Commoditization is the act of turning something of subjective or unrealized value into something of quantifiable value. Inherent in this definition is the implication that the value quantified is subject to the same market forces as are physical commodities. A physical commodity is readily available in large quantities from numerous producers, enjoys little product differentiation from producer to producer, and thus, leaves individual commodity producers largely unable to command a price premium over others. Commodity production is a battle of low-cost producers engaged in an arms race of aggregation and consolidation as they pursue the economies of scale that is often viewed as the only route to competitive advantage, or even survival. If you are thinking this sounds a lot like the agency industry over the last twenty years, you wouldn’t be alone.
In the last issue of the Win Without Pitching Newsletter we discussed how speculative pitches and agency search consultants have thrived in and perpetuated a commoditized agency industry. In this issue we explore methods you can employ to fight the commoditization trend.
The services that agencies provide to their clients are not, of course, commodities but many factors over the last two decades have perpetuated their devaluation. A client of ours told of participating in a pitch for an agency of record assignment for a large packaged goods brand in which 131 agencies were initially contacted, 81 were interviewed and 12 invited to pitch, without compensation. If your prospect sees 12 (let alone 80!) alternatives to your agency, then you have zero ability to premium price, little input into the financial terms of the relationship, and an equally dismal opportunity to control or affect the selling process. You might as well be selling cattle by the pound at auction.
To recap from our last issue, some of the key drivers of the commoditization trend include agencies positioned too broadly against too many competitors, a willingness to let the client dictate the sales process, and pricing practices that are often misaligned with the value being delivered. Now lets explore some methods to ease back from the commoditization cliff.
1. RECLAIM THE STRATEGIC HIGH GROUND (SELL YOUR THINKING)
An agency’s services are part high-value strategic consultation (thinking), and part lower-value tactical implementation (doing). Most firms have historically charged for the doing and given the thinking away for free. In the glory days, the justification for commanding fifteen points on large media buys was based on the amount of work required to be done to get the campaign on the air.
Account planning came to North America advertising agencies at about the time that the 15% media commissions began to erode. It was the account planners that broke out strategic counsel from the rest of the agency offering and held it up to all as the high-value intellectual property-based service that it was. But once strategic development (and I include creative and media strategy in this description) is broken out from an agency’s offering, what remains is a whole lot of tactical implementation that doesn’t differ much from agency to agency. When strategic counsel is broken out from the agency’s offering, the services left are too similar and available from too many sources for them to command a price premium – the same as physical commodities such as corn and pork bellies.
For small and medium-sized agencies the way to reclaim the strategic high ground is to reverse the historical focus on an agency’s services. Focus on your strategic counsel and charge more for it. Instead of having one function subsidize the other, play up the differences in the offerings, charge more for the counsel and less for the implementation. Ensure that in your deliverables to your clients you separate the strategic from the tactical. Position your firm as one of thinkers who happen to do great work.
The common mistake to avoid when reclaiming the strategic high ground is leaving your space. Some agencies, in an effort to get more strategic, try to back all the way up the strategic-tactical continuum to marketing strategy, when in reality they have no business counseling their clients on broader marketing issues such as pricing and distribution. A design-based agency can significantly increase its margin by focusing on design or brand strategy without having to move into the foreign space of marketing strategy.
2. ABANDON COMMODITY PRICING
Question: How do you commoditize thinking? Answer: You break it down into measurable units and sell it at a price per unit. You sell it as time. Selling thinking by the hour or as a percentage of total budget is, I believe, the largest contributor to the commoditization and devaluation of an agency’s services. Just as commodity prices find a market equilibrium, so too do the prices for advertising, design, and public relations services. There is an understanding in the markets in which you compete that agency services are worth x dollars per hour, y percentage of the media buy, or z dollars in monthly retainer. Without a compelling point of difference it is difficult to charge a premium over these rates. But the agency that quits selling its time and begins selling its services based on the value to the client can command significantly greater margin.
One of our rules for negotiating price is to never justify it. Once you begin to explain why the price is what it is you open up the door to a discussion on how the price could change. Every time you receive an invoice that details hourly rates and number of hours, what do you do? You pick it apart. How much an hour?! How many hours!?! Hours and rates are justification for your profitability based on your expenses without factoring in the value to the client. While a good client will have concern for his agency’s profitability, he wants pricing based on what he gets, not based on what it costs you.
Use the hours and rates calculation to serve as a guideline for your pricing but determine the final price by considering the value of your service to the client. Keep your hours and rates math to yourself.
3. DRIVE THE SALES PROCESS
‘There is no cost of sale, there is only the cost of buying.’
There are costs associated with buyer and seller coming together. In an oversold market, the seller bears the bulk of the costs. In an undersold market, the buyer pays the majority of the costs. Bearing the majority of the costs of these transactions in the form of travel, other hard costs, and development time points to one or both of two dilemmas: 1. Your prospect sees many alternatives to hiring your agency, 2. You lack a coherent sales process and are letting the client impose his upon you.
Clients will drive the sales process when they have the power in the relationship or when there is no strong sales process coming from the agency. Agencies get that power back through properly positioning the agency and developing and implementing a clearly defined sales process.