How Should Agency Pricing Structure Change?

There was an article recently in USA today about value based pricing structures for agencies. The article talks about several potential solutions, from flat fee pricing to performance based pricing. It reminded me of a discussion that was started in the Six Pixels of Separation Podcast by Mitch Joel a few months ago.

There is no question that the current pricing structure between client and agency is broken. A time based price structure and a 30 percent markup is a disservice to both agencies and clients. 30 percent markups make agencies no more than retail middlemen. Fees based on hours puts creative, both design and strategy on the same level as a mechanic. The current state of the industry pricing structure downplays creativity and ideas. Ideas are what clients are going to agencies for, why then do agencies give them away for free and charge based on markups and time? Is a an idea that took forty hours to come up with any more valuable than one that took only 10 hours?

I believe a performance based price structure that is based on value would be best for both client and agency. However, to accomplish this type of pricing a true partnership based on trust and common goals would need to be established. I’m not quite sure if clients or agencies are ready for that level of commitment and trust although I believe that is where the industry needs to go to elevate ideas and creative strategy to where they deserve to be. Giving away ideas for free and just charging based on time and markups devalues the big idea and the industry as a whole.