What the agency model can learn from other markets

There is a lot of talk in marketing, and quite rightly, about the difference between price and value. But there is probably too little discussion about the difference between price and overall cost – in particular, the transaction costs of making a purchase.

To quote Wikipedia, 'Consider buying a banana from a store: to purchase the banana, your costs will be not only the price of the banana itself, but also the energy and effort it requires to find out which of the various banana products you prefer, where to get them and at what price, the cost of travelling from your house to the store and back, the time waiting in line, and the effort of the paying itself; the costs above and beyond the cost of the banana are the transaction costs.'

There is a good reason why marketers may disregard this. If you are, say, a detergent brand, and your products and your competitors' products are largely sold in multiple supermarkets, the transaction costs are broadly the same for everyone (though strong brands and packaging can significantly reduce consumers' search and information costs: distinctive brands typically make consumer decisions faster and easier).

In other areas of business, reducing transaction costs may be significantly more important than cutting prices. Sometimes there is a risk that people confuse or conflate the two – mis-attributing the success of low-cost or free competitors to low prices when they result from lower transaction costs. Low-cost airlines, for instance, are 'low cost' not only in the prices they charge but also in their pioneering of online booking, which reduces the pain factor involved in planning and booking trips.

THE LURE OF CONVENIENCE

Take the success of Metro. Is it solely popular because it's free, or is it popular because you can acquire a copy in 0.3 seconds without breaking your stride? And without the need to dig into your pocket for change, or to queue behind someone buying a month's Lottery tickets for a 200-member syndicate while you miss your train. Moreover, as you grab your daily free sheet off the rack, no one pesters you by suggesting you complement your reading with an unfeasibly large bar of chocolate.

Next consider the reaction of the music industry to digital piracy. It is absolutely true that illegal music held massive appeal because it was, well, free. But, in its smug way, the music industry was slow to spot the huge additional transaction costs it was imposing on its customers by requiring them to buy music in its conventional, physical form.

Imagine it is 1999 and you want a single track from the latest Metallica album. You can either (a) download it in three minutes in your underwear at 1am and transfer it straight to your iPod, or you can (b) wait until morning, get dressed, travel to a music shop, queue behind a couple of goths, pay £14.99 for a CD that bundles your favourite track with 13 unwanted tracks, take the bus home (another £2), insert the CD into your PC, rip the track and then transfer it to your iPod. Even had the illegal download cost £5, it would still have been a bargain.

And yet, for some years, the music industry refused to sell online maintaining that (b) was the only acceptable option. Its position was not helped by the fact that owning music in tangible form was no longer especially desirable to a younger audience (the packaging of CDs in a laughably named 'jewel case', a nasty piece of frangible plastic with no tactile virtues, can't have helped).

Over-reacting in the opposite way, online news media hastily concluded they must give away content since earlier attempts to charge had failed. This decision may have been another example of confusing price with cost. The pain of registering or typing a password is often far more of a deterrent than the pain of paying 2p to read a page. As iTunes shows, simple one-click micro-payments can still be made to work.

I can cite many more cases where transaction costs, not financial costs, are the real problem. Personally, I am driven almost insane by mainline London stations' practice of charging 30p to use their lavatories. In my case it is not the loss of six bob that pains me – scarcely an egregious sum to pay for the use of clean, safe, manned and generously Andrexed conveniences – but the need to extract two or three fiddly coins while wrestling with weighty bags and a weightier bladder. (My colleague Giles Rhys Jones suggests the system could be improved if you paid when exiting the loo and not on entry, since you would then be, physically and metaphorically, under less pressure.)

What of the fact that young people, famously reluctant donors to charity, become quite generous when you allow them to donate by text message? Or the fact that, in direct marketing, the best improvements are often obtained not by rewriting the proposition but by redesigning the application form (some charities now even enclose a 'nudging' pen with their solicitation)? The creation by Thaler and Benartzi (authors of Nudge) of a pension for the young where payment was made less painful by clever deferral (minimising loss aversion) – see http://tinyurl.com/plhoeb – is a now famous example of encouraging saving by reducing its emotional costs.

All this is vitally important to marketers. But I believe it is also crucial to understanding the future of their agencies.

In a sentence, too much attention is now being paid to reducing the price of what agencies do, whereas the real attention needs to be spent reducing the other costs.

TACKLING TRANSACTION COSTS

In the last few years, the splintering of agencies into different disciplines, and the fragmentation of media, have made the choice architecture (see http://tinyurl.com/q6lp7r) of our business vastly more complex and unwieldy. Decision making is time consuming. Coordination costs have soared. The menu of options has gone from being a McDonald's breakfast to that of a Chinese restaurant, with a bewildering range of options all noisily competing for limited budgets.

One role I hope the IPA can play is for its membership to become more complementary and less conflicting. To work out how to package what we do in a cohesive, complementary fashion rather than as a range of competing voices, presenting a self-organising approach to what we do.

While we do this, we might want to challenge a remuneration system that actually penalises efficiency gains, that encourages turf wars and that pays us not according to the value of what we do but to the cost of doing it. We should also have the courage to question tortuous client approval processes that impose huge transaction costs on the – at root – straightforward business we are in: of generating ideas that turn human understanding into business advantage.

There should be no issue with people being well rewarded. Ours is a business where £20,000 an hour (for the right hour) can be a bargain and £20 an hour can be a waste. The music industry wasn't at fault because of the high price of music – it was at fault because of the high cost of everything else.

ABOUT THE AUTHOR

Rory Sutherland is Executive Creative Director and Vice-Chairman, OgilvyOne London and Vice-Chairman, Ogilvy Group UK

[email protected]