IPA urges agencies to rethink billing structure amid ‘limited’ progress toward outcome-based pricing

Despite widespread acknowledgement among agencies and intermediaries that their commercial models must be reassesed to move beyond traditional time- and resource-based pricing, meaningful progress has been limited.
That is one takeaway from The Price Isn’t Right, a new report from the Institute of Practitioners in Advertising (IPA) that highlighted systemic barriers to pricing innovations, including entrenched full-time equivalent (FTE) models.
“Outcome-based pricing, although discussed, remains rarely implemented,” according to the report.
Yet with automation from AI innovation quickly approaching and S4 Capital founder and CEO Sir Martin Sorrell recently describing media businesses as “cooked” if they don’t shift their agency models from time-based to outcome-based — the need to evolve is definite.
Moreover, a recent IPA survey conducted ahead of the report found only 27% of agencies believe they are paid a fair price for the work they do — while 58% reported little to no progress on reforming commercial agreements.
Meanwhile, three-quarters (75%) of advertisers are looking to make changes to their agency compensation model within the next three years, according to a report published last autumn by the World Federation of Advertisers (WFA) and MediaSense.
The IPA report, which was produced in partnership with Creative Salon, is based on 63 qualitative interviews with creative and media agencies, clients and intermediaries, and proposes a roadmap to revolution. Full findings are set to be revealed today at the trade body’s Business Growth Conference.
“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,” said IPA director of agency value Joyce Kelso.
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Obstacles to pricing innovation
The report report identifies several hurdles to pricing restructuring.
The dominance of FTE models was highlighted due to their comparability, administrative ease and alignment with procurement expectations, especially within global frameworks.
Chair of the IPA Commercial Leadership Group and CEO of BMB, Jason Cobbold commented how this is compounded by agencies not prioritising challenging pricing strategy because of internal incentives, fear of losing business and a lack of commercial training.
“Too often agencies are caught up in the battle to win business and fail to leave the time and space to challenge pricing strategy,” said Cobbold. “Agencies let existing contractual arrangements roll over another year because change is difficult.”
He added: “If we are to evolve meaningfully, this has to change.”
However, the report noted short-term financial pressures and inflexible global procurement rules, as well as fear of risk, means clients are also cautious towards new pricing approaches.
Additionally, the pitch process was pinned as a pricing innovation stifling point, due to a favouring of rate-cards and like-for-like comparisons as opposed to alternative models during the procurement process.
Despite this, the IPA report did acknowledge there has been some interest in hybrid pricing models, such as blending FTEs with performance related fees (PRFs), drawdown pools or subscription-based models.
Proposed solutions
The IPA outlined four potential solutions to evolving pricing models to fit contemporary client needs.
These included modernising FTE models so there is more emphasis on value-based pricing to account for the more complex nature of modern agency services.
Alternatively, flexible, portfolio-based pricing could enable agencies to offer varying pricing models based on client needs. These could include outcome-based pricing, subscription models, or licensing or IP-based fees, for example.
Regardless, the IPA suggested agencies must lead in educating clients, tailoring pitches and establishing tools to support pricing innovation.
To support media businesses amid the transition in pricing models, the IPA committed to producing a commercial model playbook, alongside accompanying training.
Additionally, it will continue to engage with procurement as well as create a set of “Pitch Positive Principles”.
As Kelso warned: “The need for agencies to evolve their commercial models has never been more urgent.”