by Alistair Mokoena (@AlistairMokoena) One of the occupational hazards of being an economics major is that I tend to use the law of supply and demand to explain many of the things I observe. The basic premise is that, when price is high, quantity demanded is low and vice versa. The question I’m grappling with is whether or not this applies to advertising services. Do the cheapest agencies get the most work and do expensive agencies lose out?
At face value, there seems to be a direct relationship between size and costs. In other words, the larger your agency, the greater your costs and therefore the higher your price. This is not always the case. It is possible for large agencies to contain their cost base. Some small- or medium-sized agencies are more expensive than larger agencies. Size is thus not the only determinant of price.
Flawed argument
Pricing is directly related to an agency’s choices regarding overhead recovery and profit margin. These determine whether an agency adopts an economy price-positioning, a mainstream price-positioning or a premium price-positioning. So the argument that larger agencies are always more costly to run and more expensive is flawed. Smaller agencies can be more expensive than larger agencies.
So who gets the bulk of the briefs out there, economy agencies, mainstream or premium-priced agencies?
The psychology around pricing suggests that consumers and clients generally associate a higher price with higher quality. A quick look around our industry will tell you that the cheapest agencies are not necessarily the busiest. Cheap is often treated with suspicion. Economic theory tells us that some goods are in high demand precisely because they are more expensive and some remain in high demand despite their high price. These are referred to as Veblen brands. They are able to sustain high demand even when they take a price increase.
Perceived superior quality
These goods are seen by clients as more aspirational and more desirable because of perceived premium quality. And this perceived superior quality is cued by premium pricing. The same may be said about advertising agencies. Premium-priced agencies generally tend to do better than cheaper agencies. They get the bulk of the work and that’s how they earn the title of “tried and tested.”
The thing that worries me is how will economy- or mainstream-priced agencies ever get to be tried and tested if their price-positioning deters clients from giving them work?
The truth is that discerning clients look for value instead of cheap. Success goes to premium-priced agencies that are willing to give tangible value back to their clients, not to agencies that are willing to undercut everyone on price. It’s better to be known as an agency that offers superior value and not greater discounts. Discounts often suggest that you were over-priced to start with. Value suggests that you are willing to go the extra mile to ensure that your client succeeds.
When the economy slows down
We’ve established that premium-priced agencies defy the basic tenets of the law of supply and demand by being Veblen goods. Their premium pricing does not discourage quantity demanded. But what happens to advertising spend when the economy slows down? Do clients keep investing in their brands during recessionary times or do they cut marketing spend?
Unfortunately, ad spend currently does not defy the laws of supply and demand. When income drops or budgets are cut, it’s the first to go. In economic theory, advertising is referred to as a normal good. A normal good is one where demand increases when income increases, and decreases when income decreases.
But what are we as the advertising industry doing to reverse this trend?
Challenge to advertising industry
Conventional wisdom says when times are tough, consumers spend less money on brands by either reducing consumption of their favourite brands or by downgrading to cheaper brands. Economic theory says Veblen goods defy this trend by being price- and income-inelastic. The challenge to all of us in advertising is to make the brands we work on the same.
We need to make our brands must-have items in every shopping basket; they need to deliver disproportionate value to consumers. Over and above the functional needs that they address, these brands need to stand for an ideal or a belief that consumers are not willing to sacrifice. Any product of acceptable quality may fulfill a functional need but only a few brands may satisfy an emotional need that is held in high regard by consumers. That’s how you insulate your brand from fluctuations in price and income.
Alistair Mokoena (@AlistairMokoena) is a Unilever-trained chartered marketer with lots of blue-chip marketing experience who switched from client- to agency side at the end of 2012. He is currently managing director of Ogilvy & Mather Johannesburg; previously, he was MD of FCB Joburg. One of his favourite pastimes is driving around in the bush, photographing wild animals. Alistair contributes the monthly “The Switch” column, covering relationships inside agencies and between agencies and clients, to MarkLives.com.
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