AI & agency margins
I put together a super simple model to try to understand how impactful AI might be for the margins & growth prospects of a small agency.
This focuses just on AI like Pencil's that generates ad ideas and makes the creative process more "efficient" for high-volume briefs. Here's the link for you to play with the model yourself, editable cells are in yellow. I've definitely made some big assumptions here and may have missed some massive bits, so please point them out!
Here are some thoughts I had:
- Dropping the time taken to complete a creative deliverable from 4 hours to 0.5 hours is an 8x productivity increase. I'd say this is conservative. Most creative deliverables take way longer than 4 hours. Pencil generates an ad idea in 1 minute
- Still, this kind of productivity increase might shift margin from 22% to 78% for a small agency with 12 clients doing around $1M in revenue per year
- Margin improvement driven by automation could obviously be used to run a leaner ship with a smaller, higher quality team. I know some studios that would like the idea of this. But crucially it could also be used to take on far more clients and grow the top line with the same team. Our little example agency could go from 12 clients to 96. Sounds like fun for the suits!
- This all assumes that the agency continues to charge the same amount for the AI-generated creative deliverables. You might argue that they should charge less because they cost them less to make. I might argue they could actually charge more, because AI-generated ad ideas work better for the client - we've already shown AI "winners" perform +79% better on ROAS and -49% better on CPA on average. Maybe charge 25% more? Win-win
- Agency work isn't just about churning out creative deliverables. Far from it. I've baked in an extra 50% on the costs side for non-creative work but in lots of agencies non-creative work (strategy, account management, reporting etc.) could be a far larger portion of fees and potentially rightly so. But for AI like Pencil that creates margin in the creative side of the business, you'd see more upside the more creative work you charged for (and the more high-volume briefs you do!)
- Clearly an agency making this kind of margin could also re-invest it into the work itself. Shooting more, higher quality, longer-form assets to feed into the AI for it to turn into performance ads. Focusing on purpose-driven brand work funded by super-effective and super-efficient performance ads
- One final thought... we built Pencil to be a positive force in the creative industry. If you've read Michael Farmer's excellent book "Madison Avenue Manslaughter" you'll know that the deliverables per agency scope has gone up something like 3,000% since 1992 but the fees per agency scope has gone down by something like 70%.
Agencies are squeezed and they need better tools to grow. We're here to help ✏️ 💪