If you live anywhere that’s not under a rock, and anywhere that puts you occasionally on the hell hole that is Linkedin (if you’re here from there - hey!), then you probably have seen quite a few posts in the last few months talking about AI, “agency businesses”, and outcomes-based pricing. 

If you’re more blessed than I am, and have NOT seen this debate, then let me catch you up: traditionally (with big caveats below), “agency” businesses (a generalized term that is used in this context to represent human services-based businesses writ large, including companies like lawyers, consultants, etc) have billed on a time and material basis. Hours worked x rate card / hr = the bill you send to your client. This model delivers projects at a consistent margin; the margin = whatever the markup is on your true cost of time.

Now, everyone wants to talk about “outcomes-based pricing”, which moves away from the time and material model. It’s not new—and it doesn’t magically improve margins. It just changes who holds the risk. A note of clarification: most of the conversation I have seen is actually about deliverables based pricing, or output based pricing, which ties pricing to a specific deliverable(s). This is actually not outcomes based pricing in the purest sense, but is rather dressing up what used to be called “project rates” in VC-speak. 

This “new” thesis is that AI, coupled with other trends, will allow time and materials-based businesses to move to “outcomes-based pricing”, where you bill clients for an outcome or deliverable. In either outcomes or deliverables pricing, the price is pre-negotiated; the client is then assumed agnostic towards how efficiently (or inefficiently) the work is delivered on the side of the provider. This fixed pricing scheme, paired with the efficiency gains due to AI, theoretically will allow you to capture more margin than the standard markup on hours worked, as long as you can deliver more efficiently to a quality that pleases the client.

AI hype cycle aside, the question of “time and materials” vs “deliverables or outcome based pricing” has been a pertinent issue within the creative services industry for a long time, because of the overall margin pressure on pricing and hours; it allows services providers to focus on the value of the output itself, rather than on the quantum of effort that was put into it. In fact, I’d say that most of the companies we talk to at FOL-IO already price purely on a deliverables basis; the big shops and HoldCos seem to be playing catch up with the smaller agencies, prodcos and media companies that have been playing in this realm for a while. 

True outcomes based pricing, in which payment is tied to certain metrics or outcomes, is considerably more rare; it is, in my opinion, a fantasy dreamed up by holdco guys regurgitating VC bros who want to find a way to continue to justify their rates against independents. Therefore, I won’t devote much time to the specifics of outcomes vs deliverables; but the general contours of how you manage them are the same.

Which leads me to say: my experience is that deliverables based pricing certainly offers the opportunity for margin upside; but it far from guarantees it. In fact, outcomes-based pricing tends to create far more risk around margin capture – most companies are surprisingly good at losing money on fixed-fee work.  

That’s because deliverables and outcomes pricing represents a risk tradeoff: in a time and materials scheme, the client bears the risk of a project going off-rails. In a deliverables-based pricing scheme, the service provider bears the risk in their margin. Therefore, a successful deliverables-based pricing scheme requires three things to de-risk: understanding the effort required (correct pricing), clear and consistent client management, and actually tracking results (plus turning that result into better pricing next time). If you’re not interested in doing those three things, then you are better off billing by the hour and saving the effort. In fact, there are a few instances in which time and material will likely drive a better outcome for all parties involved: a new client, notoriously difficult clients, and exploratory work. 

The most important first step in achieving an optimal outcome in an outcomes based model is understanding the effort. How much time / and or spend will it take to achieve the clients’ goals?

Here’s the rub - no one really over-estimates the effort it will take to get something done. And clients absolutely tend to under-estimate the amount of effort it will take to achieve their hopes and dreams. Service providers need to think through a range of inputs: role mix, sequential vs. parallel workstreams, and non-headcount spend, all of which can complicate accurate pricing (none of which the client might fully appreciate). Therefore, outcomes-based pricing hits its first hurdle: finding a price that will allow the company to make money (or that they think will allow them to make money), while also getting signoff from clients who are incentivized to drive the price down as much as possible.  

This brings me to the second-most important part of a successful outcomes pricing strategy - managing the client. Once you’ve set a price based on a level of effort, that effort needs to be contractually memorialized, and the client needs to be held accountable to that contract. This means, in practice, the boring sh*t: understanding that revisions need to held to a certain number of rounds, that the client can’t decide that they suddenly want a massive floral budget for their “small intimate dinner”, etc. When the client suddenly changes creative direction, or more deliverables get put into the production budget, that needs to be communicated clearly and consistently. Client services is often deeply undervalued, because people don’t understand the relationship between effective client management and positive financial outcomes. At the end of the day, even good pricing and strong contracts mean nothing if they’re not enforced. 

Finally - all of that effort and cost needs to be appropriately tracked, made visible, and managed, at the project level. I hate to be the bearer of bad news: for most services businesses, this means that time management needs to be implemented. People like to think that project-based pricing eliminates the need to time track; in my experience, it makes it more crucial than ever. If you price a $150k project on an assumption that it will cost your team $100k in time (33% margin), and you have no idea whether it took $100k or $200k of time, then you have no way of truly understanding whether that project was actually profitable. Time is money; to understand money, you must understand time. And in order to manage your client effectively, you must understand where your current level of effort stands against the project scope, in real time. 

Only when you can actively measure the outcome of a project, and compare how much time (and spend) you thought something would take vs what it actually took, can you actually create a feedback loop to price better the next time around. Until then, you’re (likely) just leaking margin indefinitely, and wondering why you aren’t making the SaaS margins that everyone promised. At FOL-IO, this is our core principle - we believe understanding how the project is tracking in real time is the most important information for keeping your outcomes based model margin-accretive, rather than unprofitable hype.

So what about AI in all of this? After all, the thesis goes: if we can automate some of the time-intensive tasks using AI, we can charge the client the same deliverables-based rate, save ourselves a ton of effort, and achieve higher margin. To which I say, yes but: the likely outcome is that clients will (and already have) wisened to the use of AI, and will expect some amount of those time savings to be passed back to them. Efficiency gains will eventually be competed away. This is what’s driving the current conversation about outputs vs outcomes; if we can tie a payment directly to results, then the inputs become irrelevant. However, I do not think this works for the majority of creative services businesses, who sit in an in-between segment of the value chain, and therefore may not be able to trace a direct line from their work to the results (and who are in the midst of arguing their work is worth more than the clicks it can deliver).

So - will outcomes-based pricing transform the creative services business? Short answer: no, because it’s been around for years, and pricing schemes alone don’t guarantee higher margin. When appropriately priced and managed, outcomes and deliverables-based pricing can offer companies better opportunity to drive perception of value, and (hopefully) decrease the amount of time spent haggling with procurement over rate cards. However, the management aspect doesn’t simply disappear—it becomes even more important. Outcome-based pricing doesn’t create margin—it transfers risk. If you can’t manage that risk, by pricing accurately, controlling scope, and tracking effort in real time, you’ll lose money faster than you would on hourly.

Product plug: Here at FOL-IO, we help clients price accurately, stay on top of scope, and track project margins in real time. If you’re interested in seeing how FOL-IO can transform your business, reach out.