Undercutting. What is it good for?

... absolutely nothin'! (Say it again, y'all)

A short while back, I pitched for a project that I ultimately lost. After putting together a comprehensive proposal and fielding numerous questions (which I have no problem with), I was given the unfortunate news that I didn't win the business. This much is normal and as with anything in life you win some and lose some. No problem there.

However, as I do with any pitch that I lose, I asked the (lost) client if they could share any particular reasons why I lost. The answer wasn't what I expected (i.e. 'it was so close, just between you and the other guy' or similar). Instead, the answer was that the other agency I was pitted against decided - at the last minute it seems - to charge the project at more than half of the original amount (which was on par with what I had quoted). That's 50% off the sticker price, folks.

What's more, I learned that this same agency had gone ahead and created initial visual design 'mock ups' earlier in the proposal phase. They had performed some sort of reverse spec work voodoo. They worked on designing for a website they knew very little about, presumably making wholesale assumptions about the site's intended users and/or statistics supporting certain design decisions, and passed it off to the potential client as a 'this is what your site will look like, isn't it pretty'. All very odd.

Now, this post isn't sour grapes, at all. But it is concerning. I realise that within this growing industry we have no codification or a defined set of 'do's and don't's' for winning new web design work, but I do take umbrage with the practices employed by the agency I eventually lost out to. Their methods, values and morals seem to be completely out of whack with anything I'm used to.

At this rate, what's to stop any agency/freelancer/studio from always undercutting their competition by gratuitously lopping off 50% or more from their original charge? What type of message does that send to potential clients about the value of the service they're about to receive, and ultimately the value of the industry as a whole when pricing can be so fluid and gutless? Similarly, what's to stop any agency or freelancer from spending their time creating ill-informed mock ups to sway potential clients who might be enticed by the nice colours and pretty pictures without considering the bigger picture?

I realise this might all be a common occurrence, and it might have happened to more web designers than I'm aware of. But it's a problem, and it needs to go away sooner than later.

What are your thoughts?