Agencies 'must fix broken fees system or face decline'

Advertising and marketing agencies are being urged to grasp the nettle and finally ditch reliance on charging by the hour – a practice which dates back nearly 40 years – to future proof the industry by ensuring fees accurately reflect the value agencies deliver to clients.

That is the central message of a new IPA report, ‘The Price Isn’t Right’, to be unveiled at the organisation’s Business Growth Conference today (July 2) that calls for a fundamental reassessment of, and proposes a roadmap for, how agencies structure their fees and client partnerships.

The report comes five years after the IPA’s seminal study ‘The Price of Success’, which led to industry chief Marc Nohr accusing agencies of “colluding in their own demise” by perpetuating the age-old practice of charging clients by the hour for their products and services.

‘The Price Isn’t Right’, based on 63 qualitative interviews with creative and media agencies, clients and intermediaries, finds that the industry remains largely reliant on traditional time-and-resource (FTE-based) pricing models.

For most of the 20th century, agencies charged a 15% commission to buy media for clients; creative and planning services were all part and parcel of the deal. Then when media and creative departments split into separate agencies towards the end of the 1980s, the creative agencies adopted a fee structure based on the number of hours it took to do the work.

There has been a growing groundswell of opinion that this practice is no longer fit for purpose, with widespread acknowledgment among agencies and intermediaries that these models do not align with the complexity and strategic nature of modern agency services. However, meaningful progress has been limited.

Supporting this, a recent IPA survey conducted ahead of the report found that only 27% of agencies believe they are paid a fair price for the work they do, while 58% report little to no progress in reforming commercial agreements.

IPA commercial leadership group chair Jason Cobbold, who is chief executive of BMB, said: “This is not just about price, it’s about value. Too often agencies are caught up in the battle to win business and fail to leave the time and space to challenge pricing strategy. Too often agencies let existing contractual arrangements roll over another year because change is difficult. If we are to evolve meaningfully, this has to change.”

The report outlines several systemic barriers to pricing innovation, including entrenched FTE models, which persist due to their comparability, administrative ease and alignment with procurement expectations, especially within global frameworks. Outcome-based pricing, although discussed, remains rarely implemented.

Meanwhile, short-term financial pressures, rigid global procurement rules and fear of risk deter clients from adopting new pricing approaches and agencies often default to existing models due to internal incentives, fear of losing business and lack of commercial training or support.

In addition, pricing innovation is frequently stifled during the pitch process, where rate cards and like-for-like comparisons dominate.

There is some interest in hybrid models blending FTEs with performance related fees, drawdown pools, or subscription-like arrangements. Interestingly, AI – which has been described as both a friend and an enemy to the sector – holds potential to improve attribution and forecasting, enabling smarter outcome-based pricing, but its adoption is still largely aspirational.

Even so, the report also identifies strong appetite for reform and presents a series of practical, business-focused solutions to help agencies and clients navigate this commercial crossroads.

Among the proposed solutions is a plan to evolve FTE frameworks to account for hybrid teams, strategic consulting, data and AI capabilities, moving toward value-based pricing while retaining structural clarity.

Agencies should also develop a range of models to suit varying client needs, including output- or outcome-based pricing; subscription or drawdown access models, licensing or IP-based fees; and strategic resource pools

They must lead in educating clients, tailoring proposals to speak the language of procurement, finance, and marketing – offering clarity, benchmarks and commercial alignment.

Finally, agencies should establish tools, frameworks, and guides to support adoption of innovative pricing, including clear KPIs; measurement protocols; briefing discipline; and gain intermediary support for modern pricing.

To help agencies adapt, the report outlines three actions the IPA will undertake in the coming months; these will include producing a commercial model playbook with accompanying training available; continuing to engage with procurement; and creating a set of Pitch Positive Principles, in consultation with members and partners.

Cobbold added: “While there is no single solution, the report is clear: progress requires courage and commercial fluency. Agencies must challenge internal norms, present bold new models and demonstrate value beyond hours billed.

“Clients, in turn, are urged to engage with curiosity and openness, rewarding partners based on outcomes, not just inputs. We need to reframe pricing as a shared value conversation, not a cost negotiation.”

IPA director of agency value Joyce Kelso concluded: “The need for agencies to evolve their commercial models has never been more urgent. Marketers are looking for more than just new pricing options; they want transparency, clarity, and, above all, value that’s tied to outcomes, not just hours.

“With market pressures shifting and new ways of working emerging, agencies must act now and the IPA is committed to supporting them.”