Many creative agencies compete on price simply because they haven’t considered an alternative competitive advantage.
The problem is that trying to undercut your competition when selling a high-value service can set you on the path to financial troubles, and an agency that’s unsustainable. Competing on price leaves you with narrow profit margins and difficult customers.
Here’s how to stop competing based on price and shift your focus to create a more profitable business.
So When Should You Cut Your Prices?
As a creative agency, the answer is never!
It’s extremely difficult to get a cost advantage in this space. This is a direct result of your largest fixed cost being people & their expertise, rather than goods that you can source for a discount.
Pay your team below the market rate and you’ll quickly find you are lacking in talent, delivering low-quality work to clients, and have high staff turnover.
Competing on price as an agency only means smaller profit margins and therefore limited growth. If you can't sign a client at your price point, don't be afraid to walk away - they're not a good fit for you.
Ward Off the Vampires
Every agency owner has had to deal with a vampire client at some point in their journey. These vampire clients question the price of everything and don’t see the value of anything. They are, therefore, extremely difficult to work with and although they may bring in additional revenue, they don’t generate a significant amount of profit - even costing your business money. They can bleed your agency dry!
When you stop competing on price, these vampire clients may fly elsewhere but if they aren’t generating profit, then that’s a good thing for your agency.
You can focus on attracting high-value clients who will instead contribute to your bottom line and allow your business to grow.
Start As You Mean to Go On
During the startup stage, it’s easy for agency owners to compete on price because they lack confidence in their offering and see low introductory prices as a surefire way to attract business.
Unfortunately, this won't start your agency off on the right foot and won’t bring you the profit margins that you need to grow and scale.
Instead, bake in the fact that you won’t be competing on price in your business plan and keep this intention at the forefront of your mind. Whilst it may feel strange rejecting clients willing to pay you in the short term, you’ll be far better off as your agency grows.
Track the right metrics
It’s common for agency owners to see ‘number of clients’ as an indicator of their success, driving the wrong strategies.
Think about it like this; you would rather have 10 clients generating you £100k revenue instead of 50 clients generating the same amount. Invest the time and effort you would spend managing 50 clients into attracting 10 high-value clients and you'll be much better off.
Identify the metrics you need to impact to take your agency where you want to, and track those exclusively.
Make Value Your Selling Point
Price and value are not the same. If you want to convert high-paying clients, then you need to communicate the quality of your offering to them. Creative agencies can be guilty of not practicing what they preach to clients!
Invest in your own marketing and messaging. Demonstrate your expertise to the market, and show up as the solution to the problems of your audience to earn their trust and demand higher prices.
Work To Find Your Optimum Price
So you now understand that you need to price your services for value and never discount your offer. But how do you find the price that puts real money in your pocket?
Finding your optimum price requires consistent testing, adjusting, and retesting to learn how many leads convert at a certain price point, and slowly increasing that price point until your profit : conversion rate is optimised.
A good starting point is to set a minimum (but not low!) profit margin you need your agency to achieve to support your growth plans and set a price that achieves it. You can then increase prices over time as you collect data on conversion to find the optimum price that maximises profits.
Summary
Competing on price is never an effective strategy for a creative agency and will often lead you towards financial uncertainty, a low-quality service, and a business that’s stressful to run.
It can be difficult to stop competing on price once you have begun to do so, so if you’re a new agency then start as you mean to go on and compete based on value from the beginning.
If you're running an established agency and still competing on price, it’s still possible to change your approach to give you more time, more money, and less stress. Re-evaluate your client base and let go of those vampires that are hard work. Work on your marketing and sales strategy to focus on quality and value, and onboard new clients at a profitable price point.