One thing I hear frequently from senior agency leaders these days is how clients are constantly demanding more service for lower fees (usually in a tone that implies said clients are nothing more than ungrateful, mentally challenged, penny pinching wretches).

Perhaps not unnaturally, given my client background, I take a different view. I think such behaviour is inevitable given that the market for ad agencies bears all the hallmarks of one that competes almost entirely on price.

Price competition is not an aberration in markets; it’s the default competition mechanism unless strategies are employed to avoid it. We clients have wrestled with this beast for more than a century.

One route is to have a commonly agreed upon pricing mechanism. This is what kept ad agency fees out of price competition for most of the 20th century, with compensation at a fixed percentage of media spend, and it’s a mechanism that keeps realtors in BMWs to this day.

But there is a vulnerability: players losing market share can also lose their nerve. When that dam burst during the 1990s, price competition took hold.

Procter & Gamble’s and Lever Bros.’ response to having more than 400 price-cutting competing firms to deal with in the early 20th century U.S. soap market was to buy most of them up. This approach is somewhat reminiscent of that employed more recently by WPP, Omnicom, Publicis and Interpublic.

However, it did – and still does – create a new problem: what to do with the vast brand portfolios that result? The agency world has largely taken the route that Lever took: benign internal competition.

But that never really solves the price war problem, which can remain rampant between the larger groupings.

The only truly effective, enduring and legal solution to competing on price came from the P&G market statistics department, where it became apparent to then-president Neil McElroy that the Camay brand was losing sales – not to Lever Bros., but to P&G’s own Ivory soap.

His solution – brand management – led quickly to the price war-avoiding Holy Grail of segmentation. By targeting Camay at one cleansing need and Ivory at another, both could happily occupy different price points. Prior to this, all soaps had targeted every cleansing need, leaving price as the decider – a bit like all agencies targeting every client.

At first glance, it seems this segmentation can’t work in the agency world. Position yourself as the agency specializing in auto accounts and, thanks to client conflict concerns, you will only ever have one account.

However, you can regain pricing control by deciding the part of the customer proposition you will be the best at, protecting you from price competition with the customers who most value that attribute. Thus, L’Oréal and Estée Lauder compete by specializing in different components of the cosmetics offer: L’Oréal is unbeatable on science, while Estée Lauder is unbeatable on service.

Can this work in the agency world?

Yes, it can, but it’s currently found mostly within small, young agencies. Such agencies, due to the background and expertise of the founder(s), tend to have a unique approach to, and be uncommonly good at, a certain part of the job, be it planning, brand turnarounds, digital or whatever.

If you as a client desperately seek that attribute, then, within reason, you will pay their price. Maintaining that expertise as the agency grows is the banana skin. Agencies don’t grow organically, they grow in big leaps: win a big account and you have to recruit 50 people pronto.

Making the areas of uniqueness part of the DNA of the agency is next to impossible when talent is almost always imported en masse. Should that pitfall be avoided, the founders cashing out invariably signals the beginning of the end. A necessary component of any successful segmentation strategy is having the nerve to not try to be good at everything; it didn’t work for Ivory soap and it doesn’t work now.

Unless you can identify areas you are not going to focus on, and demonstrate why you are the best at what you will focus on, you don’t have a strategy and will keep dropping your shorts on price.

John Bradley is a former VP, marketing for Cadbury. He’s now an author and judging coordinator for the CASSIES.

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