Tuesday, May 5, 2009

Is Cutting Prices Smart Marketing?

Obviously the competitors for stressed out coffee drinkers think so. In the face of McDonald’s spending $100 million on a new marketing campaign touting the quality of its coffee at a more affordable price than its competitors, Starbucks announced it is cutting prices on some of its drinks and Dunkin' Donuts followed suit.

In an MSN.com article, Jean-Pierre Dube, professor of marketing at the University of Chicago Booth School of Business, said it is “extremely important” for McDonald’s to advertise lower prices during the recession because they are less expensive than others.

This brings up a question for me. Is it smart marketing for agencies to lower their prices and promote that to prospects?

Everyone knows it’s more competitive out there. Large firms are going after prospects they wouldn’t touch if times were good. Yet, large firms have a cost structure that makes it more difficult for them to change or lower billing rates and client fees. Smaller firms don’t necessarily have that problem. They can be more flexible and more nimble. And, they can emphasize lower fees in new business presentations. Despite what we would like to believe, many (good) clients initially buy on price and that’s even more true today.

Some will argue that lowering fees or reducing billing rates, or “giving work away” cheapens the value of that agencies bring to clients. They say once you lower costs you can’t raise them. I don’t buy into that philosophy.

If you can establish a price advantage over a competitor (and still make money) why not use this to win the business, develop a relationship and look to increase the scope of work (and fees) over time. Since many agencies increase their billing rates annually anyway, why can’t you lower them and then increase them in years to come?

I think you can. And it may help you win the business!


Alessia said...
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Alessia said...

It's a kind of philosophy I share, but in different terms.
Clients and firms could be surprised by unpaid services you grant them: attending a trade fair for the entire weekend while the agreement just asks you to be there for one day; doing some digital P.R. even if you're not asked to; doing some more meetings with the journalists or spending more time to invite them at a press conference. Anything that goes beyond...

Price drops are extremely dangerous I think, and their raise too long sometimes (especially if the boss of your agency puts impossible targets in the budget objectives)..