The Pricing Model Wars: Why Time & Materials Is Dying and Retainers Are Thriving

Artificial intelligence is forcing a fundamental reckoning with how agencies price their services, accelerating a shift away from hourly billing that industry observers have predicted for years but which has proven difficult to implement at scale.

Survey data from 181 agencies published by the professional services platform Productive reveals significant fragmentation in pricing approaches: 27% are keeping or increasing prices while improving margins through AI, 31% report AI has little impact on pricing or profits, 13% are lowering prices to stay competitive, and 29% are still determining the right model.

This lack of consensus reflects deeper tensions about how to price services when production efficiency has dramatically improved but the value delivered remains constant or increases.

“With AI, anyone can have a brand strategy created in three minutes,” observed Yonah C.L. van Andel of Amsterdam agency On a Daily Basis. “What’s now rewarded is the point of view behind the tool, not the time spent.”

Across the industry, four traditional pricing models are experiencing different levels of pressure:

Time and materials pricing faces existential challenges. When a copywriter can use AI to produce high-quality work in less time, expertise matters more than a specified number of hours. Thus, billing hourly can create margin compression unless rates quadruple, which a client would resist. Agencies using this model report needing greater transparency about AI’s role while maintaining flexibility as capabilities evolve.

Fixed-price contracts remain viable where scope and outcomes are clearly defined. AI can improve margins by reducing production time, but agencies must avoid overpromising delivery speeds that eventually erode profitability. The model’s predictability appeals to clients but requires careful scope management.

Retainer arrangements are proving resilient. For ongoing strategic partnerships where continuity matters more than discrete deliverables, retainers align well with AI-augmented work. Clients receive continuous improvement and strategic guidance, while agencies benefit from stable revenue and deep client context that makes AI tools more effective.

Outcome-based pricing is emerging as particularly well-suited to the AI era. By tying fees to results rather than process, agencies sidestep debates about how work is produced. “It’s not really about time, it’s a value thing,” van Andel said. “Trying to reach your revenue targets through hours won’t be sustainable because clients expect a lot more for a lot less budget.”

The shift toward outcome- and value-based pricing isn’t merely theoretical. Among agencies experiencing positive revenue impact from AI, nearly half maintained or raised prices, suggesting that focusing on value delivered rather than time invested protects pricing power.

However, implementing alternative pricing models presents challenges. Outcome-based pricing requires sophisticated metrics, clear attribution, and often longer sales cycles. Value-based pricing demands confidence in articulating worth independent of production costs, a skill many agencies are still developing.

One project manager described her firm’s transition: “We haven’t adjusted our rates yet, but we’re moving toward value-based billing. AI helps us work faster without compromising quality, though mostly in areas like copywriting and project management.”

Some agencies are adopting hybrid approaches. A second project manager explained: “We’re quoting fewer hours on some scopes because delivery is quicker, but we’re using that headroom to handle more work, so it hasn’t hurt revenue.”

This suggests a pragmatic middle path: maintaining existing pricing structures while using AI-driven efficiency to increase capacity rather than cutting prices.

Productive’s research also indicates that the way an agency prices is directly correlated with financial outcomes. Agencies still “figuring out the right model” are disproportionately represented among those not yet achieving positive revenue impact from AI, 47% compared to 25% among successful firms.

Industry consultants note that the transition away from hourly billing has been discussed for decades, typically focused on better reflecting strategic value. AI has simply made the existing model’s limitations more obvious and urgent.

The 29% of agencies still experimenting with pricing approaches suggests the industry has not reached equilibrium. However, early patterns indicate that models decoupling price from production time, particularly outcome-based and value-based approaches, may be best positioned for an AI-augmented environment.