AI saves ad agencies a lot of time. Should they still charge by the hour?

Agencies have long billed marketers by the number of hours their employees spend producing client work, using rate cards to charge different amounts for contributions by people according to their role.

Now, AI is eroding the number of people, hours and roles required to deliver for clients, and agencies may find the standard billing arrangement comes up short. AI is helping agencies rapidly produce personalized creative images, for example, or altering elements like color, position, lighting and language—tasks that were once highly manual. It’s also letting copywriters, who once may have needed several hours to write 50 variations of copy for a given ad, now generate 100 variations immediately, then choose to edit and curate them.

“Just in ChatGPT and Adobe alone are hundreds of use cases on how the creative side of agencies can shave so much time off," said Tracey Shirtcliff, chief executive and founder of ScopeBetter, which helps companies price their services, among other offerings.

Billing for time doesn’t explicitly account for everything agencies do, including valuable aspects of a creative campaign such as generating strategic insights and big ideas, but it helps them cover such costs and keep the marketing machine humming.

“I ran a strategy department for a long time. Strategy is sort of an example of something that largely has been given away over the years," said Noah Brier, founder of BRXND.ai, a company that is organizing events, content and education to help the marketing industry understand how to grapple with AI, and co-founder of Alephic, a consulting firm helping marketers solve problems using AI. “Ideas have been given away, strategies have been given away, and we sort of get paid in the back end."

Some agencies and their marketer clients are moving over to pricing that pays based on what they deliver or measurable results, meaning they get paid a certain amount regardless of how long a task took to do.

That also creates a better incentive structure for agencies to create good work, some industry leaders say.

Monks, a marketing technology company owned by S4 Capital, is working with clients such as General Motors, Meta Platforms and Google to develop compensation models that focus on outputs or outcomes instead of hours.

The agency might charge a client a set amount to run social media for a brand in a certain region, for example, promising to deliver a given number of posts and to achieve certain measurable goals.

“Instead of the traditional way where we’re saying, ‘You’re buying eight people or ten people or twelve people,’ they’re buying a minimum amount of output and a predefined level of outcome," said Wesley ter Haar, co-CEO of marketing services at Monks.

The model makes increasing sense when humans are still needed for the work but the time they need is much less, according to ter Haar.

“Broadly, clients are looking to save money," ter Haar said. “If we’re purely in a rate-card space, then the only place for us to save money is on the people." That could mean clients are working with agency staffers that are getting paid less, or that those staffers are also working on other projects.

While new clients are often happy to sign such compensation arrangements, he said, it has been tougher to change the model with existing clients.

Ad holding company WPP, which owns agencies including Ogilvy and Wunderman Thompson, told investors earlier this year that the use of AI will help the company move away from hours-based pricing toward output and return-based pricing models.

WPP CEO Mark Read also suggested that AI is enabling new tactics that have new costs of their own, such as employing people to manage the technology.

“Look at other industries that have been impacted by technology," Read said during the company’s capital markets day. “You look at the movie industry, as AI has reduced the cost of special effects, the cost of making movies has increased."

“AI is going to enable much more personalization, much more volume of creative work," Read added. “I don’t think it would necessarily be sort of value-destructive or value-destroying. We’ll just enable different pricing models."

Marketers could be expected to celebrate getting charged for less hours and fewer roles to pay for under a rate-card model in the era of AI, but changing the way they pay could also help make sure they capitalize on AI’s potential.

“If you’re paying for hours, then there’s no incentive for somebody to get there quicker," Shirtcliff, the ScopeBetter CEO, said.

Many generative AI tools that are having an impact in the marketing world right now are either free, are already included in existing subscriptions or have a negligible price, according to Shirtcliff.

Big tech providers are largely subsidizing the costs of AI for end users such as marketers and agencies, ter Haar said. But agencies such as Monks are still making significant financial investments in AI as they integrate products from Google or Adobe and build their own services internally, he said.

The transition to new pay models that addresses all these changes remains very early, according to industry experts.

Some players are still hesitant to move away from the way things have always been done, said Samrat Sharma, the leader of the marketing transformation unit at professional services company PwC U.S.

“When you’re being paid on effort, it’s a very clear, measurable thing," Sharma said. “You put in an hour, you get paid an hour, etc. When it’s done on outcomes, there’s a lot of variables, and therefore there’s a lot of risk."

Write to Megan Graham at megan.graham@wsj.com