When we met recently, the topic turned to pricing. A few of the CEOs whose businesses are in the service sector led the discussion. Lots of hand-wringing over procurement, low margins, demands by buyers for lower fees (without sacrificing quality), 'Dutch auctions', incentive-based procurement folks and the like. Wow. What a fun meeting it turned into.
What was fascinating, however, was what we believe caused the sudden pressure on pricing in corporate America: Walmart. Yeah, sure, blame it on the world's largest retailer. As explained in "The Walmart Effect" and elsewhere, Walmart's low prices might be good for the consumer, but the chain reaction when it starts putting the squeeze on suppliers can be felt far and wide. Follow me here. A Walmart buyer tells a supplier that the box of detergent it's been purchasing for $2.53 now has to be purchased for $2.39 -- or else. The "or else" is Walmart will take the detergent off of the shelves and replace it with a competing brand at that lower price. So the detergent manufacturer has to go back and figure out how to drive even more efficiencies in order to keep the Walmart customer and maintain profit margins.
The likely scenario is that the detergent company does a number of things: exacts pricing cuts from its suppliers, like the chemical manufacturer, box supplier, machine supplier, accounting firm, law firm -- and it probably even cuts its labor costs by firing some employees. It also drives consolidation, as some companies resolve to gain pricing leverage over Walmart by acquiring the competition so they can dominate a category. Point is, the efficiencies have to come from somewhere -- and that somewhere is the businesses and employees that serve them, and the competing products that disappear through consolidation.
The squeeze started with Walmart later extended to many of its retail competitors -- and now companies of all kinds mimic the way Walmart buys.
It didn't happen overnight; Walmart has been around a while. Add in the recession, which brought out bad behavior in buyers in all sectors, and the "l-can-get-it-cheaper" mentality has flat-out permeated our economy. It's happening to accounting, law and architecture firms. Manufacturers in every sector.
And look at what has happened to the advertising industry. Agencies are being asked to lower their fees to levels not seen in many years; clients are demanding to own intellectual property in reviews; agencies -- especially smaller ones -- are being bid out for projects, not strategic, retained relationships; clients are often hiring agencies based on the lowest bidder, instead of the best idea; procurement teams are insisting on seeing what agencies pay their employees, so they can adjust the compensation accordingly. Walmart and other low-price retailers have taken this approach to pricing for many years. Did it finally rub off on the rest of corporate America?
I believe the best way for small-to-mid-size agencies to protect the fees that we earn is to shift to the offensive:
- Improve the product we offer by hiring even better talent.
- Innovate relentlessly. You can charge a premium when you're not just like everyone else.
- Measure what we do, and structure compensation so that we can be rewarded for great performance. Make clients a partner in the success and everyone wins.
- And just say NO to Dutch Auctions, and those who insist on owning our ideas without properly paying for them. It's plain disrespectful to the value we bring and the careers we've dedicated ourselves to.