Over a portfolio of projects, it balances out, allowing you to earn a healthy margin without micromanaging every minute.
The pricing model used by most creative firms is backward. They work from the bottom up:
- Calculate the cost to produce (hours x rate).
- Add a markup to create a price.
- Hope that price represents value to the client.
The rest of the business world works from the top down:
- Start with the customer and estimate the value of the solution.
- Establish a target price based on that value.
- Figure out if it can be produced profitably at that cost.
- Decide whether to proceed.
Steve Jobs, Williams notes, said pricing the original iPhone was one of the most important decisions Apple ever made. They didn't start with the bill of materials. They started with the value it would create and priced it from the top down.
The idea that there is a large gap between your cost and the price you charge is not unethical. It's capitalism. It’s business. As Williams points out, “It's not typical for sellers to disclose their cost to a buyer.” You don’t ask Apple for their component costs. The fact that procurement departments in the agency world have normalized this behavior is an anomaly, a bad habit that can and must be broken.
The End of an Era, a New Paradigm
The excuses for sticking with the old model are wearing thin. “It’s different in my town.” “It’s different in my industry.” Williams dismisses these as manifestations of disbelief, citing the work of Peter Block and his book The Answer to How is Yes. The real problem isn't practicality; it's a failure to change your mental map.
He offers a powerful historical analogy: germ theory.
“Prior to the 1850s, hospitals and doctors and surgeons, they operated with dirty hands,” Williams explains. For thousands of years, the dominant paradigm was that infection came from bad air. Then, Joseph Lister came along with a microscope and showed his colleagues the tiny organisms that were the real culprits. Germ theory was born.
Once the paradigm shifted, the practices changed immediately. Doctors started washing their hands and sterilizing instruments. They couldn't go back. To do so would be unthinkable.
It would be malpractice.
“In a way, billing by the hour is malpractice,” Williams concludes. The information is available. The new paradigm is understood. To cling to the old way is a conscious choice to operate with dirty hands. The economics of the business will eventually force the change, but why wait to be dragged into the future?
AI will be the final catalyst. “How do you monetize what AI can do in terms of what humans, knowledge workers, used to do?” Williams asks. You can’t bill by the nanosecond. The entire container for knowledge work has been shattered. The shift to value is no longer a choice. It's an imperative.
The Future is a Product, Not a Service
So, what lies on the other side? It’s more than just better pricing. It’s a fundamental rethinking of the agency itself. Williams believes the future lies in a productized business model.
For years, agencies have experimented with labs, incubators, and popup studios, but many of these initiatives have failed to gain traction. The reason, Williams argues, is that they tried to apply a service-business mindset and pricing model to what should have been a product business.
The shift is from selling a bullet-point list of capabilities to selling pre-defined solution sets. In his new book, Madison Avenue Makeover, author Michael Farmer chronicles how the agency Huge, part of IPG, has done just that. They offer three core products, like “Experience Transformation” and “Growth Creation,” framed around solving specific client business problems.
This approach forces specialization. Instead of being a full-service agency that can do anything for anyone, firms identify the 7-10 core problems they are uniquely equipped to solve and build products to address them. This is a core tenet of positioning, a topic Do has explored extensively, including how to find your niche and build a powerful brand.
This product mindset also opens the door to more sophisticated business relationships. Rather than simply being vendors, agencies can become true partners. We see this with firms that are incubating brands and taking equity stakes:
- Crispin Porter + Bogusky took an equity stake in Method soap, co-founded by an ex-ad man.
- Anomaly invested in and helped incubate the cosmetics brand EOS.
- Bullish in New York has done similar work with direct-to-consumer darlings like Warby Parker, Casper, and Harry's.
These firms are not just making ads. They are building brands and sharing in the upside. They are moving beyond the transactional nature of client service and becoming business partners. This is the ultimate expression of value creation.
The transformation is already underway. The choice for every creative professional and agency owner is stark. You can cling to the familiar comfort of the timesheet, a relic of a bygone era, and watch your relevance and profitability fade.
Or you can make a change.
The message from Tim Williams is unequivocal. Starting with your next client, your next pitch, your next proposal, make the commitment. Price the output, not the input. Price the solution, not the effort. The old world is gone. A new one is waiting.
TRANSCRIPT
back in the The Golden Days the Mad Men era agencies were wildly profitable certainly within 10 years there won't be a single agency left on the planet billing by hours malpractice I mean what an incredibly bad idea time is not a cost time is a constraint is advertising dead I'll make this bull
prediction today on our podcast I'm thrilled to welcome Tim Williams who's a luminary in the world of branding and marketing as the founder of ignition Consulting Group Tim has revolutionized how professional approach positioning and pricing his groundbreaking book positioning for professionals has become a must-read for anyone looking to carve out a unique
space in a crowded Marketplace Tim's expertise doesn't just stop at Consulting his insights into value-based pricing and specialization have transformed businesses worldwide Tim welcome to the Future wow thanks Chris that's a great uh way to start I appreciate that thank you so much well our mutual friend uh who I have great admiration
for Ron baker said you must talk to this person so here I we're I'm so thrilled I think you and I have done a little dance in terms of like getting our time in sync and here we are so I know that you speak a lot about uh pricing and positioning uh strategies
for agencies and before we go a little bit deeper here can you just tell us a little bit about your your background and your experience in in the agency world yeah I'm uh I've devoted my career to the uh agency business I I started in the business on uh Madison Avenue in New
York uh years ago I figured if I wanted to do it right I should I should go um join multinationals uh to learn the business and then I spent the the the second half of my agency career in independent uh firms um midsize some of them fairly large um where I was a
partner head of the firm and so it's good way to get my feet wet learn the business good preparation for what has become my my current business an ultimate goal which is uh Consulting with agencies so I started ignition Consulting Group with the idea that agencies need the same kind of help that
they provide to their clients they help their clients focus and position um and so that's exactly what I do for them which is how I launched my Consulting work only to find that um uh when I met a guy named Ron Baker who's maybe familiar to to your audiences uh I learned that
that that pricing uh actually is probably alongside positioning the key strategic uh decision that that agencies need to make so I got in the business of also teaching agencies new paradigms around their revenue model you know I noticed something having worked in the Ad Agency space myself as a service provider as a
vendor that there was this shift away from agencies getting the media buying business and so then it seemed like wow how are they going to make money now and so for audience who are uninitiated can you tell us a little bit about how media buying works and why that worked for a while
and when it's decoupled from the agency then it starts to fall apart back in the The Golden Days of of our business uh the the Mad Men era agencies were wildly profitable businesses average 30% margin uh which allowed them to attract the very best talent I mean if you wanted a job in
the marketing space you definitely wanted to go agency side the the the those were the plum jobs that paid the good salaries and employed the SM people but when uh we as an industry decided to move media out into separate uh companies that made us look for a new Revenue model uh to
fund creative and and digital and social and all the various disciplines we've got today so it was David olgy of olgy and may mayther Fame who had the idea to work like law firms and he adopted the idea of billing by the hour and agency started doing time sheets and now uh we're
we're trapped in a in a revenue model that David ogy later in life repented for on his deathbed he said he regretted ever having introduced that idea um because it's just cascaded into a situation where today the average agency profit margins are below 10% uh and if you if you look at the
uh the the the steady trajectory downward over the past 30 40 years in both revenue and profit it's just uh un unsustainable uh business that we're in right now okay so I have to ask you this question and this might be a little click baity but I'm going to ask it because I
have friends who own agencies is advertising dead as we know it given the economic situation you talked about in terms of also how people are consuming content and the traditional advertising models are have from my perspective have been disrupted a bit it's been fashionable for many years to write articles and I'm probably
guilty of it with that with that headline right the AY business is dead you could certainly make the argument that the the traditional model is is long dead and now that AI is is on the horizon uh it it it's forcing a re-evaluation uh of the entire business for sure so I guess
my short answer is yes it deserves a you know more explanation but uh the the the business model itself is certainly dead and the revenue model right alongside okay so as an agency Insider an expert on ad agencies are you seeing massive shutdowns or Acquisitions and mergers because if profit margins have shrank
the business model is in trouble the pricing model is in trouble what is happening like we're here 2024 give us a snapshot of the landscape of ad agencies it's been a number of years since I've been involved I mean you see it in the business press the headlines that just as you said
there's been massive consolidation agencies trying to to save their way to success in effect you know they they have been combining brand brand names that have been around more than a hundred years are now disappeared have disappeared and are being merged into more digitally Centric uh agency brand names the likes of a
Jay Walder Thompson right young and rubicam and you know the the stars of of uh of Madison Avenue now really as as Brands really kind of no longer exist the problem is uh agencies been very slow to adapt to the changing landscape um the the change in media habits the the you know
what happened with the birth of the internet the explosion in in unlimited numbers of New Media channels uh where agencies just can't apply the same kind of thinking to marketing problems and now with um you know bring AI back into the into the conversation with the billable rate model uh are are you
now going to build by the nanc I mean how do you monetize how do you monetize what AI can do in terms of what humans knowledge workers used to do okay so fans of our Channel and our podcast are going to know my position on this in terms of the billable hour and
why that might not be the best thing for you to do yeah and it's surprising to me when I try to make a very clear logical argument about why this doesn't work I think creative people would embrace the idea but in fact I I think maybe 20 30% of them think that this
is the the evils of capitalism and that there there there's some other model and they're just like trying to tear it apart so I'm going to step out of this argument and and ask you to present your perspective on the billable hour I've been doing this for uh probably 12 15 years now
and I started down this path by making the a philos a philosophical argument against hourly billing um and and showing why it's suboptimal why it the roots of it are the KL Marx theory of Labor value uh the the labor theory of value and you know what what happened in terms of the
uh the pricing Revolution that's happened in the last 20 years and so you can make a strong philosophical argument of why it's suboptimal and I've heard you do that very convincingly but but I'll tell you where I am now I am trying to just cut to the Chase and help professional firms understand
that what clients buy is not efforts and activities what clients buy are solutions to business problems and the the simple fundamental change we need to make is to move away from the concept of billing for inputs and Bill for outputs right so not activities and efforts but actual deliverables and this is a
fairly easy change uh this doesn't require the agency to blow itself up resign clients and to to do much in terms of changing their their internal operations it's a it's a simple change to just Orient the business around well wait a minute instead of charging for the person and the time let's charge
for the deliverable uh and the solution so you you price the the the program or the product not the person or the hour so agencies get that and and I I can now really not worry about making the philosophical argument uh because they're primed for for a better business model they they've watched
their margins decline uh very steadily and they know that that um there's there's got to be a different way and a better way and let me also say that out what I now what I call output based pricing is the way the rest of the business World prices right I mean when we
buy any product or service it's usually uh a a fixed price for what it is we're buying it's not you don't walk onto a BMW showroom and say I really love this new X5 but how many hours did it take to build it right you there's a price and you make the decision
which model do you want which options do you want uh fixed price for fixed scope is equivalent of that in in our business so agencies get that rather than stand up and say you know what you need to stop stop doing time sheets you need to kill the billable hour um which freaks
everybody out and makes them feel like um they couldn't possibly run their business that way I simply say look keep doing time sheets if you want you don't need them but stop pricing based on time start pricing the output not the input the deliverable not the time do you think the agencies gave
a lot of resistance or push back to this concept and if so like what do you attribute as the factors in which they were able to ultimately Embrace this aside from what you just said in terms of how you're packaging this information yeah well a lot of the resistance is just you know
force of habit we as a business have trained um and of course you know the larger agencies are always dealing with procurement people we just got to keep in mind this is our system you know this so many agencies throw up their hands and say oh you know pricing we have no control
over that what are you talking about our clients dictate to us what what they're going to pay us they feel like they're victims of of a system that that they have nothing to do with which is just absolutely nonsense it's our system we made the decision to to to migrate to the billable
hour we have taught that to our clients so well that that procurement departments have constructed all their internal processes completely around internal Billings guess what questions they want to ask us and guess what kind of information they want it's all around this uh system of selling selling time what I take what I
what I tell agencies is guys this is our system we we we made this decision it wasn't always this way we were paid in a different way 40 50 years ago and so now we're going to be now we're changing the the pricing Paradigm again and now it's your job to go out
show your clients um that you're pricing in a different way the fact that you you or maybe still in the Vanguard and that that it hasn't had complete adoption far from complete adoption in our business is a competitive Advantage not disadvantage you want to differentiate your firm and you want to stand out
well here's yet another way to say look uh among other things that makes us different we don't we don't approach compensation remuneration the same as other agencies we do it we've got a better way so it sounds to me like the problem is because this is the way it's done we feel like
this is the way it can only be done so we have to kind of break our pattern of thinking our habit and you also said that we've done a really good job as in the agency space to teach our clients how we want to work and so if we taught them that we
can unteach them that we can teach them a new way and it just takes a little bit of courage and there's an advantage here exactly now I want to share with you a little personal story here so not only have agencies taught their clients they've taught their vendors to work in the same
way right it's like if it's good for me it's good for you so when we submitted a bid for producing a commercial that they had written a script for they wanted to see line by line where all the money went as if they're going to manage that so one day I wake up
and I tell my producer don't bid this way anymore I want you to give one page estimate based on scope and unless they break the scope this this is the price and if they want to know the hourly rates or what we're paying people then they have to agree that if we go
over they'll pay the extra which they don't want either so wanted their cake and eat it so here's the push back my producer says Chris this will never work this will never work and they're going to come and they're going to ask me like give me a breakdown I said well when when
that happens let's get on a phone call and I'll I'll handle that objection it goes okay it's your business you want to commit suicide that's your business go for it he submits the bid and here's the thing here's the drum roll for everybody they didn't even ask they did not even push back
we submitted the proposal we made the pricing formula completely opaque and we just said we're going to do this for this amount of money are we in or we out yeah and surprise surprise that became the new way so I'm 100% here as maybe anecdotal evidence that if you teach your clients in
this case the agency we we're going to do it a different way they can either agree or not and it's totally fine y but the push back that we imagine never came you know what that is exactly my experience even in the world of you know the multinationals because I've consulted with some
of the largest agency brands on the planet and they all have the same expectation wait a minute this will never work our clients will we will be disqualified from this review in the first round and I say trust me just go with this we're going to politely disrupt the buying process we're going
to do what you just describe we're going to go in with a fixed price for fixed scope we're not going to break down our our time on and our hours agencies are continually shocked and amazed at the the the uh lack of push back that they get they they expect it to be
the end of the world and instead by by showing our clients and Prospects exactly what they get right not not all this time that's going to be spent but what are you going to get for the money um and as long as you don't change the scope we're we're going to guarantee you
this fixed price that's uh that's a preferred way of working for most organizations but most agencies don't believe it until they try it like you like you're same experience right how will you know if you don't try you got to try everybody the first time you do something it's going to be a
new experience so you you can also look at the the the data which is okay our margins are shrinking our business model has changed our competitors are going out of business well we can keep doing the same thing if we want yeah that's up to you doesn't seem like a smart idea yeah
I'm gonna Channel our audience I'm going to ask you a question and I'm going to be a little bit kind of nasty because sometimes they hit me up with this so I'm going to just Channel them for a second okay Tim yeah but but but this is what they're going to say but
how can you price something you have yet to do how do you come up with a fixed fee for a scope that we just don't even know how it's going to be done isn't that unethical to just make up a number well this happens all the time where agencies are hired for undefined
scope of work clients say we're not sure exactly what we're going to need this coming year but we need a team ready and a able to execute and will'll feed you the the work as the year goes on I mean what an incredibly bad idea so we call that the all you can
eat buffet and it's the scourge of our business right it's the all-inclusive retainer in which your client is in effect renting people they're renting a retain team that are available to work in some cases exclusively on this client or 50% on this client and it's just a recipe for abuse uh because the
client always loads on more work than than was ever uh anticipated the solution in part is to work in phases never you you don't agree to a project without knowing what what the objectives are so a discovery process in which you uncover what needs to be done and what the right solution is
so that's a phase one and then you scope of phase two uh which is the the design and and uh the problem solving and then you scope of phase three which is the development and the execution so you price in phases and you don't know what the price of phase two is going
to be till you do phase one Etc that's absolutely uh a necessary thing to do is you know price in price in phases you can't agree to a price without knowing what what you're going to be doing but I'll say one other thing we have a process I mean agencies and and production
houses we have a process for what we do and we often know all right the thinking is going to be custom and unique to this situation in this client but the process for getting there is going to be pretty similar to what we what we have done in similar situations and so you
do have an idea enough of an idea that would allow you to offer up some pricing but we always preach price uh offer options never a single price never a yes or no take it or leave it always options and so you're giving your your client the the choice of small medium large
give your client a choice of yeses don't don't don't not a not a yes or no not a take it or leave it um client organizations marketers they all do this the the world's best marketers and and actually marketers across the board they all offer options uh whether it's a service or a
product you're you know sign up for a cell phone plan or buy a television there's always options small medium large extra large and we preach the same idea in Professional Services you know McKenzie adopted this uh some years ago it's it's part of what they teach their all their consultants in their sales
training always offer options and the uh result is that two two things first it engages your client or Prospect in the right conversation because your options are are showcasing outputs not inputs they're listing deliverables not hours and people so it's Sparks the right conversation with your client as in which it not why
is this taking so many people and taking so many hours but which of these options you think could work best for you so it's the right conversation it puts your offer in context so that your clients very often will upsell themselves if you offer three options guess what they'll choose 70% of the
time human nature middle option yes followed by the cheapest option or the most expensive most expensive they don't they rarely go for the cheapest option when you put it in context and show them what they get and don't get with the money that they've got to spend so it's very very powerful tool
and we we teach that we should always always offer options okay so we offer option because it's changing the dialogue around the outcomes of the client's buying not the time or labor effort which is a very different way of looking at it so whenever possible offer up multiple things this is like the
Goldilocks concept right it is the Goldilocks rule yeah uh pretty much it's like porridge is too hot too cold just right bed is too soft too firm just right more often than not they pick the middle option so design your options such that you're going to be really happy when they pick the
middle or the most expensive and even the cheap one can actually work for you as well and something that I've learned is when you provide options they don't have to go and price bid you against other people because you've given them three options you know we all need context to to make a
informed buying decision and now I want to follow back up with something that you said previously which was okay we don't know the scope so we're going to do this in phases we're going to enter into phase engagement with the client so we need to First figure out what the heck we're doing
what are the objectives what are the parameters constraints and all that kind of stuff if we eliminate time sheets which I'm all for I'm 100% we at our office we don't do time sheets anymore what are we basing the price on then even for phase one Discovery what how do we come up
with the price and by the way let's let's just step back and realize that this is almost exclusively limited to Professional Services and it surround service providers the model that the rest of the business World uses to price is exactly the opposite of how we work we we do pricing from the bottom
up we start with the with the project or service and we ask the question how much does this cost us to produce it we then turn the cost into a price hoping that that then has value to our client the rest of business world pric is exactly opposite of that they start with
the customer and they ask the question what is the potential value of this product or service they then uh establish a Target price based on that subjective judgment they then figure out the cost so cost after price price before cost that's a just backwards of how we do it and then they decide
okay let's do it or not do it I mean there's a famous case study about how the iPhone was priced you know Steve Jobs said that pricing the iPhone was was maybe the most important decision they made in the introduction of this disruptive technology and how do you think Apple priced the iPhone
bottom up or top down well of course they did they did it right right they top down that's mistake one is that we approach pricing from the first the question of what should what is the cost rather than what should the price be my the second answer is uh less philosophical and that
is to say any agency or or Allied business that's been around for more than six months or a year you know you know what your costs are you don't need time sheets to tell you your costs I begin an engagement with an agency that's been around 40 years and they ask me well
how how are we ever going to know what what our cost requirements are for for developing a social campaign if we don't have time sheets and I just look at I'm like really are you you serious you've been doing this for decades are you honestly telling me you don't know what your costs
are I mean of course you know you've been capturing this data uh by the quarter hour forever look in your database you've got the history you know what your costs are you don't need time sheets to tell you your costs you know so that's a that's a really flimsy argument and then and
then and then in the to to look at it in in you know in the rearview mirror like well okay so then once we do the project how will we know if we made any money or not uh if we don't do time sheets uh and that's got also uh interesting philosophical answer
which I'll skip past but a more practical one is well look again once again you've done this many many times you know on average what your cost uh ought to be and you know sometimes you're going to exceed it and sometimes you're going to you're going to you know go over it sometimes
you'll come in under it on average you know it's going to play out in a way that's going to allow you to earn a margin you don't need the no to the penny on every single project but let me give you my more philosophical answer which is kind of provocative which is uh
time is not a cost office supplies is a cost rent is a cost time is a constraint we run it's not a c we run a fixed cost business it's a very simple business we don't have complex inventory and we have a fixed staff fixed set of costs fixed resources it's not a
complicated business and uh our you know our Central problem is we view time as a cost and and it's it's just not you know the first step in making the pricing transformation in our brains is to unhook those two concepts it's a hard one to unhook because it's so ingrained within our culture
to think of Professional Services as a billable hour right absolutely yeah it's it's tough it took me two or three years to change my mind about this there's a bunch of things I need to follow up with you on so first let me just quickly recap is that there's a cost and then
there's a difference between what it costs you to produce and value to Market and that's what we determine as the price now this is where the marxists in the in the community which they're all capitalists pretending to be marxists which is well isn't that completely unethical if it cost me $200 to make
something and the value to Market is eight grand how do I justify that how do I sleep with myself at night and stare in the mirror so help them understand that on any level that which you can yeah well that's I mean you said it that's just capitalism I mean that's that's just
that's just business to me it's not an it's not an ethical question it's just a it's just a common sense business question the because you have to also take that in context of the all the times that you that you underprice and that you leave money on the table or that that you
put in much more effort than you're ever compensated for those things kind of all come out in the wash I mean we we teach this idea of a diversified uh pricing portfolio where what we want are lots of different sources of revenue and a mix of risk and reward so you've got some
some deals and agreements and projects that are priced at high risk High reward some medium and some low but overall it's you you you end up with a much healthier margin um by doing that it's just like how you say for retirement you know we don't we don't put all our money in
gold or stocks or one company we we don't we we spread the risk we we have a diversified portfolio and and we preach the same idea of Diversified pricing portfolio so meaning this introduces the concept of sometimes getting paid for outcomes so performance-based so if you imagine that your pricing portfolio you have
a little slice of it that that comes from outcome or performance-based agreements then fine you should do that but you're not always going to do it you're going to have some other deals that are very stable and fixed and you're going to have some other so so at the end of the the
year you you know you've you've placed a series of small bets on yourself but you know they're going to pay off you're just not sure exactly how and in what way but the agencies that work this way that have this diversity in their pricing method ologies are twice as profitable as agencies that
are stuck on the billable hour so for the people who look at the gap between the price or value to Market versus their cost as an evil of capitalism and and some form of exploitation do we just leave them alone or do you have the a new way to reframe this and say
you know what here's another way that you're not being consistent with the way you look at the world or do we just like let them be lie in their own bed so to speak you have to kind of imagine that there's somebody who is a solopreneur who who sees himself as an artist
designer creative person they say well this is what it the the labor it's going to take to make this and then they're like everything else above that seems like criminal here's what I often try to Showcase is is is the the the underpinnings of all this which is it's not typical for sellers
to disclose their cost to a buyer you don't walk into a Apple Store and say I really like this new iPhone but I need before I pull the trigger I need to know what was Apple's actual cost right sellers generally do not disclose their cost to the buyer somehow in our business that's
become normalized where we've allowed buyers and c and and most especially professional buyers procurement types to ask what were your act what are your actual costs here not only ours but in some cases what salaries do you pay your people what's your overhead what do you pay your people in in bonuses and
401K contributions I mean really obnoxious levels to which they drill down on our cost and rather than than pushing back and saying well actually that's none of your concern meaning none of your business uh we cave and say oh well okay if that's what it's going to take to get the business then
you know here you go it's become this you you know if as long as procurement keeps asking and we keep giving they'll keep asking and we keep giving and it's this vicious cycle that you can't get out of so what I say to agencies is guys this is not normal to disclose cost
other Industries don't do it we're kind of all by ourselves in in this bad habit so take heart in the fact that it's not it's not typical and not a common business practice in other sectors so let let me just reflect on this and and ask our audience to consider this in case
you're you're still here and you're like no I want to understand this Con okay ask yourself this one question of the things that you buy like make a list of 100 things that you buy how much of those hundred things that you buy services and goods do you actually know the cost yeah
answer is zero it's going to be very small very small percentage Yeah now there's many reasons to hate lawyers but let's just put this in there did the advertising industry learn this from lawyers and are lawyers to blame them well they certainly learned the billable hour system from lawyer and even in law
uh it wasn't always this way law lawyers prior to the 1940s uh didn't do time sheets they did fixed pricing they do outcome based pricing especially in litigation right where if they win they get paid and if they lose they don't time sheets this interesting historical fact were introduced into law firms not
as a means of billing but simply as a means of resource management resource allocation they were never meant to be uh a a mechanism for billing uh that didn't happen until you know 50s and 60s where they attorneys started doing that that makes a lot of sense to me hopefully everybody we can
put this issue to bed because you're only shooting yourself in the foot if you wish to continue doing this yeah be my guest so here's something that I think about and and I'd love to share this with you as a practitioner as a person who used to do Professional Services I would tell
my team the client has a budget in their mind they have a pain that's connected to that the greater the pain the greater the budget they know what their budget is and they play a game with us for us to try and guess at whatever it is based on our hours and our
overhead and our cost to produced our cost of goods sold so here's how I want you to run the project I want you to ascertain what you think the budget is and then we work backwards from there to figure out how much of that we can spend to produce the work so behooves
you the people on the front line to get the most amount of money that you can so that you have the most resources to produce the work I look at this as and there's two different ways of looking at this hourly people will say this is what it costs this is a fair
amount of profit to make even if they ask that question I just look at it what is the budget what can we afford to spend given our history and our overhead and we would just carve out a piece of that and then we can manage it that way what are your thoughts on
that yeah yes and here's another thing you can do take that budget and make it your lowest priced option take that budget and say okay or if they're making this guess at the budget what we think they're telling us the budget is make that your lowest price option and show your client what
they can get for that money then in the middle option show them why that's not enough that if they spent a little more they could get what they really intend which by the way is their real budget right that's their real budget and then show them a premium option in which they they
they get other valuable Solutions and outputs that they may not have considered that they're going to look at and say wow you know what I might need that I I might need that because that that is probably going to be the most effective solution to my problem and they will leave that economy
option completely alone they they they it becomes pretty apparent to them not enough to get the job done okay so you take what you think they told you is the highest budget make it the lowest option that you have and then be creative and be Innovative think of new ideas and other things
that if you spent this money you could get this and then go Pie in the Sky premium balls to the wall if money No Object what else could we do and then that is the thing that I love doing often times we're working within constraints when if we free ourselves of those constraints
what else could we do and I give an example to our audience right so they can think of this in real terms like what if you could spend time at your client's place of business and helping them to develop systems or teach them how to use what it is that you've created what
if you develop software or tools that are something that will give them significant cost savings over time there's all kinds of things that you can do versus the lowest price option I love that and uh you know my my experience with that is that uh as I've said a few times now clients
will upsell themselves you don't have to do it you know they'll come back and say yeah we've actually we can we can find a little more money to to do what what you're recommending here okay you had said something and that I want to Circle back to which is okay this works for
Professional Services and you mentioned certain types of people like lawyers add creative people those do we exclude people who are trades people like we have an audience of people who are maybe Carpenters or plumbers and electricians are they considered Professional Services people or are they something else well they're service businesses right they're
service businesses and I could argue that advertising is not really truly Professional Services as you know because we're not accredited you know lawyers and accountants and Engineers are accredited so they they truly qualify as Professional Services we're we're a service business that masquerades as Professional Services so uh plumbers and carpers would be
you know true service businesses right uh but they they face the same questions and and issues we do right there's the famous story you you know the plumber story right about you have trouble with your washing machine and you call the plumber and they show up and they get out their flashlight and
and they crawl under the machine and you hear a One pound one thud plumber reemerges and says okay that'll be $100 and uh you say well wait a minute you've only been here for for two minutes you know and plumber says well uh yeah okay so I'll charge you $10 for the time
and $90 for knowing where to hit right he solv the problem so they they same thing right they're selling the solution to a problem not the time they spend and I think we as consumers are all bothered by uh a trades person that shows up and and spends the time but doesn't solve
the problem yes so I want to say this as a buyer of services whether we categorize them as Professional Services or not I have a lot of anxiety when people show up and it's going to be hourly yeah me too I won't hire them so it's like okay uh are you eating a
sandwich are you working on the problem uh what are you guys doing and I'm sitting here looking at my watch and worrying about my gosh the Bill's going to be crazy yeah so I would just prefer to say you know what we don't know what your problem is but it's going to be
300 bucks Takes Me 2 minutes or or 10 hours I'm going to fix this so that you can get back to your normal life because if you've been without a toilet or running water it it can be a massively disruptive thing to your dayto day and I'd rather just pay that and so
I think I would feel much better as 99% of the world gives you fixed fee pricing if it's this kind of problem it's going to cost this unless there's something that we don't know about where we have to like do all new piping or something then it's going to be the surprise yeah
so they can apply these principles as well absolutely uh yeah as a buyer of those Services I insist on a fixed price I won't hire an hourly plumber or electrician um or contractor like my Landscaping guy yeah Landscaping good good I had this experience you call landscaper and say uh I need somebody
to mow my lawn trim my bushes they say great we bill by the hour well okay $40 an hour you call the next landscaper they show up and they they survey the the your yard and they say fixed price $200 for to do all this better right so one is inputs the next
is outputs third landscaper shows up true story these guys say okay we can see what needs to be done here but so we understand you travel a lot you're gone a lot right you're not you don't know if a sprinkler is going to go down or the wind Storm's going to blow down
a a tree right yeah I'm gone a lot that would be fantastic and they say okay so tell you what we'll sell you green and clean we'll sell you best Curb Appeal on the Block you'll never have to worry about dead dead Bush broken sprinkler all taken care of our responsibility $400 a
month so they're selling an outcome and you've got the choice right whether you want to pay for inputs outputs or or an outcome that illustration I think is it it work Works in in any business right um and so I chose the outcome guys I paid the premium price because it's worth it
to me because of my personal situation it wouldn't be right for everybody but I would never hire the input guys for sure it's either the middle one the output person or the outcomes person and depending on the the uh Peace of Mind factor and and the price premium that we're putting on it
something that's real interesting as you illustrate this people are nod their head like we totally understand this we get it I'm all on board and they're like but what I do can't be done this way of course they always do that so when you hear right when you hear one of your clients
that you're Consulting with when hear that like how do you help them to solve this problem is there a tool or framework or some questions that you get them to start thinking about that then it becomes pretty clear what the path forward is yeah I mean everybody's got a push back like uh
it's different in my town or it's different in my industry or did right I come back to the work of Peter block I don't know if you're familiar with with him and his book the answer to how is yes to me those questions are all uh manifestations of disbelief it's not a real
concern that way you know won it works in the United States but it would never work in the UK you know that's nonsense of course you know that's just that's just them asking uh a question that shows they're not pers they're not persuaded to the Paradigm Shift they haven't changed their mind yet
they haven't changed their mental nap so I go back to that I go back to the Paradigm to the mental shift and I don't try and address the question of you know their particular industry that's how I've dealt with it over the years so I might borrow this from you so your sponsors
when they're like how do you do it for my industry you're like your biggest problem is you don't want this to work yeah you don't believe it you don't believe it what else do we need to talk about so you can believe this so you put you you put your energy into getting
them to believe it or not and then once they believe it then the answer becomes pretty obvious it's this notion that you will never change your PR your practices until you change your Paradigm once you do change your Paradigm you can't help but change your practices and one of the iconic there are
plenty of examples of this in medicine and Science and one of the iconic examples is prior to the 1850s hospitals and doctors and surgeons they operated with dirty hands literally the surgeon would walk in with dirty hands and slice somebody open and operate and then the next guy comes in and the same
instruments and the same dirty hands and that for thousands of years doctors operated with dirty why because they're oper they operating under the wrong paradigm about infection they thought infection is caused by stale air bad air you know go back and look at medical history and it's a it's crazy but then Along
Comes Joseph liser and the microscope he invites his colleagues to look and you see these little organisms that are circulating down there in this m those are germs that's bacteria that causes infections so germ theory was introduced in which Physicians understood uh that a giant Paradigm Shift around what causes infections and so
guess what happens all the practices changed hands get washed instruments get sterilized the clean operating rooms and so when you when you change your Paradigm you change your practices and so and and if you don't change your Paradigm you won't change your practices so these questions about it won't never work for me
is simply them saying I haven't changed my Paradigm yet because when they do they'll say oh I could never go back to hourly billing I could never do that this is how you feel about it and how I feel about it right we'd commit suicide before we'd build by the hour well I
don't know that's pretty [Laughter] extreme but that how that's how passionate you are about that well so here's the problem though Joseph list says Hey i' I've figured it out it's it's uh germs that's what's causing the infections so the Paradigm has shifted now if you're a doctor and you refuse to understand
the Paradigm then I believe that's a malpractice at this point cuz you have the information that would be malpractice yeah yeah yeah that's I've never thought of it that that way but yeah in a way billing by the hour is malpractice that'll be the U the title for this episode I like it
I like it you already know the Paradigm many people are successful doing this in a lot of different Industries actually in the town in which I'll say it this way someone in your town who's doing work that's less like not as good as what you're doing lower quality in your town is applying
this and winning in ways that you're not I guarantee it somebody in your town is already doing this so you're holding on to something for whatever reason CU your identity is wrapped up in this old way of thinking and it's entirely up to you if you want to change or not we're just
here to help you see the light and if you want to walk through the door and enter or leave the darkness that's entirely up to you at this point and I would say that the the decision will ultimately be made for you in terms of the economics of of the the business uh
they'll they I I'll make this bold prediction certainly within 10 years and probably five there won't be a single agency left on the planet billing by the hour the reason I can say that with confidence is um AI will be the final nail in the coffin right it just doesn't it doesn't work
knowledge work has never been uh I mean hours and minutes have never been the right container for knowledge work and AI is just going to amplify and accelerate that so that it will be it won't be a choice anymore so why why why not do it now right get on the leading Edy
of the trailing Edge because you know the old quote you don't like change you're going to like irrelevance a lot less you mentioned AI we have to talk about AI we have to do a little deeper dive because this freaks out the creative Community sure some some embrace it some don't but I
want to ask you this question first I was watching a video that you gave I think it was in LA in 2014 called Progressive agency models under the 4as and you were talking about a bunch of different things like popup agencies product development incubators Lab Studios things I'm really excite me okay it's
been 10 10 years 20 yeah 10 it's been 10 years how have people fared with this information and do you see do you have success stories about people like yeah we're doing this uh that's a really great question Chris uh I mean certainly there have been a lot of experiments with popup agencies
and agencies developing their own Labs R&D models and things like that uh from what I recall in that presentation but I I'll tell you I think what's held them back that that the Innovation hasn't uh manifest to the degree that that it could or or should and here's why I it's because agencies
keep getting I what that all means is agencies have to develop more of a product mindset but they're trapped in a service business mindset and so when they try to develop when they they develop a lab and they start developing products they just get stuck every time because they keep applying the service
business hourly rate model to what in effect could and should be a product business I mean this takes us into new territory but the uh subject of a whole new different podcast but I mean the real future of our business is that agencies will in in very short order have a fully productized
business model right now what we have is a service-based model uh in which we sell capabilities and competencies and bullet point lists of services where our business is headed is agencies that reimagine those competencies and services as solution sets and as products and programs and they price the program not the service and
so it's a whole different way of thinking there is a new book Madison Avenue makeover by Michael Farmer that that that just came out a few months ago that that tells the story of one agency developing a product ised business model the ipg agency huge they have three main products and then supporting
products underneath that but if you want to engage them then you know you're going to essentially buy one of these three products in in one of its forms or iterations there's a lot of productization underway in our business for for many reasons which is great it's good because it addresses you can't run
a product business with the billable hour service model right it doesn't apply no longer applies completely different rules long way of answering why haven't some of these things taken off because agencies have tried to apply service business pricing and and resourcing models to what is essentially a a an emerging product business yeah
when you mentioned huge and productizing and there are like one or three options what are some of the options I I'm I'm having a hard time wrapping my head their products are uh experience transformation growth creation and I forget the third they're framed in context of client business problems so the the agencies
that that go down this path of productization that the first step is to step back and say what are the client problems that our firm is best suited to solve not just we can do anything for everyone which is the ill- fated full service model which is a dumb idea that doesn't really
ever exist anywhere they realize that they are best suited to solve a certain set of problem problems these 7 8 9 10 problems are are are what we're best at now let's develop products and programs that solve these that are designed to solve these problems they're targeting clients who have these problems not
every client Under the Sun not every client who just wants advertising who wants creative work or wants an agency they're targeting clients who have these business problems and their products are designed to solve them I've always wanted to myself as a person looking from the outside a shoe is a shoe until there's
a story to be told with a shoe and then there's an Anthem that's created for it and then the Sho is worth way more than what the shoe costs to make and these Brilliant Minds working at these agencies came up with these stories I've always wondered why they don't start their own shoe
company why don't they have their own product division because isn't it much better because I mean you get a percentage of the media by you get a percentage of the or you you recoup your cost but you don't actually you're not making anywhere near the kind of money that the company that you
worked for and if you have these Brilliant Minds why wouldn't you do this and there are some small examples of individuals probably frustrated I imagine leaving the agency World starting their own Product Company like a real product like method soap I understand it's like two guys former ad guys and then liquid death
is an ad guy and they just left the system but they're no longer part of the agency model it's either they become their clients but there's not someone in between why isn't that the case there are examples of that right a gencies who've developed their own whiskey brand and their their own retail
stores and things like that and those are marginally successful I think they're mostly to to fulfill you know cre creative Outlets that you know agency people want to develop a brand and have some ownership in it but the thing that I think is more uh practical and we see more often is agencies
doing joint ventures with with Brands and investing and this was done with method by the way their agency was Chrisman Porter buuski at the time and they took an equity stake in method to help develop the brand and uh they retained that Equity stake for for a long long time uh became worth
a lot of money agencies like anomaly have done similar things they help incubate the brand they invest not only intellectual Capital but fin actual Financial capital in the brand and so they become business partners with their clients um uh anomaly did it with EOS the EOS Cosmetics brand uh the agency bullish in
New York has done it with uh Warby Parker and Casper mattresses and uh Harry's shaving uh which is a really interesting idea um it kind of straddles the between those two worlds of yes we're going to be your your creative uh Problem Solver but we're actually going to be a business partner with
you as you develop your brand I I I like that a lot uh I think I think there's a lot of uh professional fulfillment in that for agency people okay so it is is working the joint venture makes a lot of sense you get an equity stake yeah you're you're you you even
put in money and help to develop product ideas so it's not just promotion it's it's really into the product itself which I love and I want to I want to see more of that happen because if advertising or the creatives that work at advertising agencies have that power to to shift culture why
not take a part of it exactly and you know I I'll suggest a good podcast guest for you who's done this uh Michael Aaron flicker who runs a firm called xenoa in in New York they've done that very thing they have agency Brands and they have product Brands under the same company and
they uh it very they've got a they've got several successful consumer brands that they own and their agencies do the Creative work for them so as we're we kind of winding down on the p podast here I would love for you to be able to speak to those agencies who need to hear
whatever it is you're going to say next which is what what is the message if they didn't walk away with nothing else today what's the one thing you want them to think about going to bed tonight say okay maybe I need to rethink this as I said before I've kind of boiled all
this down uh the the the arguments for Revenue model transformation uh into this simple idea just make the the decision the commitment that that you are going to starting tomorrow starting next week starting with your next pitch with your next client you are no longer going to price and Bill for inputs no
more percent of Staff no more hours but here's what you get here's the deliverable here's the output here's the thing price the thing not the time and that simple change you can you can do fairly easily and it's a Game Changer and it and and once you do that once you do that
you can migrate to other you know pricing methodologies that we also preach which like subscriptions it's a big one licensing some outcome based agreements but start just with that simple that one simple change keep doing time sheets if you want that helps you sleep better at night but just don't use the time
don't use what goes on time sheets to set your price do that wonderful just do that and and that will be a giant step forward well I've been having a wonderful conversation with Tim Williams he's the founding partner of ignition group uh if you want to find out more information about him be
sure you go and visit his website which is ignition group.com and while you're there check out his blog called propulsion if you're so curious check out his latest book called positioning for professionals thanks very much Tim for being a guest on our show really had I really enjoyed our time together great Chris
thank you I enjoyed it a lot you asked some really uh provocative questions and I admire all the work you do as well so thanks for inviting me I am Tim Williams and you're listening to the Future [Music]
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