The numbers tell a story that many agency owners already know in their gut: AI concerns are rising fast.
By 2024, 44% of digital marketing companies view AI as a major threat to their business model. Just one year later, that number increased to 53%, according to SparkToro’s annual State of Digital Agencies survey of hundreds of agency owners around the world.
But here’s what makes this especially painful: agencies aren’t just watching AI disrupt their industry from the sidelines. They use it themselves, automate tasks, reduce costs, and hope to improve margins. All the time their clients are doing the same thing, using AI to justify budget cuts or bringing work in-house entirely.
It’s a squeeze game from both sides, and agencies are caught in the middle.
A promise that turned into a problem
When AI tools like ChatGPT and Claude began to explode on the scene, many agency leaders saw an opportunity.
Finally, how to turn a repetitive, time-consuming task into a profit. Content summaries, first drafts, performance reports, basic ad copy, can all be expedited or partially automated. The math seemed simple: use AI to do more work with fewer people, make a difference, and stay competitive on prices.
Unless the clients do the same math – and come to a different conclusion. When brands can’t put together decent content, analyze campaign performance, or create ad variations with a few commands, the question becomes inevitable: why are we paying an agency for this?
“Several services that agencies used to charge a lot of money for are now done in-house or with automated software,” commented Al Sefati, CEO of Clarity Digital Agency, who spoke volumes about the pressure facing retail agencies.
Earlier this year, Sefati had clients who “stopped marketing” despite strong performance metrics. The manufacturing client withdrew from the contract entirely due to tax uncertainty. When budgets tighten, and AI makes certain marketing functions sound profitable, agencies become an easy target to cut.
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The margin trap no one talks about
Agencies are embracing AI in hopes of increasing profits by doing more with less staff. But clients expect cost savings to flow to them, not the agency’s mission.
The result? Reducing retainers across the board.
SparkToro research shows that sales cycles are increasing, with many agencies now reporting deals taking 7-8 weeks or 12+ weeks to close, the highest increase since 2024.
Prospects take longer to commit because they do their own internal calculations: “If AI makes this cheaper and faster, shouldn’t we pay less?”
Currently, customer expectations are completely independent. In fact, they have strengthened.
Progress is no longer good enough. Brands now require tangible business results, pipeline impact, revenue exposure, and demonstrable ROI for every dollar spent.
So agencies are stuck: use AI to stay efficient and risk their services, or refuse to adopt it and be overtaken by competitors and internal teams who will agree.
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No one is preparing for the problem of young talent
Perhaps the most concerning finding of the study: 66% of agency owners worry that younger team members will have fewer job opportunities in the future. This goes beyond entry-level pricing throughout the talent pipeline.
Historically, agencies have relied on small staff to handle repetitive, basic work, keyword research, content development, reporting, and campaign setup. These were not glamorous jobs, but important training grounds. Young salespeople learn the craft by doing the work, eventually graduating to strategy and customer leadership.
AI automates those tasks. And while that may seem like a net positive for efficiency, it creates a devastating long-term problem: where do the great strategists of the future come from if there is no ladder to climb?
The battle for top talent is brutal. Top strategists, creatives, and media planners know their value and demand premium compensation. At that time, the clients backed out of the payments.
The math doesn’t work unless agencies can maintain lean teams, AI allows them in theory.
But five years from now, when those seniors retire or move on, who takes their place? If an entire generation of marketers never had the experience of working because AI was doing the work, the industry is at risk of becoming a hobby.
What AI can’t restore yet
Despite the disruption, there is a clear pattern in what is working for agencies dealing with this change.
Research shows that larger agencies (51+ employees) report healthier sales pipelines than their smaller counterparts. Part of this is resources, supermarkets have dedicated sales teams, and can better absorb economic volatility.
But something else is at play.
The agencies that are still alive, and in some cases successful, are the ones that stop trying to compete by execution alone. They sell something that AI can’t easily replicate: strategic thinking, real-world market knowledge, unbiased storytelling, and intelligent execution directly tied to business results.
“Customers want teams that really understand their industry,” commented Sefati.
The trend is clear: specialization is no longer an option. Generalist “do it all” agencies are struggling the most. Those with deep vertical expertise, B2B SaaS, financial services, healthcare, and ecommerce, prove that context and strategic understanding still command premium payments.
This is important because AI is great at pattern recognition and working within known parameters. But it struggles with the complex, abstract task of understanding a customer’s competitive position, learning market forces, or positioning art that resonates with a particular audience.
The problem? Most agencies have not yet made this change. They are still selling and delivering services that sound interchangeable with what AI, or a skilled in-house team with AI, can produce.
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The uncomfortable truth about property
A few years ago, having the technical ability to run a Google Ads campaign or set up marketing automation gave agencies an edge. That is no longer true.
As martech platforms have become more complex and AI tools have grown rapidly, many brands have built skilled internal teams. The bar for what counts as “distinct agency value” has been raised significantly.
This is why sales pipeline data is so revealing.
- Only 14 percent of agencies describe their current pipeline as “very healthy.”
- More than half said it was just “average”.
- 32% agree that it is “not good.”
These numbers have improved slightly since 2024 (when 36% said it was “not good”), but we are talking about growing benefits in a very challenging environment.
Small agencies, those with 1-10 people, are hit hardest. They often don’t have dedicated employees, so business development competes with customer delivery on founders’ time. And when budgets are tight, brands partnering with large, specialized agencies feel less risky.
How your agency can escape the squeeze
Focus on these important things as the customer wants to move up and the limits are getting tighter.
Be honest about what the AI has done
Don’t fight the AI or pretend it doesn’t exist. Be brutally honest with what the AI has already done, and focus ruthlessly on what it can’t replicate.
This means making uncomfortable decisions now. Stop competing in services where AI behaves well enough. If you’re still selling basic content creation, social media management, or general reporting as a core offering, you’re volunteering to be priced out.
Instead, double the work requires real expertise: deep market understanding, strategic positioning, creative ideas that move the needle, and the kind of unerring judgment that comes from seeing what works (and what fails spectacularly) in many client situations.
Lead with AI, don’t hide it
Change the way you talk about AI with customers. Rather than looking down on it or taking it as a lurking threat, lead with it.
- “Yes, AI can generate content, and we’re using it to do that faster and cheaper than ever. But AI that won’t let you know that your competitors have just changed strategy, or understand why your last three campaigns underperformed despite great metrics, or realize that your messaging is technically sound but completely misses what your audience really cares about. That’s what you’re paying us for.”
Rethink pricing models
Hourly billing and retainers based on team size are the remnants of a world where labor hours are tied to value. They don’t know anymore.
Results-based pricing, value-based fees, and performance synergies align agency incentives and customer success, and make AI leverage work for you instead of against you.
Rebuild the talent pipeline
Address the problem of young talent head-on. Agencies that figure out how to train the next generation of strategists in an AI-enabled world, by pairing them with top professionals in high-level work rather than doing tasks handled by AI now, will have a greater competitive advantage in five years when everyone is looking for talent.
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The old agency model is not coming back
The data shows 64% of agencies expect revenue growth over the next 12 months. Whether that hope is justified depends entirely on whether agencies adapt to the new reality or remain hopeful that the old model will return. It won’t.
Compression is permanent. But there is a way forward for agencies willing to rethink what they sell and how they deliver it.
Will your agency become important because of the way you use AI, or will it pass completely by because clients realize they can do what you do themselves?
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