Is AI Going to Kill Labor-based Pricing?

Blair is stunned that he still encounters so many advisory businesses like ad agencies, consulting firms, legal and accounting practices — large and small — that are still selling time. So he and David discuss what new revenue models should look like as we all adapt to how AI is changing our businesses.

Links

“Time’s Up, Babycakes” by Blair Enns for winwithoutpitching.com

Time's Up!: The Subscription Business Model for Professional Firmsby Paul Dunn and Ronald J. Baker

The Automatic Customer: Creating a Subscription Business in Any Industry by John Warrillow

The Forever Transaction by Robbie Kellman Baxter

Subscribed: Why the Subscription Model Will Be Your Company's Future – and What to Do About Itby Tien Tzuo and Gabe Weisert

Transcript

David C. Baker: I have not written about AI intentionally. I kind of mouth off about it on LinkedIn every once in a while, but I haven't written anything about it because I just don't have any cogent thoughts, even though I'm a heavy user. Is this your way of sneaking AI in, forcing me to embarrass myself about it, or is this about timekeeping? What are we doing here, man?

Blair Enns: This is not an AI episode.

David: Whew [exhales].

Blair: We are never doing an AI episode, but AI is infiltrating all episodes.

David: [chuckles]

Blair: In fact, Blair couldn't make it today. Clarence, his AI, will be conducting this podcast.

David: [chuckles] I'm actually looking forward to this. I am going to have a better time training Clarence than I am Blair.

[laughter]

Blair: Well, we're having a hell of a time training him, but that's another topic.

David: You originally titled this "Time's Up Baby Cakes", and that may not be the title we end up with, but [chuckles] all I could think of was you calling me up and saying, "Hey, David, I've--" You have this tone of voice when you want something from me. You're all excited like this is something I'm going to want. "Can you build me this beautiful, I don't know, sort of a coffin out of bird's eye maple?" I get all excited. "What are you putting in this thing?" I asked finally. You say, "Timekeeping." You've already put 13 nails. Okay, there's only 14 nail holes. Is this your last nail hole to fill in the timekeeping coffin? Probably not.

Blair: So--

David: Haa, I got you. It took you a minute to think, didn't it?

Blair: Wait, it took me a minute to process that elaborate opening, wondering where you were going. There are some topics I'm sure you will agree where you feel like you don't need to write about them or speak about them anymore because we, all of us, we've had this conversation long enough. Everybody understands what you understand. There's no need to keep going on on this topic. Do you know the feeling? Positioning anyone?

David: Yes, right.

Blair: Timesheets, anyone?

David: Recurring revenue arrangements? Yes. You said something in this article that got this started for me. You said something in here that appears really obvious, but it hit me in a new way. I want you to start by explaining it. You said procurement departments are demanding timekeeping. Can you just unpack that a little bit? Why are they demanding timekeeping? I guess it makes more sense if they're demanding timekeeping, but they're also capping what the hourly rate could be. Is there something about timekeeping that is in their best interest?

Blair: Yes. Well, first of all, labor-based pricing is dead. They haven't buried the body yet in your beautiful bird's eye maple coffin.

David: It's just lying there stinking.

Blair: I was pinch-hitting for a coach on a call with a client not too long ago, and they made the comment that they're a large agency and all of their relationships are still labor-based. It's interesting. If you look at what the leaders in marketing procurement are writing, they're all saying, "Listen, agencies, we're ready to go past hourly rates. It doesn't make sense anymore. We're leading the charge to move away from the billable hour."

In reality, that's bullshit. I know some of the lofty consultants that are friends of mine and of yours who are out there leading voices who aren't actually employed by any of these brand marketers. They're trying to make that happen. When it comes to the procurement people on the ground, they are clinging to labor-based pricing, hourly rates, prices for FTEs, et cetera, in the age of AI, where every agency is rapidly getting more productive.

David: Or at least supposedly, or will if they aren't yet.

Blair: I don't even think that's a hypothetical discussion anymore. I think we can make the blanket statement that everybody is far more productive today on a per capita basis than they were a year ago or even six months ago. There are productivity gains being had. If you're charging for your time, you're effectively losing money. You're being more productive in the same amount of time, you have to move away from labor-based pricing. I feel like everybody should know this, and everybody's known this for a year or two, that you can't get away with labor-based pricing in a market where AI is running rampant and changing everything, dramatically increasing everybody's productivity.

Then I was in a coaching call with a client, a large agency. They made the point that all of their relationships, all of their engagements are labor-based. I was shocked. Their response to my shock was, "Procurement won't have it any other way." They said, "This is the way procurement wants to hire us." I said, "Of course, it's the way procurement wants to hire you. You're getting more productive, more efficient by the week, certainly by the month. Do not look to procurement to be the party that moves these relationships away from labor-based pricing.

David: There have been these pressures over the last 20 years, maybe 30 years actually. Is it your opinion that AI is the forcing function that we've never quite had before? It may not do away with it, but it will force us to rethink it. I think about another segment of the professional services industry, like law firms, they're very time-based and making a lot of money, not because they've gotten away from time-based, but because they charge a lot more per hour.

On the other hand, they are facing a whole lot more scrutiny than our industry is because of AI. In fact, if you look at some of the sell-offs in the software side, the SaaS side around legal, then it's pretty dramatic. Anyway, back to this, is that what you're saying, that this is finally the forcing function that we can't ignore?

Blair: Yes, it's the last great forcing function that will ultimately kill labor-based pricing in 90% of the businesses out there, including almost all professional services firms. I just don't see any way around this recording early February of 2026. In 2027, that's going to come fast, but I just don't see how it's tenable today.

David: We have control over how quickly we change. We don't really have much control over how quickly procurement changes. Might they not just stay with hourly-based, but just demand more from the hour that maybe it just cements timekeeping?

Blair: What I say, I don't remember if I said it in this post or a post that I published in the Win Without Pitching Academy for our clients, and I said, of course, procurement wants to keep insisting on paying you by the hour, and they're going to keep insisting on paying you by the hour. Meanwhile, they're going to in-house a large majority of what it is that you're doing, because the tools will now enable them to do it. Of the few remaining things that they can't do, the really high-value, magic, maybe highly creative stuff, they're going to hire somebody else to do it for them.

They're going to hire a younger, smaller, more nimble, more forward-thinking shop to do the small amount of remaining high-value stuff. I say in this post, I don't know how they're going to pay that other firm, but I can promise you that other firm will not be charging for their time. If you think this is inevitable, it's inevitable. What's the metaphor? You're in a car, you're going down a lane, the lane goes over a cliff. Boy, that's a pretty shitty metaphor. You can do better than that. You're Mr. Metaphor, David. Anyway, you feel like you're in between these guardrails, you can't get off this road. The road goes over a cliff, so you're going to have to find a way off.

David: Now, if you're listening to this, you're running a firm, it's still time-based, and you start, for the first time, to feel this pressure, this forcing function. What's the first thing you would want them to think about?

Blair: The first thing I would have you think is this idea that you reinvent the firm one new client at a time. You draw a line in time that's today, and you say, after today, new pricing model. Every new business conversation that we're in, when it gets to talking about money, we're going to price differently. We no longer sell time to new clients. The typical creative firm turns over its client base in three to four years, so in three to four years, at a minimum, you have everybody on the new pricing model. Then the second thing you do is you try to think about how do you convert existing clients.

David: Past this line that you've drawn in the sand, if you don't have an answer to this, that's fine, but is there something that you would experiment first with this new model, like productization or subscriptions, or is there something that comes to mind that you would want them to start first?

Blair: Yes, we have a list of models that we can talk about here, subscriptions, productized services, unified programs and platforms, outcome-based retainers, value pricing, and performance pay. I would start by thinking about productized services. Now, this is a blemish on my record for many years, as you know, David.

David: Oh, I know. So many things came to mind as soon as you said productization. I wanted to rewind some of our talks from the past.

Blair: I know. Jonathan Stark he's interviewed me, I think, three times over the years on productized services. The first one's like, I was adamant, "Don't do it." Then a couple of years later, it's like, "Yes, maybe a little bit." I don't remember if we've completed the trilogy where I said, "Yes, you should think seriously about productizing." We've talked about this a little bit before, AI, because it's changing your revenue model, it's changing a little bit of your business model. If you want to start pricing deliverables for sure, let's put aside value-based pricing. There are basically three things you can price and sell. Inputs of time and materials, the outputs of the deliverable, the thing that the client is buying from you, the website, the campaign, et cetera, or the outcomes that you create or value. Inputs, outputs, value. Let's put value aside, I'm saying inputs is off the table. Value aside for now, we'll come back to it because it's hard. It's harder to sell. It takes longer to sell, et cetera. I don't think it's the panacea that I used to think it is. I think we should explore that and the elements of it.

Let's just move to deliverables. Let's just say the easiest path from selling inputs, pricing inputs is now to pricing outputs. You're pricing deliverables. Then you should think about packaging those deliverables up into these discrete packages. In one of the most recent episodes that we did, where you talked about if you were launching a professional services firm today, you made the point of saying you would productize your services, and you had a specific number of products in mind. Do you want to just refresh the listener?

David: Yes. It was 16 loose products, but they would be combined individually for each client. 16 isn't a magic number. I just think that's roughly about right.

Blair: I don't think I asked you for your motivation on that. What was the rationale of what's the basis of productization, and then 16 or roughly that number?

David: Part of it is to get away from timekeeping. There is one big element of timekeeping still in my professional life, which I can talk about at some point. That's one reason to get away from it. Also, it's just so much easier to sell. It's so much easier to train a team to deliver. It's so much easier to manage scope. Not to the point where you're just mailing it in with clients, but as a starting point for sure.

Blair: It's easier to scale a productized service because so much of the magic in a customized service is the individual who's B, customizing the service, but A, who's pricing and selling it.

David: Yes.

Blair: That's one of the challenges with value-based pricing. It takes a certain level of skill to be able to have these value conversations and to come up with numbers on the fly and price really big and be comfortable when the client is uncomfortable in a discussion that includes a really broad price range initially and then gets narrower.

David: You mentioned something a few minutes ago, and I just want to say it again because I think it really captures what we're talking about here. It announces what you think is happening, but then suggests what to do next, and that's the way you divided all of this into three options. We start at the bottom. You sell based on inputs. That would be timekeeping. What you're suggesting is maybe not jump all the way to the top value pricing, which is really an amazing thing, but difficult to pull off, especially if you're going straight from inputs to value pricing.

Instead, you go to this middle one where you're pricing outputs, and outputs are essentially another way to describe productization. I just don't want people to miss that because all of a sudden, I think the fog clears in people's minds when they hear it that way. Let's move from inputs to outputs and experiment with value pricing, but let's just think more about output.

Blair: Yes, outputs doesn't necessarily mean productization, but it really-- productization is the next step because if you're pricing outputs, what's the basis of the price? It's almost certainly your inputs of time and materials. Once you standardize your products, you set the price, however you set it, even if it's on time and materials initially, just think of this. As you repeatedly deliver on more and more of the same productized services, what happens? You get better at it, you get faster at it, you get better outcomes. The price stays the same, maybe even goes up. Maybe you even reserve the right to not price the product, but price the customer. Now that's value-based pricing with productized services. That's the most we've talked about this before. I forget the source of this, and maybe I've patched this together, but that seems to be the most lucrative business model in professional firms where you standardize or productize the delivery, so productize services, and you price the customer rather than the products.

David: Right. Moving from that second to the third level. Timekeeping on its own, I don't think we should view it as the enemy. I wrote an article that is one of the top ten articles I've written in terms of reactions from people. It essentially says that the default is no timekeeping. That doesn't mean that timekeeping doesn't have a purpose to it. Here, I don't want to put words in your mouth. You may not agree with all this. I then suggest that there are five times when timekeeping on a temporary basis makes sense. One of those is to figure out how to price an output. It doesn't mean that it caps the timekeeping caps what you can price that, it just means that it gives you information. I think it's valuable information, but you just use it as that. Then once you've figured out how you need to do something, then you can just stop it. The only timekeeping sheets that are accurate are from contractors who get paid for what they do, and that's going to change, too, by the way. Even those have lies in them. On the employee side, there's probably more lies in timesheets than anywhere else.

Blair: I would agree with that. That's my fundamental problem with timesheets is it's like the drunk looking for his car keys under the street lamp, not because he lost them there, but because the light's better there.

David: That's a great image. You've used that one before. This is a forcing function, or should be, moving us away from inputs to outputs and productization. It certainly is something that you would explore. What else would you add to this?

Blair: After productization, then I would look at the various pricing models because productization isn't a pricing model per se. You do have to decide whether or not you're going to price the product or price the client. I'm a big fan of pricing the client. There are variations of like pure value pricing, where the pricer could reserve the right to charge almost anything, versus you could have tiers of prices based on certain markers of value. I'll give you an example. I don't know if you still price the total business review, or what's the full name of the TBR?

David: Total business reset. It has a flat price up to a certain number of 20 people, and then it's so much per person above that.

Blair: That tier, so much per person above that, that's a surrogate for value. The idea that the value, it would be greater-- maybe your rationale is, "It's going to cost me more to deliver the work," but it is also a surrogate or a marker for value. You could use certain markers like this, in your case, the headcount of the firm, as a demarker of pricing levels. That's a simple way of embracing value-based pricing. Also subscriptions. I'm spending a day with Ron Baker next month, and I'm rereading his book, Time's Up. The subtitle is the subscription business model for professional firms. As you know, everything Ron Baker writes is worth reading. There's a ton of valuable stuff in here.

I'm also rereading the canon of other great books on subscriptions, like The Automatic Customer by John Warrillow, whom you know, The Forever Transaction by Robbie Kellman Baxter. There's one more. Oh yes, Subscribed by Teen Zoo. There's a lot of great stuff out here on subscriptions. I haven't written much on subscriptions because it's such a massive topic. There are so many different types of subscriptions, and I don't fully have my head around it. Maybe once I get a download from Ron, I'll have a better or stronger point of view on subscriptions, but I think subscriptions are something a lot of businesses should be considering.

I've said for years, when software moved from this capitalized expense where you buy it once, and then you rebuy it every four years after that, when it moved from that to SaaS, I predicted the future in which everybody who did website design and or dev would move to monthly pricing. You can call it leasing, you can call it subscription, you can call it whatever you want. It really is this idea of subscribing to a website. It only happened in really tight vertical niches where somebody does the same type of website for the exact same type of business. I'm surprised. I think now is the time. It remains to be seen how long the website business is going to continue to be a business.

I don't want to get distracted by that, but that just strikes me as an example of something where people should be subscribing to a website. Website owners, when they buy a website, they typically buy some sort of maintenance contract afterwards. That maintenance and the high-level design and development and optimization, and constant improvement, that should all be bundled together in a subscription.

David: I wonder if the reason that hasn't really taken off is because there are very few firms that have the staying power or the trust level of an Adobe. That's what they did, basically. Instead of buying Photoshop, now you subscribe to it. There isn't much question about whether Adobe will be around. I think most of these firms are 10, 30, 40 person firms. I'm not sure the client believes in the staying power of these things. I don't know. It's just curious-- I'm writing another article on recurring revenue. That should be under my bonnet all the time. One thing that strikes me, there's so much love for recurring revenue, I think largely for the wrong reasons, but it's still there. What strikes me is so funny about the importance of recurring revenue to people is that it really reinforces the timekeeping model more than anything. It just makes the timekeeping more even. People are not using recurring revenue as subscriptions to something. They're using recurring revenue as a fixed amount of billable time.

Blair: Well, that's one model. We have a recurring revenue product called the conversation, where I talk about something once a month. I go deep into a topic once a month. I just did the monthly one earlier today, and that has nothing to do with time. A, I love that product. B, I love the consistency of the revenue from month to month. Previous to this, many years ago now, I did 10 years of the monthly Win Without Pitching webcast.

Every month, I did something similar to the conversation. Back then, it was all me going deep into a topic for about 55 minutes and then 5 minutes of Q&A, and this one's flipped, so quite similar. Even back then, in 2008, 2009, when we went into a recession, I was really grateful to that monthly recurring revenue. I absolutely see the appeal of recurring revenue. I understand your concerns. I can't wait for you to publish the post and for us to do a podcast on it.

David: You're a little too eager to poke holes in my model. I can hear it already.

[laughter]

David: I think this is a case where sometimes my own personal preference differences as a consumer have maybe too much sway over some of my perspectives about this, but I don't know.

Blair: That's valid, though. That's the biggest argument I have against subscription services, is I feel like I am over-subscribed. It drives me crazy how many services I want to buy are trying to force a subscription on me. I think there's a subscription backlash. I don't know if it's the same in a B2B world. If you go back to software, this idea of capitalizing this expense. What business wouldn't rather take that expense that they used to incur once every four years and divide it up into 48 payments and never have to go through the cycle, have the website always be optimal? That's a no-brainer to me. To this day, I can't figure out why more firms didn't do it. I've advised lots of firms on it who've done it. I think most have been pretty successful at that pricing model. I'm surprised why it hasn't just taken over universally, but I think we're at the point where now it has to.

David: Now there's a subscription you can get, you can pay for monthly, that helps you cancel your subscriptions. Now, how ironic is that? I forget the name of it.

Blair: What's more ironic is my wife came up with that idea two or three years ago, and my kids and I were all dismissive of it, and now she just keeps rubbing our faces in it, as she should.

David: [laughs] Time's up, baby. You've been saying time's up for a while. What do you really think? Is not what do you want will happen in, say, three years. Let's fast forward three years, and we look at this industry and how they've responded. Not what you want to be true in three years, but what do you think will be true in three years?

Blair: I think AI is the driver, where, previous to AI, it would have been my hope that most businesses get away from selling time most of the time. I could always see the occasional case for selling time. I don't think you go to hell for selling time. I think AI has changed this. I think there are very few businesses left where you are going to be selling ideas and advice in units of doing.

David: I am still selling time in one platform. I think you were on it at one time. You probably don't use it anymore.

Blair: Is that Clarity? Clarity.fm.

David: Yes, clarity.fm. Two months ago, I sent the founder of the thing an email. I said, "Hey, I've got to get off your platform. I cannot live within the maximum hourly rate you have set, and I'm just going to have to find another platform." He said, "Oh, no, no, don't leave here. What do you want it to be? We'll just change it." They did. They made an exception.

Blair: $10,000 an hour.

David: No, but there is one person on there that is charging about that. I was at the cap of 1,000, and I said, "I don't know, 1200." It allows me to help some people that wouldn't buy one of the productized services I have. It fills in gaps for them and for me, and there's no chit-chat. That's the most beautiful thing about it.

Blair: I used to like that model. It was like, you could accept the occasional thing. It would be an hour or less. There's no preparation, there's no reports afterwards. There's no collecting money. It's all handled for you. Dan Martel started that business. He wrote a book called Buy Back Your Time. He since sold it to somebody else. I'm not sure who owns it now.

David: Oh, okay.

Blair: Dan's moved on to other things.

David: I still think it's fine. In fact, I read this thing on LinkedIn. Somebody was saying-- I think it was a ghost writer, and they said, "Hey, I'd like to buy you by the hour to fix this." She said, "I don't sell my time by the hour." I popped in and said, "I'd sell my time by the hour. Let's talk about the hourly rate. You're not going to like the hourly rate. You're not going to do that." Fundamentally, selling your time by the hour, I don't think it's a sin necessarily. It's just more the whole system around it that doesn't allow for you to capture some of the value. This is an area where, if you just look across the firms and you say, "What are the best practices?"

I would have to say most of the best practices are wrong, and that's because most innovation comes from a small corner, and when the majority of the people doing the best practices look at it, they say that'll never work. Sometimes they're right, sometimes they're wrong. I think a lot of what we do in this field is wrong. I just have to pick my battles because I'm just not going to win in many of them, and in some cases, I don't know what I'm talking about, but I think we need to keep looking at where we could do things differently. This is an area where we could do things differently.

Blair: I always say about pitching, and I saw you in a discussion with some agency person going on about how agencies are horrible at pitches, and you tried to steer them in another direction, but I always say the best of bad practices are still bad practices.

David: Yes, right. They capture the lemming-like approach of everybody out here. That's the problem with some of the discussion groups you see out there. It just discourages the innovative people who get whipped down by everybody who says that's not possible. You've been saying for a long time, as have been another half dozen people, the same sorts of things, and now maybe people will be forced to listen a little bit because of AI. That's what you're predicting.

Blair: Yes, and some won't. They're on a road going down the road. There are guardrails on either side of the road, and one side, it's the client, and the other side, it's your habits, and that road goes off a cliff sometime in the next 12 months.

David: You're such a motivational speaker. This is why you don't get hired to be a motivational speaker.

Blair: Half the people in the village I live in think I'm a motivational speaker.

David: Really?

Blair: Yes, and I say I'm more of a de-motivational speaker.

David: All right, thanks, Blair.

Blair: Thanks, David.