Cost-cutting is mistakenly being used too much as a driver by today’s advertising and marketing professionals, says Tim Williams. It is valuable brands that increase profit and profit is the only metric that counts.
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 advertising and marketing professionals. Brands and agencies alike are currently 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. A recent study published in the US trade press by Provoke Insights shows that almost half of large marketers indicate ‘cost’ as their main motivation in initiating an agency review.
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.
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 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. This phenomenon is indisputable, having been demonstrated numerous times by research and brand consultancies the world over.
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 programmes that don’t do much to boost revenues can increase margins by differentiating brands and thus allowing companies to raise 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 charge higher prices over the long term.
The value of premium pricing is significant. A study by McKinsey shows that reducing costs improves a company’s profits only marginally, whereas increasing the brand’s price improves profits dramatically. In many industries, a 5% improvement in price can result in as much as a 50% improvement in profits. 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 bestseller Priceless: The Hidden Psychology of Value, observes that “Because profit margins are small to begin with, adding a per cent 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 programme.
Seasoned marketers know it’s possible to grow sales and market share and still be unprofitable. Some studies show that fixating on market share instead of profits can actually decrease profitability. ‘Buying’ sales and market share 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.