Strategic Pricing

There’s a t-shirt that reads: “I wish the dollar store sold gas.”

The punchline about gas prices is funny now (sort of), but it didn’t make sense in the 1960s when gas was 30 cents per gallon.

It still wasn’t funny in the 1980s when gas first topped $1.00 per gallon because most gas pumps were not yet designed to account for the extra digit in the price (the amount rang up as per “half” gallon instead, or $.50). So, the total amount due after fill-up was double what was shown on the pump.

The relevance of humor changes over time. As do prices.

Chief Executive magazine reports that more companies plan to raise prices this year than they did last year… on average about 6.5 percent more. And high-tech industries lead the pack at 7.5 percent more, according to the survey of 333 CEOs¹.

This survey question was framed in the context of a recession environment… Have you increased or considered increasing prices to help cope with the current economic conditions?

Drew McLellan, CEO of the Agency Management Institute, agrees with the timing for price increases. The AMI is a peer group and business-advice association for marketing agency owners. And a rate hike at those agencies is overdue, as reported on his podcast series².

Here’s an AMI podcast excerpt, paraphrased:

The cost of doing business is getting higher for all of us [marketing agencies]. Cost of employees is for sure higher, and benefits are higher. But most of us have not raised our rates. Historically, agencies have been at about $150 an hour. I’m suggesting that everybody go up to at least $175. For those with larger clients that are used to paying bigger prices, rates could easily go to $200².

—Drew McLellan, CEO, AMI

Of course, all agencies are different and so are their service offerings and billable hours. A rate increase means something different to everyone.

Case in point, some agencies offer commoditized production services. Maybe it’s an hourly rate for drafting organic social media content or creating graphic illustrations or doing programmatic media buying or web development. Maybe there’s a separate rate for headier offerings, such as industry research and strategy and road-map development.

That is, within each agency, there may be tiers of pricing to reevaluate separately. Not just a blanket solution.

Consider This

With advances in AI, can some of the more commoditized agency services be provided via a bot? Or bot-assisted? It’s not too hard for an AI app to spit out some social media hashtags and simple (or complex) illustrations for page layouts.

And it doesn’t matter what those commoditized tasks are. Hashtags, illustrations, web-page templates, or otherwise. As more and more agencies automate with AI, the competitive pricing for those services will plummet.

So maybe “commodities” are NOT the place to raise prices.
Maybe it’s industry research and strategy and road-map development instead.

The more that agencies either want to free themselves from in-house production tasks or the more they have to free themselves, the more valuable strategy needs to become and can become.

The agency sets itself apart from the competition through its industry intelligence instead. It’s niche positioning.

The production can be relegated to an outsource partner. For example, web development can be provided offsite for a wholesale pass-along cost. A cost that’s less than staffing up in-house.

While the rates for what the agency is really known for can increase in stride.

One market paradigm that I take exception to is: Buy low and sell high.
I believe far more money is made by buying high and selling at even higher prices.

— Richard Driehaus, Chairman Driehaus Capital Management LLC,
philanthropist and founder of the Driehaus Architecture Prize