Ben Quigley, Group Chief Executive at Everything Different argues that as an industry we are on a treadmill of cost-based, input-oriented price negotiation. So what can we do to change this?
Nelson Mandela is remembered as one of the best negotiators in history. In his book, Bargaining with the Devil: When to Negotiate, When to Fight author Robert H Mnookin cites Mandela’s patience, tenacity, pragmatism, and strategic thinking: “He rejected the simple-minded notion that one must either negotiate with the Devil or forcibly resist. He did both. He was willing to make concessions, but not about what was most important to him. With respect to his key political principles, he was unmovable.” Mnookin noted Mandela’s ability to persuade the Apartheid regime: “He ultimately achieved through negotiation an outcome that could never have been accomplished solely through violence or resistance.”
So what’s this got to do with advertising? Well, Michael Farmer’s seminal presentation on ‘Agency Pricing and Workload’ at last year’s IPA Commercial Conference, revealed there’s been a massive 128% increase in agency output per head of staff between 1992 and 2014. We are working more productively than ever before. Yet, in the same period, pricing has actually decreased by 62%, as agency fees have come under pressure progressively from clients, procurement, peers and competitors.
The 2016 IPA Agency Remuneration Survey tells us more about the state of pricing strategies and negotiation skills within advertising today: 90% of agencies agree they need to improve strategic pricing, selling and negotiation skills in order to improve commercial performance. So the industry accepts it has a problem and needs to change the status quo. However, only 20% of IPA member agencies currently train their staff in strategic pricing. Furthermore, only 23% consider strategic pricing to be a core agency discipline. Of those that do, networks like WPP are leading the way in this respect. As an industry, we are on a treadmill of cost-based, input-oriented price negotiation. A race to the bottom of our own making.
Agencies create value by offering specific solutions to well-defined target markets that transform clients’ fortunes. We deliver value through effective organisational structures and production models. And we capture value with defined cost structures and innovative revenue models. Actually, most agencies are missing the last bit about ‘innovative revenue models’. They simply look at cost and turn it into a price, as if selling a commodity such as bricks.
In any transaction, there’s a seller’s profit and buyer’s profit – price sits somewhere between cost and value – hence the importance of a strategic approach to pricing and negotiation. In order to establish a potential negotiating leverage, an agency needs to establish the clients that it could, if needed, walk away from. At my agency, Everything Different, we classify prospects according to their ‘fortune’, ‘fame’ or ‘fun’ potential.
According to Tom Kinnaird, Head of Commercial and Procurement Services at WPP, procurement teams exist either to get the best deal from the agency the client wants, or to set the rules of the game in the first place. In this respect, negotiation means knowing when to say ‘no’ too…even when they keep asking. And when to use other levers like cost avoidance, process improvement, efficiency and value added to take the pressure off a straight discussion about fees. The potential wins are huge: a 1% price increase through better negotiation can improve agency profits by a whopping 11%, whereas 1% reduction in costs only improves profit by 3%.
Warren Buffett said, ‘the single most important piece in evaluating a business is pricing power. If you’ve the power to raise prices without losing business to a competitor you have a good business. And if you have to have a prayer session before raising the price by 10% then you’ve got a terrible business.’
In business, as in life you don’t get what you deserve, you get what you negotiate. In 2016 the IPA achieved chartered status and advertising is now officially a profession. What better time for us all to professionalise price negotiation too?
Ben Quigley, outgoing IPA Chairman England & Wales and Group Chief Executive at Everything Different.
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Last updated 27/06/2017