Locking down costs for marketing services in an AI world
AI changes everything - including budgets for marketing services
It’s clear that the burgeoning array of AI tools for marketing can create huge efficiencies and add enormous value across the spectrum of marketing services.
What’s less certain is how this added value will be distributed between the buyers and sellers of marketing services – and how it will impact the way marketing services are budgeted and billed.
In turn, this puts a new spin on the old question: Is it better to buy and sell marketing services by the hour - or to pay a fixed cost for a specified outcome?
By-the-hour billing no longer makes sense, if it ever did
While some might still favor the hourly rate model because of the flexibility it allows, it suffers from the same problems it always has.
By-the-hour models make budgets unpredictable – and being uncertain about final costs can lead to margin erosion and dissatisfaction.
Moreover, by-the-hour models can inadvertently promote inefficiency, as service providers are incentivized to focus on billable hours rather than the quality and effectiveness of their output.
Now, AI places still more pressure on marketing service providers who bill by the hour by creating massive time efficiencies – even though the education and experience needed to create and refine quality outputs remains the same.
All of which creates a tricky situation, easily solved by…
The advantages of the fixed-cost model
Adopting a fixed-cost model provides clarity in budgeting - and emphasizes the quality of outputs rather than quantity of hours.
In addition, a fixed-cost model allows purchasers of marketing services to compare apples with apples in terms of quality, value, reputation and total cost - rather than flying blind.
Here are the main benefits of the fixed-cost model:
Provides predictability and simplicity: It offers clear, upfront pricing, which makes budgeting easier and protects margins.
Aligns interests: Service providers are incentivized to deliver high-quality outcomes as effectively as possible within budget, aligning their goals with those of the purchaser.
Focuses on value, not time: Shifts focus from time spent to value provided, leading to a more meaningful assessment of work impact.
Reduces administrative burden: Simplifies the administrative process by eliminating the need for detailed time sheets and hourly justifications.
Builds client trust and satisfaction: Builds trust as there's no incentive for service providers to extend hours unnecessarily, leading to higher client satisfaction.
Building clarity, aligning interests and allowing for flexibility
One concern with the fixed-cost model is managing project “scope creep”. What happens when a project requires more work than initially anticipated?
To address this concern, a robust fixed-cost model should include:
Clear Scope and Milestones: Establish a detailed scope of work and set milestones upfront. This practice not only brings efficiency and focus but also sets clear expectations for both parties.
Provision for scope creep: For small unforeseen additional changes outside scope, a reasonable hourly rate can be agreed upon, balancing fairness and predictability.
In summary
Here are the main points re the pros and cons of each model for quick reference purposes:
Hourly rate model
Provides greater flexibility but:
Incentivizes inefficiency
Puts the focus on time rather than value
Requires more admin – in terms of time recording
Offers limited transparency in advance – which can erode margins
Leads to misunderstandings or misalignment – which can put a strain on relationships
Makes it difficult to compare competitive offerings – ITO quality, reputation, value and total cost
Fixed cost model
Requires more work up-front but:
Forces the discipline of creating a clear work spec and milestones in advance – which reduces wheel-spin and wastage
Provides budget certainty – so no margin erosion
Low on admin – no need to capture time or justify time spent
Puts the emphasis on quality of work rather than the quantity of hours
Provides transparency and certainty upfront, which is good for working relationships
Allows buyers to compare apples with apples – ITO total job cost, reputation, quality & value
Can still include provision for scope creep, activated when both parties agree that the original project scope has been exceeded