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Episode 96

The Truth About Agency Models

41% of agencies bill by the hour, but only 24% of marketers prefer this model. As AI reshapes marketing, traditional agency structures are cracking. So what comes next?

This week, Elena and Rob tackle the evolving agency landscape. They explore why the term 'agency' might disappear within three years, how AI is pushing the industry toward platform-based solutions, and what marketers should look for in strategic partners. Whether you're considering bringing services in-house or evaluating new agency relationships, discover how to navigate the shifting marketing services landscape.

Topics Covered

• [01:00] Traditional agency models vs modern alternatives

• [03:30] What marketers really want from agency partnerships

• [12:00] The real cost of bringing services in-house

• [18:00] How AI is transforming agency relationships

• [21:00] Why platforms might replace traditional agencies

• [24:00] What marketing services could look like by 2026

Resources:

2024 WARC Article

2024 WARC Podcast Episode

Today's Hosts

Elena Jasper

VP Marketing

Rob DeMars

Chief Product Architect

Transcript

Elena: Hello and welcome to the Marketing Architects, a research-first podcast dedicated to answering your toughest marketing questions.

I'm Elena Jasper on the marketing team here at Marketing Architects, and I'm joined by my co-host, Rob DeMars, the chief product architect of Misfits and Machines.

Rob: Thanks.

Elena: We're back with our thoughts on some recent marketing news, always trying to root our opinions in data, research, and what drives business results. Today we're talking about the agency model. We'll cover types of agency models, how to choose an agency, when your brand should in-house, how AI will change agencies, and the future of the agency model.

We hope this episode will be helpful for any marketer because most of us end up hiring and working with agencies at some point in our careers, and important agency hires could really make or break your year. But first, let's start as we always do with some research. I have two resources from Work that I'd like to chat about. The first is called "If AI Saves Agency Time, Does Charging by the Hour Still Make Sense?"

In this article, Work asked marketers which compensation model their agency uses to charge for strategy work, and then they compared that to what model marketers think their agency should use. 41% of agencies bill by hours of labor, but only 24% of marketers prefer that. Marketers actually wanted a project-based fee instead, but 18% would prefer a performance-based fee.

But only 2% of agencies offer that type of performance model. Work writes that traditional hourly billing is the backbone of many agencies, but as AI speeds up processes like creative revisions or strategy work, it's clear that this model might have some cracks.

That's our first resource. The second is also from Work, but it's a podcast called "Why Agency Business Models are Hurting Effectiveness". They interview Carolyn Johnson from the Business Model Company who believes that traditional agency models like billing by the hour are no longer cutting it. She believes these models often prioritize effort over outcomes, leaving creativity undervalued and agencies misaligned with client needs.

Carolyn makes the case for a shift. Agencies need to embrace models focused on results and outcomes, not just inputs like time and effort. All right. So before we talk more about that, I wanted to briefly touch on the different kinds of agency models because I mentioned a few there, but there are a lot of other options if you're a CMO looking to work with an agency.

So a traditional full-service agency would typically bill by the hour, or maybe they charge a retainer for end-to-end services. There are specialist agencies. They focus on areas like social media or performance marketing, or in our case, TV, often charging project-based or monthly fees.

Now an in-house team would provide you with more control, but obviously come with some fixed overhead costs. You could work with a freelancer collective. They'd offer more flexibility with hourly or project-based pricing. You could work with a consultancy like Deloitte. They usually bill for strategic services at premium rates.

And now increasingly a platform model might be an option, sometimes charging a subscription fee. There are pay-for-performance models, but they're rare and they would tie compensation directly to chosen KPIs. There are also project-based agencies which charge flat fees for specific deliverables, offering predictability and focus for more one-off needs. Hopefully that's a more complete list of agency model types, but Rob, am I missing anything?

Rob: That is a lot of agency types, Elena. I think the only other one I can think of is the "all of the above" agency, which is kind of a hybrid approach where the model combines different agency types. Imagine if you're an in-house agency, and then perhaps you're tapping into some specialist agencies or consultancies. That can really set you up for having deep expertise because you're an in-house agency, but you're also getting the specialization of other services and other brains looking at your business as well.

One thing I was also going to add is I just love this quote. As everyone's trying to debate whether getting paid by the hour makes sense anymore, Roy Williams, the Wizard of Ads - I heard him say once that a copywriter that charges by the hour is like a gunslinger that charges by the bullet. And I think that as we think about outcome-based advertising, I mean, he said that 20 years ago and there was such precision in what he said then. And I think it's going to be more relevant today than it ever was.

Elena: I love that. That's a great way to think about it. And you're right. That's exactly what they were saying - are agencies to focus on the effort they're putting into your work versus the result that you're getting from them? But I agree with you. I think we're going to more and more see a mix. And I think most big brands probably have a mix of agency partners and a mix of models, probably combined with some sort of in-house team.

One other thing that I thought of is - I don't know if this is actually really a type of agency, but agencies are typically independent or part of a larger holding company. And you'd be surprised how many agencies are part of a giant holding company. I think we're one of the biggest independent agencies in the United States. It's not easy to find an agency that still operates independently because a lot of them will get scooped up by bigger holding companies. And that can be helpful because then you're in a network of different agencies and brands. It can not be helpful because oftentimes you hear about independent agencies being scooped up by a holding company and they lose their ethos. They start to adopt big company corporate ways. So it just depends on what you're looking for.

Rob: Yeah. I always laugh when you hear about those RFPs where two of the three contenders are actually owned by the same holding company.

Elena: Yeah, that's got to be weird for them a little bit. But I think it depends on the agency. They could be completely separate from one another too. So you never really know.

All right. Well, we are going to talk about the future of the agency model and how AI is going to change things. But first, I wanted to start at the beginning and talk about choosing an agency partner, because depending on the channel you're interested in or the project you have, this could be the biggest decision that you make every year - who you decide to hire and work with. And we can share a little bit of our own data here because we recently ran a survey to a couple hundred marketers and we asked them, what causes you to say no to working with an agency?

And the number one result was "too expensive," followed by "low quality creative," then "poor client reviews," and finally, "a poor presentation or pitch." So Rob, how do you think a brand should decide what kind of agency they want to work with first, and then how could they go about sourcing them and selecting them?

Rob: That's a million dollar question there. When you think about reviewing different agencies, it's really easy to get caught up in a classic advertising dilemma that we have, which is, are you focused on features or benefits? That's the classic advertising discussion when you're thinking about marketing a product.

Is it - does it have a V8 engine or does the car drive fast? And benefits are always where the money's at. And as marketers, you can get really caught up looking at agencies over all the features and going, "Oh, they offer this and they offer that," but what at the end of the day is going to trigger transformative growth for your product or service? That's what really needs to be your focus. And so trying to challenge yourself not to get caught up in shiny objects and go, what is truly meaningful at the end of the day to deliver an outsized result for your campaign?

So that's a really broad answer that doesn't say much, but I think where I'm trying to go with that is it's probably less about a checklist of features and more really focused on growth and how is the agency that you're going to hire truly going to connect with growth for your product or service?

Elena: Yeah, I love that recommendation and it reminds me of something that I've been really passionate about recently just at work, which is defining the problem because I think so often we jump to solution mode.

It happens a lot of time in marketing and sales. You're like, "Well, we should advertise on Reddit. We should do this and this." You jump to tactics and I could see how when you're choosing an agency, a lot of marketers might be jumping to that - alright, well, I definitely need an agency to manage my social spend.

It's like, alright, well, what are the core challenges your brand is facing? Like you said, how are we going to drive growth for the company? And then make sure you're really aligned on that because there are a lot of different types of agencies, different channels, and you're right. It's not always about the features of the agency.

It's what are they able to provide for your brand? And I think that especially with channels like TV or channels that can do multiple things for your business, it's important to be really aligned before you work with an agency on what exactly does our brand need? Because you might end up choosing an agency or a channel that you hadn't thought of before.

So I agree with you. I think that's really the first step - not just features and benefits, but what exactly do we need to solve for? Then I think obviously everyone has their own ways of doing research, but I was spending a little bit of time looking into this and we've asked questions like this before - how do you find an agency? Because we're an agency, so we're curious how you look for them and research them. And Google is always the top one. Like people, if you want to be thorough, you probably spend some time just looking at what you can find.

Rob: Doing your homework.

Elena: Right? Doing your homework. But your network is obviously a big thing for people too. I think that inspires trust when they get some sort of a referral into an agency. And then I think if you're doing your due diligence, you're probably talking to multiple agencies. Sometimes depending on the channel or the project, you might put together a sort of pitch process to hear from each of them, make sure you ask the tough questions, try not to have it drag out for a year because your business might look totally different by the time you get through the pitch process, which sometimes I think happens in our experience.

And then I asked, I was looking up what some marketing leaders might say about this, the agency search process. And one line I found was "fit, not just fluff", which I think is great because you might have kind of like, "Oh man, I want to work with this big Madison Avenue shop or agency." And I like the idea of partnering with them. And obviously, it matters if you know, like, and trust the agency, but also really looking at, is this a good fit for my brand?

Rob: And I don't know if it's still a thing or not, but back in the day there definitely were consultants that you could hire that would manage that process and would say, we're going to narrow the field down for you and find the right fit. I don't know if that's still a thing or not, but it used to be.

Elena: Yeah, and I think especially like we work with a lot of consultants because TV is so complex. There's so many different ways to buy it, so many different types of agencies to work with that it can really help to work with someone who's an expert on the topic.

I wish Andrew was here because I could drop a few names of people you should talk to, but I don't know if I'd be able to do that or not. So I won't, but there are people out there whose whole day is just consumed by who are the best agencies for this channel, this category. That can be kind of a hack.

Rob: They're the matchmaker.

Elena: Yeah. And then they've also then they have more experience because they've typically, they have a roster of agencies they've worked with. They can kind of see who's a good fit for this brand, that brand. And then it is like a matchmaker.

Okay, let's talk about in-housing. Because I feel like that's always like every single year that comes up as a bigger and bigger topic. We've even come across brands that are trying to in-house or currently in-housing something as complex and expensive as TV. So clearly, no channel is off the table here. When do you think in-housing might be a good idea?

Rob: It's a great question. You know, we live in Minneapolis and there are some major brands that are headquartered here. So you kind of get an inside peek into how they run. And one of them dear to us Minnesotans' heart is Best Buy. Massive company. And it's just a classic tennis match between in-house out of house, in-house out of house over the years and no fault to either strategy - each one has its benefits.

Obviously, if you're in-house, you've got deep expertise, less time needing to turn stuff around in terms of educating people on what the product is when you're bringing in outside folks. And so you have definitely an inside baseball perspective. At the same time, it's really expensive to offer all those services within your own company. And so there's definitely cost advantages, and then there's also the advantages of an outside perspective coming in and looking at your problem and maybe taking solutions they found from different industries and applying them to your business. So definitely advantages to both sides. I wish I could tell you one is a home run over the other, but boy, you sure see major companies that have even continued to debate that even today, going back and forth.

Elena: So you're saying Best Buy, I didn't know that they've flip-flopped between in-house and external.

Rob: I mean, for years, they did all of their stuff in-house. I mean, every aspect of their business, all the way from the FSIs all the way to the top tier TV brand commercials that they would do. And then they switched to other agencies to do the major brand work and then kept a lot of the more block and tackle work in-house. And then they'll switch again. So I don't even know where they're at these days.

Elena: Yeah, I would guess - I know this is annoying, but as in most things in marketing, a mix is probably the right answer for most brands. Because then you could keep the things you're strong at internally, but then I don't know how you can make the case for no outside perspective from agencies. Like say what you will about agencies, and I know there's a lot of benefits to keeping things in-house, but you just can't - it just doesn't make a lot of sense to me that you would never outsource something when it's like, alright, there's no way that we could be best in class and best in the world at every channel internally. Those people are usually at agencies.

Rob: Yeah. And I think sometimes it's hard to attract talent to go and work on one product for their whole career. Right? They like the variety that an agency can offer. So can you truly staff an in-house agency that's going to be top tier talent?

Elena: That's a great point. And I know we're going to talk about AI and its impact on agencies in a second, but I was thinking in my head, alright, well, AI - I can actually see going either way with this. Because on the one hand, I think the easy answer is AI, everything's going to be easier to in-house.

The downside would be everything's changing so quickly with AI, is going to continue to change. So you build an in-house TV team - how are you going to keep up with all this new AI stuff? Do you have to let people go? Like, does it become a personnel issue versus your agency dealing with that? Like we're the ones right now as an agency that have to deal with AI disrupting TV. Can you imagine if you were dealing with that for every single channel on an in-house team - how would you even keep up with it?

Rob: Let someone else deal with the disruption.

Elena: Right. All right, well, let's move on. So when we ran that survey, we asked questions about brands choosing an agency partner. And I was really surprised by one thing. I thought that synergy or the connection with the agency you choose would be important. And when I spent some time researching this topic, that came up a lot, like make sure you like the team and you've got good rapport, but that actually ranked towards the bottom when we asked marketers what matters to them. So why do you think that is? Like, do you still think that a connection with an agency matters more than maybe you'd answer in a survey? Like, is it still important?

Rob: I don't know. I think you have to look at the hierarchy of needs. If a CMO goes to the board with a failed marketing campaign and they're like, "Boy, but we have great rapport with our agency" - do you think they're going to care? And I think that's probably why the answers are coming through that way.

Because of course you want to enjoy the people that you work with. You want to have them feel like they understand you and you understand them. That just makes your day-to-day life happy, but at the end of the day, it doesn't keep you in the CMO seat.

Elena: No, I agree. I was thinking something similar. Another question we asked marketers was what's your top marketing priority and time and time again, revenue growth is number one.

That has to be what marketers are most accountable for. And if you don't have that, synergy isn't really going to help you, but I can see how people might underestimate how important it is to them in the selection process. You might say no, I'm way more focused on their capabilities, the outcomes, but like you said, we're human beings and you don't want to work with people that you don't like.

So there's got to be some sort of - and as an agency, we feel the same way when we're talking to brands, like you want to work with a team that you're going to enjoy and get along with. So I'm thinking maybe it is more important than we'd like to admit, which makes surveys tough.

Rob: Well, I think I agree. I mean, I think these CMOs that are taking these surveys are probably while they're looking over the choices that they can check, thinking 'if I don't put revenue right now, I feel like somebody is going to know'.

Elena: I know, that's why it is nice to use some more of these AI models for asking and answering questions because it's funny when I researched this topic, like I said, that came up a lot more using things like Chat and Claude versus our actual survey to marketers. So maybe it is a little more important than they'd want to admit.

Well, let's get to the most fun part of this conversation, which is how is AI going to change things for agencies? So what do we think? What impact is AI already having and going to have on the sort of traditional agency model?

Rob: I'll repeat an answer I had on a previous podcast about just the awkward nature of what this year is going to be like for agencies as we're all trying to figure out what our voice is, how do we work in this new world? I mean, billable hours is a joke now. And it's just going to get weird, but I don't want to sound like a doomsday-er when I say this, because I actually say it with optimism, but I don't think agencies - the word "agency" is going to exist in three years. We are going to be platforms.

Elena: Holy smokes. Three years. That's quick.

Rob: We're in a time when things move fast, but I just think we're going to really start to erase that word "agency" because I just don't think it's the right description for what's being offered anymore. I think we are going to be much more of a plug-in scenario where you offer a suite of intelligent services. But the idea of an agency, I just think is going to be an old term, and maybe this is semantics, but I do think a pretty big reframing of how services are rendered is coming and it's coming a lot faster. And again, I don't mean doomsday-ish. I just mean this is a big change and it's not just advertising. It's all kinds of industries where you're gonna be rethinking - is that really going to be a law firm anymore? Are financial advisors going to exist in the way that they exist today? Again, none of those industries are going to go away, but this idea of these agency relationships, I do think is definitely going to be reframed.

Elena: That's interesting. At three years, it seems fast, but you're right. So much can change in just a year. A lot is probably going to change even this year.

Yeah, I think it's an interesting conversation and it's probably going to depend on the agency and the services, I think, because you can see some things are just so ripe for disruption. One interesting thing I heard today, I was listening to the Big Technology podcast and they were talking about Buzzfeed and how the For You page has just totally disrupted Buzzfeed's business model. That used to be the place you'd go to scroll through meaningless stuff and be delighted and find new things. But now, you have BuzzFeed basically on your Instagram reels or TikTok. It's constantly serving you new content.

And it feels like there are some agencies that I think are going to fall, unfortunately, more in the BuzzFeed camp. It's like, alright, I just can't see how this whole thing is not just gone because of this, but then the others that remain - I do think there's going to be a lot of opportunity for agencies that can sort of lean in and disrupt themselves before the disruption gets to them. I think that specialized services are probably going to thrive just because a lot of what we're seeing with some of these new AI tools, the use cases matter and data matters a lot.

So if you're an agency that has a lot of history with a certain channel or a specialty, you can use that to your advantage. For brands, again, that's the whole reason you hire an agency. You want something best in class. It's like, you could go to a model get something generic or you could hire a best in class agency.

And then this question always comes up and I find it to be a really hard one, but people always bring it up - alright, you got to think about what human-driven experiences will AI not replicate? And I always find that hard because AI continues to do human things really, really well. But that's probably going to become a topic for agencies. And I think part of that probably is the outside perspective is still going to be important and where are humans going to still play a big role.

Rob: Yeah. And what's it going to look like and sound like? I think we're all still trying to figure out. I just read an article from Harvard this morning actually, talking about studies that they're doing that consumers don't actually want AI experiences that are trying to be too human - like they actually just want it to deliver services, again that platform type feel.

So how this agency - I think we immediately go to, well, AI is just going to mimic what we're doing today and it's going to do that really quickly. And it's like, no, it's going to be something else. It's not going to just be robot mad men showing up at your door telling you brilliant campaign ideas. It's just going to be different. The experience is going to be different, the offerings are going to be different.

Elena: That reminds me of - have you heard, I think it was over the weekend or a week ago, there was some controversy about people started to find the AI profiles that Meta has created. Did you hear about that?

Rob: No, I didn't.

Elena: Meta created like a little team of AI Instagram profiles as some sort of a test to see, you know, can these get greater engagement? And people started to find them. And it actually said in the description, "I'm a Meta AI agent," and then it became a hunt for AI profiles and people were kind of rebelling against it. But it makes me think about like, Meta's incorporating AI in a lot of ways. And you're right - people, they are not really liking, at least when it's transparent that, "Hey, this is an AI profile." People are kind of rebelling against that at the moment.

Rob: Right. And it's early too. And will that trend continue as people get more and more used to AI as an interface? We'll see.

Elena: Yeah. I think it's similar to the AI creative discussion - will people get used to it or will they not be able to tell?

Rob: Yeah, I gotta tell you, I liked the AI Santa Claus that was on my ChatGPT app voice mode. That was pretty good Santa. So I didn't miss the guy dressed in the mall who was half drunk wearing a white beard.

Elena: Yeah, I think we can agree that the AI Santa is probably an improvement over the mall Santa. Okay, well, just for fun, I wanted to make some predictions. I know we just talked about this a little bit, but let's fast forward five, ten years from now - what do you think the agency of the future could look like?

Rob: I feel like I'm going to punt a bit on this answer. I wish I totally knew what the agency of the future is going to look like in 5 to 10 years. I'm focused on what does it look like in the next 2 to 3 years? I mean, there's just so much dynamic change. When you look at even new terms now that are coming into our vernacular for marketing where it's no longer about search marketing.

I think it was Shelly Palmer that said it's going to really be about "find." Well, what does that mean? How are we optimizing for find? Search engine optimization is now becoming search everywhere optimization. So I'm excited about what advertising is going to look like in five to 10 years, but I'm still, like everyone else, trying to understand what it's going to look like in two years and how do we contribute to that? I think it's one of the most exciting times to be in marketing and advertising because the table's been reset and everything is so pliable and small agencies can now be mighty.

One person can be mighty now in this industry - I mean, how cool is that? It's not just for these massive ownership groups that just keep swallowing each other up. It's kind of this wonderful new era that we all get to play in.

Elena: Yeah. I like that thought. It's almost like how we've disrupted the traditional content distribution model where before your content would be created by these big production companies. You would need millions and millions of dollars to create content. Now you have individuals who - you have some people who all they watch is TikTok content. All they do is watch individual creators. And now you're right - a lot of these, I know we started with this as an independent agency, you're always battling against these big holding companies. Some of that is going to break down a bit. There's going to be more opportunities for more people.

Rob: What do you think?

Elena: Okay, so I actually took a swing at this. I went ahead and talked to AI because I thought if anybody knows, it's AI. There were some kind of fun ideas I wanted to share. So one prediction was, well, we'll have more what they called "pod agencies" inside brands. So I thought that was fun. Just as AI gets better and it can do more, are you going to see these - maybe brands absorb agencies, like absorb small teams, or they build small teams that are super specialized? And will you be able to have more specialized small teams because AI is making the processes easier?

Another prediction was that we're going to see more hyper-specialized consultants and agencies. I think that bodes well for us - like I was saying, if you can be a true expert in one topic as opposed to an agency that is full service and dabbling in a lot of different things, those hyper-specialized companies with a lot of data are going to do well.

And then it called something an "always-on intelligence hub", which I thought was really cool. Like, okay, in the future, instead of for certain channels or certain use cases, instead of tapping into a human agency team, you might be looking at either agency offerings or separate platforms that do similar work to an agency, but they're just completely automated.

So you can see how maybe before you'd have to hire an agency team and work with them on your Instagram ads - you know, they're Instagram experts. Now, could you just plug into a platform or a hub that would do all the work for you, provide intelligence? I thought that was fun. And then it works all the time. So you're not waiting for agency meetings or for them to update things. And I think all this stuff, all these ideas - I agree with you, they're slowly going to start happening. Like this isn't going to happen overnight, but I think in the coming months, years, you're going to start to see agencies themselves developing more of these options for brands.

So you could be negative and think, "Oh, it's a terrible time to be a marketer," or you could say, this is about to be a super fun time, because if I'm the CMO of a fairly large, even medium-sized brand, I have a lot of options now for new things I could try and people I could work with.

Rob: It's funny too when you think about introducing discussion around the vernacular of what agencies are, but at the same time, what is this considered the year of already - the agent, for the agentic AI. So it's like the AI is even classifying itself as an agent. And that's what we are.

Elena: I don't know. That's kind of interesting. All right, well, let's end with something a little bit more fun. If you could hire a best-in-class agency to handle something personal, like a single event in your life past or future, what would it be?

Rob: Okay, so my wife and I, we really like airplanes, and we don't like road trips necessarily. We don't take really long road trips, but we're going to take one. We're going to take a cross-country road trip. And I'm kind of nervous about it because I'm like, how do you do that and not want to kill yourself? Like, how do you plan it in a way where it's fun and you make fun stops and you know the right places?

So if I could just hire a guru to help plan it out so it's a memorable and fun experience. You hear about people having the time of their lives on road trips, but I tend to like to get on an airplane and then be where I'm supposed to be. So I would love that.

Elena: Yeah, I'm the same way as you and some people I think love that process of sitting down and manually mapping out everywhere you could go and the time it would take and where you're going to stay. I'm not that person. I would also rather just be at my destination. That's a great one.

So my obvious one would be - this is obvious, but I got married almost a year ago now. And a wedding, you could hire an agency to do a wedding. That'd be nice because trying to plan a wedding on your own, it's just headaches and it'd be nice if you could tell certain family members like, "Hey, contact my agency" to have your questions answered.

Rob: Absolutely. Well, benefiting from outside experience and where someone's doing it all the time and they've seen what works and what doesn't work. Yeah, absolutely.

Elena: And then my other idea, which I've actually had this idea of just as a business - I'm like I would like to start this business - is bachelorette parties. So I'm sure you've been on bachelor parties, but bachelorette parties are the most stressful thing you could imagine. Someone has to plan it, it's usually the maid of honor. So it just falls on their shoulders to plan this whole trip. You have to coordinate with a bunch of women that you don't know.

Everyone has different schedules. You got to start with, okay, when can you go? That takes a month. Where do you want to go? That takes another month. What are we going to do? That takes a lot of time. And then the worst part, how do you divide the expenses? That is always a horrible, horrible process. If you could just hire a bachelorette agency company, they could handle all of it, handle all the communication. I think that must be a business already, but somebody should put that on TV.

Rob: It's a good one.

I don't know. I don't agree with my answer that I wrote before. So now I'm struggling with even answering this one.

Elena: Well, that's okay. That's all for today's episode. Thanks for listening, everyone!