When Oscar Wilde penned his famous definition of a cynic — someone who “knows the price of everything and the value of nothing” — he might as well have been talking about today’s professional services executives.
This is especially true in today’s belt-tightening marketing environment, where brands and agencies alike are obsessed with costs at the expense of value, but in different ways and for different reasons.
On the brand side, this obsession manifests as relentless cost-cutting meant to shore up sagging brand growth and shrinking margins. Agencies, who are on the receiving end of this cost-cutting obsession, respond in kind by agreeing to reduced fees for the same scopes, leaving them less money to pay and keep good talent, eventually resulting in lower quality output and less effective work for their cost-cutting clients. A vicious cycle that impedes the prosperity of both parties.
The default purpose of marketing
Much has been written about the immense economic value of a strong brand, yet marketers now seem bent on trying to save their way to success. Given what’s at stake, it’s worth stepping back to explore the fundamental question of why brand building is so essential. The obvious answers — brand awareness, brand preference, even increased sales — don’t get to the heart of the matter. A strong brand is important because it commands a higher price. And the stronger the brand, the higher the price.
The investment companies make in branding is not just to sell more, but ultimately to decrease customers’ sensitivity to price. In fact, it could be argued that the default purpose of marketing is not to increase sales but rather to increase profits. More than anything else, profit is a direct result of protecting pricing integrity through powerful brand differentiation.
Even marketing programs that don’t do much to boost revenues can increase margins by differentiating brands and thus allowing companies to raise or maintain prices. In other words, while brand-building efforts may not always increase revenues in the short term, they produce the important result of allowing the brand to maintain its pricing structure over the long term.
The most effective intervention
A company’s pricing integrity is exceptionally valuable. Many studies have demonstrated that reducing costs can improve a company’s profits only marginally, whereas increasing the brand’s price improves profits dramatically. In most industries, just a 1 per cent improvement in price can result in a 10 per cent improvement in profits — or more. The 1% Windfall, a book by pricing expert Rafi Muhammed, is fully dedicated to exploring and explaining the power of pricing as a means of improving profits.
William Poundstone, author of the New York Times best seller Priceless, observes that “Because profit margins are small to begin with, adding a percent or two can boost profits immensely. Very few interventions can have such an effect on the bottom line.” No amount of cost reduction can improve a brand’s margins to the same degree as protecting and enhancing its ability to command a healthy price. And nothing is as effective in protecting a brand’s price as a well-conceived, well-crafted marketing program.
Healthy margins or unhealthy enlargement?
Seasoned marketers know it’s possible to grow sales and market share and still be unprofitable. Experience shows that fixating on market share instead of margin can actually decrease profitability. “Buying” sales through discounting isn’t growth at all; it’s merely a form of unhealthy enlargement.
Profit, not revenue growth, is the lifeblood of every commercial enterprise — not sales, not revenues, not growth, but profit. And one thing trumps all others in the business mix when it comes to profitability: the pricing integrity of the brand, upheld and supported by an unfaltering dedication to brand building.