Why agency price wars are a bad idea

A race to the bottom hurts agencies and the industry

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This week on the Agency Leadership Podcast, Chip and Gini discuss the drawbacks to pricing wars, and how you can extract fair value for your services as an agency. They go into the dangers of undervaluing what you provide solely to get new customers in the door, because not only will it hurt your bottom line, but it can have a negative impact on the industry as a whole.

They explain how pricing under costs sets a precedent you cannot meet in the future, and this will in turn give your clients the wrong expectation of how much it will take for you to complete a certain project. Other topics on the table include agencies who intentionally wish to undercut others and what percentage profit should you be taking.

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Transcript

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CHIP: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin,

GINI: and I’m Gini Dietrich,

CHIP: and we’re here today to talk about war. Price wars To be more exact. I don’t know, Jenny, I mean, it’s, I think we’re all feeling a little rundown right now, as we record this head of Independence Day holiday here in the United States, we are out of gas. I’m gonna fake it as much as I can.

GINI: I think everybody as I said this in the Spin Sucks community, but it really I mean, I don’t know if everybody has, but it feels like everybody took this week off because everyone’s just like, I’m done. I’m out. Taking a week off. I don’t care if I have to just sit in front of my TV, but I’m out.

CHIP: You know, it’s it’s not about me, you know, we all sort of, I think overestimate the additional time that we’ve supposedly gained by being at home and obviously, I know you were having a young child at home Have not really gained anything she actually lost. I’ve just lost the difference.

GINI: Yeah. But what I think that happened before March however, so.

CHIP: Well, okay. Yeah. So. So today we’re talking about an article that appeared in PR week and it was by Steve Strickland. And unfortunately, I do not know the name of his agency. Oh, Tucker Taylor troublemaking force. Yeah, it was that cool agency name? Yeah, it’s one of the ones that is

GINI: nice. Yeah, nice alliteration. Exactly.

CHIP: any case, so he talked about why PR agencies should not start a price war on fees right now. And obviously, this is this is a concern because as anytime that there is an economic storm, people will do whatever they can to get business whatever they can to grab market share. And so you know, what were what were your thoughts? After reading the piece, Jenny,

GINI: you know, I mean, I liked the piece I thought it was, it was interesting. I appreciated that he talked about two things. One, one that large agencies typically have savings and so they can undercut their own fees and still make their payroll in order to bring on new clients. And I also appreciate that he said, You know, when we do that, even if we can afford it, not only do we hurt ourselves in the long run, but we heard our small agency partners because they can’t do that. And so we’re undercutting the entire industry by cutting our fees, which I agree with.

CHIP: Well, that that is absolutely true. And I am of the belief that I don’t care if you are a one person solo agency, a small agency mid size large agency, you should not ever be pricing below your actual cost. You shouldn’t be using savings to subs No, no, no, you absolutely need to be pricing appropriately because it will back to bite you eventually. I mean, you may get a land grab today, and some of those agencies with savings and I would say, not all of the large agencies, I know some smaller agencies who are doing okay and have some financial wherewithal to, to cut rates. And they’re doing so because they feel like they can grab market share now, and it’s just it’s a bad idea.

GINI: It’s a really bad idea. And I, I think, Well, I mean, you raise a good point that it never actually comes back, because the client will always think, oh, you can always do this for 100 grand when it really costs 500 grand. That’s not good, because you’ll never get the client to that level. And I

CHIP: have been there over and over in my career, where I’ve been working with or four or alongside someone who says, we just need to price it right today to get the business and we’ll make it up later. We’ll sell them more we’ll be prices in year two or year three. Never, ever, ever have I seen it happen in 25 30 years of being in this business, that hasn’t happened,

GINI: I actually have. About four years ago, I went to a client, I sat in his office, and I showed him, you know, he’d been a client for six years. And I showed him all the work that we’d done and all the results that we’d gotten. And he, you know, He even gave us credit for some return on investment that I hadn’t accounted for. And it ended up being some ridiculous amount like 15 to one or something. And I said, Now, let me show you what you’ve spent invested with us versus what we’ve spent and he was like, he looked at my number, and he goes, Yeah, I’m never gonna pay that. And I was like, Okay, then we need to reduce scope, because we are way underwater here. And we had a really interesting conversation. I’ve never gotten him to raise his fees, but he’s one of the lowest maintenance clients today that we have, because he understands that we went way underwater. I was perfectly frank with him and I showed him but we we’ve never ever, ever gotten him to raise his fees ever.

CHIP: Right. And it’s It’s different when you get into a situation like that with a client over time versus that’s what you went into it with the mindset to do. I mean, if you go into it and you say this is, this is my strategy is to underprice it. I just don’t understand what your what your plan is because there’s nobody who wants to pay $1 for a widget is going to say, Oh, sure, I’ll pay $3 for that same widget next year, you know, nothing else has changed other than you coming and saying, Hey, I, you know, this is this is why I really charged you back then. It’s a it’s a nutty approach to business. But But this article, the or op ed piece, or whatever you want to call it also makes, I think, a very important point on the impact on the broader industry. And I think that that in times like this, you know, yes, we all need to think about our own businesses. But we also do need to take a broader look at the industry and what we can do to, you know, uplift the whole industry because it’s going to it’s going to help us or hurt us over time. What we do collectively

GINI: Well, and he did say, you know, we could put our our industry into a further deeper recession by doing this, which is, I know that we tend to go into creative businesses because we’re not math or finance people. But it’s that and you and I have harped on this for a very long time. You have to understand the financial side of your business and able to in order to be able to make these decisions. If you’re, if your profit goal, let’s say is 50%, you can’t be charging 60% less because then you’re not making any money and you’re paying contractors or you’re paying employees or whatever it happens to be and all of your money’s going to them versus going into the business to reinvest or going to you as the owner.

CHIP: Yeah, I mean, at the same time, I think we do have to realize there are some agencies out there who that may be their strategic decisions, they want to put other agencies out of business, they want to know I mean, you There’s, you know, the the PR and marketing agency industry is no different from any other. And so there are certainly folks out there who see a strategic benefit in shrinking the pool. I’ve actually talked to a fair number of agency owners who are excited about the prospect about a shrinking pool of agencies that, you know, like, I don’t disagree that there are agencies out there that probably shouldn’t be in business today. But that’s different from actively trying to undercut them.

GINI: I don’t know what to say to that. So

CHIP: far, do you do you believe that there are those agencies out there that that have that as a strategic plan?

GINI: For sure, I just don’t agree with it. I don’t. It’s It’s It’s kind of like the dark web where all this stuff happens where I know it happens, but I don’t really want to know. And that’s the same kind of thing. I know that that happens. I just don’t want to know that there are people out there who are actively trying to put their content Doctors out of business.

CHIP: But there are I mean, there are unfortunately not so good agency leaders out there. And I don’t want to take us on too far of a tangent, but I did get wound earlier today, there’s another PR week article about some agency owners in the UK who were talking about reopening in the fall, and To hell with their employees if they didn’t want to come back, basically. And that was not a direct quote, but the direct quotes were pretty much just as bad in the piece where were folks talked about, you know, this is not a democracy, I’ll tell the team when they need to come back. And, you know, we just need to be back in the office by September, you know, come hell or high water. And, and, of course, these these brave agency leaders did not put their names on these.

GINI: They were all anonymous,

CHIP: but you know, I suspect that that folks who think that way may also be the type of folks who are thinking, hey, yeah, we can, you know, we can go under someone else. And if we happen to put them out of business, that’s just a pleasant side effect. I mean, it just is not How I think and I don’t think it’s the right way to think because, you know, there is such a thing as karma and it does come back to bite you at times, if you are not behaving well in in times of crisis, let’s put it that way. That’s my kind of

GINI: I have not seen the article other than what you told me about, but it is on my

CHIP: shoulders didn’t lie to you. So.

GINI: No, I know you didn’t. Um, I think just in that instance, itself, the idea that you would especially for something I mean, you don’t know. What do we don’t know if childcare is all this? Everybody’s talking about a second wave. So that school closed November in December is, you know what it helps us with, but as an agency lead.

ality where’s the risk?

CHIP: Right now it’s clearly it’s just Not worth the risk. It’s not something that that folks, you know ought to be doing. I mean, you certainly if you’re if you’re going to take that approach, make sure you talk to your lawyer first and ensure that you, you know, cross your T’s and dotted your eyes so that your liability isn’t through the roof. But it’s just it’s the wrong thing to do, just from a human standpoint. It’s the same thing with you know, starting a price war for for the purposes of, you know, harming others and winning the business in the short term. Now, that said, You know, I do think and I’ve said it before, agencies do need to look at their pricing right now. Because Yeah, the pricing that that was that was working for them, and that was proper six or 12 months ago, may not be proper anymore, you may need to look at reducing your prices. But you can only do that once you know, you know what your cost basis, what’s your floor is and make sure that you’re pricing above that. So I don’t have an issue with folks discounting their prices right now. As long as they’re doing So and still being profitable because I think that’s, you know that that’s how you really have to look at if you’re using cash reserves simply as a market share move, that’s where you get into trouble. And that’s where it’s, you know, problematic for the entire industry.

GINI: Yeah, it’s just, I mean, we have on this podcast talked before about, you know, maybe you unbundled services and not charge as much and all those kinds of things, but it definitely does speak to having to understand your your financials, having to understand what your profit margin is, and having to understand where you might take a haircut for lack of a better term in some of those cases. Now, is it? Is it more important for you to bring any I’m sorry, I was trying to think of a different phrase so I didn’t hurt your feelings but couldn’t on in the moment. I’m sorry about that. But I think I think it’s really you know, you can think about things like it is our profit margin 50% and we’re okay to To go 45% to bring this client on, or you know, whatever it happens to be, there are certain things that you can do from that perspective, but don’t get yourself down to no profit or 10% profit just because you want to bring clients in, and you’re willing to undercut that much.

CHIP: Right? Because I mean, there’s an absolute difference between pricing right and pricing competitively. And even pricing aggressively, versus taking that deliberate loss, you know, merely to steal the business, if you will, and that that goes for whether you’re, you’re going against someone who’s an incumbent or you’re in an open RFP process or something like that, or, you know, whatever kind of process you may be in. It’s really, it really does start with understanding your cost base. And this is this is something that I think far too many agencies. I know I’ve said this many times before, but far too many agencies do not understand their actual cost base for projects and for client work. And you need to know that in order to get to the right pricing that is both competitive, as well as profitable.

GINI: Yeah, you know, I use a very easy model, I look at my revenue, I say what my goal is for profit, I’m subtract the profit goal from the revenue, and then I have what’s left? And then I say, Okay, here’s my cost of doing business, and I include all of that. And then whatever that number is that’s left goes to things like, do I want to reduce fees on something? Or do I want to give raises or bonuses? Or do I want to invest in technology, whatever it happens to be, but it’s a very simple thing. And of course, I have a huge spreadsheet that’s more convoluted than that. But that’s where I start. It’s very, like, here’s where here’s what our revenue is right? Now. Here’s what our profit goal is, and here’s what’s left and then you start to figure out, okay, but I never touched that profit goal ever, ever, ever, ever, right? Because I have that lump sum at the bottom that allows me to sort of play with whatever it is I want to play with.

CHIP: Right? And you really, you also need to know it on the client and project level as well. Right? So absolutely. You certainly need to know it on an agency level but you do need to know it because we all have clients that are require far more work than others even if they’re the same price point. And so understanding that I’ve got you know, spreadsheets and stuff that you can use to figure it out, but as a general rule of thumb, if you can figure it if you can price yourself so that you take your actual cost your staff cost your out of pocket costs all that and if you multiply that by somewhere between two and three, that’s probably a good range to have your pricing at so if your cost is 5000, then you should probably be charging 10 to 15,000 to the client and that will help cover you know, your overhead expenses, your cost overruns and also give you a healthy little bit of profit. So it’s it’s a you know, it doesn’t work for all agencies, but I would say most agencies that I’ve seen if they price somewhere in that two to three X Window you know, they at least won’t get into any trouble. Let’s put it that way.

GINI: And uh, you know, what I like about that too is it allows because you always have Have a client a prospect who negotiates and allows you to say, look, this is just how much it costs, right? So you can and then you’re not undercutting yourself just because the client is trying to negotiate with you. Because a lot of clients don’t understand that we get paid for our time. And if they undercut our time, we can’t scale time. They can do it, they can make more widgets, we cannot make more time. So I think it gives people the confidence to be able to say, Look, that’s just how much it costs. I can’t do it for any less. If you want it for less than that, then we’re going to have to take certain things out. And I think it gives I have found it gives agency confidence, able to assess just how much it costs.

CHIP: Right. Right. No, absolutely. And you have to be honest with folks and if you are if you’re going to make price reductions, you need to make scope productions, you need to you need to help folks understand that there are absolutely trade offs. And you know, I mean, we’re honestly we’re way past the point of this current crisis where any agency should be dipping into cash reserves. for, you know, trying to put off difficult decisions or to take the easy way out by underpricing or things like that. I mean, you know, we this has been going on long enough that you need to be running a business that’s sustainable at its current rate. And so that may mean making some really tough decisions about costs or headcount, or those kinds of things. It may make some tough decisions about particular clients. I mean, if you’ve, if you’ve got clients, you’re dramatically over servicing, you may need to look at those right now. Because, you know, yes, it feels good to get the revenue in there. But if you’re underwater on it, now is not the time for that. So you need to be running a sustainable business, an approach where you’re out there, you know, underpricing, either on your existing client base or renewals or new business. It’s bad for you. It’s bad for the industry, and it will come back and bite you in the tuckus later on. Yes, it

GINI: will. You will never ever,

CHIP: ever have to absolutely And so I think that probably you know, to keep my blood pressure in check, we’ll call this episode to a close. But, you know, hopefully everybody is is now saying yes right on we are not going to underprice ourselves now or ever. And if so that we’ve done our job here.

GINI: And so his Steve, thank you for, for writing the article and engaging the conversation, starting the conversation.

CHIP: Absolutely great conversation. And so that will draw this episode to a close. I’m Chip Griffin,

GINI: and I’m Gini Dietrich,

CHIP: and it depends

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