For decades, the advertising industry has relied on a comfortable, highly predictable financial engine: the billable hour.
But as advanced artificial intelligence alters how the creative work is produced, the traditional “time and materials” pricing model is crumbling, according to Greg Castro, vice president of global partnerships at digital technology platform Mobvista, Castro wrote in Advertising Week in September.
Recent moves by major corporate players highlight a wider shift. Executives at top-tier firms, including Box Inc. (NYSE:BOX) CEO Aaron Levie, Shopify Inc. (NASDAQ:SHOP) CEO Tobias Lütke and Duolingo Inc. (NASDAQ:DUOL) CEO Luis von Ahn, have signaled that AI will drastically reduce reliance on outside consultants and contractors.
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Now, ad agencies are facing their own reckoning. WPP (NYSE:WPP), the advertising holding company behind agencies like Ogilvy and Wunderman Thompson, recently announced that it’s shifting away from hours-based billing in favor of output and return-based pricing models — all thanks to the efficiencies of AI.
The End of ‘Time and Materials’
The traditional agency model, structured around blended hourly rates, paid agencies the same amount whether a campaign flopped or set records. Agencies have resisted performance-based pay because they could not control external variables like a client’s product quality or brand reputation.
But the advent of generative AI changed the equation. Clients now realize that agencies can execute campaigns in a fraction of the time.
Generative AI platforms are routinely used to build animations, proofs of concept and final ad copy, dramatically reducing the number of human-resource hours required.
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“Billable hours have always punished agencies that work fast and produce value,” Castro wrote. “Advanced AI just creates a new opportunity to find better ways of charging and delivering great work.”
Shifting to Value-Based Economics
With manual asset creation becoming automated, an agency’s value proposition is shifting to delivering outcomes. The premium is no longer on who can design the asset but on who can analyze which AI-generated creative will perform best.
Advertisers do not pay massive up-front creative fees. Instead, they reward agencies based on the real-world success of the creative assets. Poorly performing ads cost very little, while high-performing ads drive agency revenue, often with caps to prevent client costs from spiraling.
While the transition is disruptive, industry veterans don’t view the death of the billable hour as a death knell for agency margins. WPP’s leadership said that it will partner with its clients to build campaigns using AI.
The shift away from billable hours toward performance-based outcomes reflects a broader market trend where efficiency and execution matter more than time spent—an approach that also resonates with investors and traders who prioritize tools that allow faster decision-making, real-time …
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