Procurement professionals have a term for it: “supplier conditioning.” It’s the most widely used technique in the procurement toolbox, yet countless agencies enter into pricing negotiations oblivious to the fact their positions have already been molded by these professional buyers.
Early in the buying process, procurement professionals present sellers with a series of “mandatory requirements,” often accompanied by politely worded warnings that failure to comply will result in disqualification. If you’re a chemical company being evaluated on scientific specifications, these requirements are to be taken seriously. But if the seller in question is a professional services firm like an agency, many “mandatories” can usually be viewed in the context of a poker game. Procurement is simply laying its first bet.
Many of the “compulsory” terms outlined in the early stages of a negotiation are simply part of the conditioning progress. Because most agency executives don’t realize the techniques of professional buyers are inspired by game theory, they tend to take all procurement directives seriously.
You’ve already won
By the time you get to the procurement hurdle, keep in mind that you have likely already won the business. Procurement is only the “technical buyer” in the process. Their job isn’t to select the firm (that’s the job of the “economic buyer,” the executive with the budget) but rather to get the best deal with the firm that has already been selected.
At this point, you may be told by procurement that “You need to sharpen your pencil by 5 o’clock to maintain your qualification status” or “We need a price reduction of 5% by end of day.” Is it true? Hardly ever. These are simply last-minute attempts at concessions your firm doesn’t need to make. No doubt you’ve had the sinking feeling of agreeing to a discount only to be awarded the business just moments later.
The most obnoxious and counterproductive procurement “requirement” of all is the directive to supply your pricing in the form of hours and hourly rates. Much has been written of late regarding the impact of artificial intelligence on the agency revenue model and the degree to which AI makes the concept of hourly billing not only antiquated, but impossible. With AI doing much of the agency’s thinking and doing, agencies would be required to bill by the nano-second. Not a brilliant — or practical — revenue model.
Standing out by standing up
Most brands today are already clamoring for new and better ways to pay their marketing partners, and the rise of AI presents the perfect opportunity to do just that. Indeed, agencies really have no choice, and major marketers are coming to terms with the fact that they must now pay their agencies based on outputs (deliverables) or outcomes (results), not inputs (hours).
Actually, agencies have at least five different ways they can monetize the value of AI:
- AI as a solutions propagator. AI helps agencies generate an exponential number of potential solutions to a problem, from strategic planning to media planning. As long as agencies charge for the deliverable – not the time – they can effectively capture the value AI contributes to the agency’s outputs.
- AI as an operations optimizer. By employing AI to automate routine tasks, agencies can save vast amounts of time in the creation, production, and delivery of their work. These savings can go straight to the bottom line.
- AI priced as outcomes. Instead of charging for the effort required to solve a problem, agencies can charge for the value of the solution. An because of the predictive power of artificial intelligence, agencies can greatly reduce the amount of risk they’re taking when implementing an outcome-based agreement with their clients.
- AI sold as a product. Agencies have the opportunity to package together their own problem-solving skills with the immense power of GenAI as a named, branded “product.” There are new examples of this every week from agencies both large and small. For inspiration, take a look at SKEPTIC from the agency Known.
- AI-as-a-Service. We’re all familiar with the SaaS business model, and AI-powered solutions can be developed and offered in the same way – licensing the use of agency-developed AI tools directly to clients.
The agencies that position themselves on the forefront of these new pricing approaches will differentiate themselves in a way that makes them vastly more appealing to prospective clients.
Your clients are waiting for you to make the first move. You’re the seller. It’s not the buyer’s job to develop pricing that meets the challenge of working an AI-powered economy; it’s yours.
