Episode 181

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We talk to clients about positioning every single day. We walk them through differentiation strategies. When they don’t take our advice, we walk away shaking our heads. However, guess who is lousy at taking our own medicine!

I say this all the time, but it bears repeating: Being a generalist is not going to cut it in today’s marketplace. Getting clear on your subject-matter expertise – the heart of your differentiation – has never been more important. I don’t think there is a way to overstate that point.

On episode #181 of Build a Better Agency, I talk with David C. Baker, who has seen it all as a consultant, often working with design firms and agencies. It’s why he wrote the book The Business of Expertise: How Entrepreneurial Experts Convert Insight to Impact + Wealth.

He speaks regularly on more than 70 topics relevant to entrepreneurial expertise and also appears as a guest on many entrepreneurial focused podcasts.

What You Will Learn in This Episode:

  • The most egregious mistake agency owners make
  • Why “seats on the agency bus” does not always equal success
  • Why establishing subject-matter expertise is more important than ever
  • The ideal numbers of prospects and competitors that define strong differentiation
  • How to measure and demonstrate your subject-matter expertise
  • Why your geographic reach is an important metric
  • Why employees are not as interchangeable as they once were
  • How to elevate training in agency culture
  • Why 85% of agencies are niched vertically
“Bigger is not always better. Now you’ve got to keep more bodies fed, and that financial pressure feels like growth, but you’ve just created this bigger machine.” – @david_c_baker Click To Tweet “As you differentiate, you're going to find that there's a smaller universe of capable employees who can work for you.” – @david_c_baker Click To Tweet “The agencies that seem to be dying intellectually are the ones that have employees who've been there 13, 18 years, and there's not constant fresh blood.” – @david_c_baker Click To Tweet “We operate from a scarcity mindset. We're terrified that we're not going to have enough opportunity.” – @david_c_baker Click To Tweet

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Ways to Contact David C. Baker:

Speaker 1:

Are you tired of feeling like a lonely light housekeeper as you run your agency? Welcome to the Agency Management Institute Community, where you’ll learn how to grow and scale your business, attract and retain the best talent, make more money, and keep more of what you make. The Build a Better Agency Podcast is now in our third year of sharing insights on how small to midsize agencies survive and thrive in today’s market. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody. Drew McLellan here. Welcome to another episode of Build a Better Agency. If you have spent any time with me listening to the podcast before, been to any of our workshops or really done any homework at all about what Agency Management Institute believes, you have probably heard me say more than once that it is very difficult for an agency today to be a generalist, that in the marketplace as crowded as it is today, and as complicated and sophisticated as marketing is getting, that it’s very difficult for you to get on a potential client’s radar screen if you don’t differentiate yourself.

And I believe that one of the ways, one of the most important ways for any agency to differentiate themselves is to define who they are and who they’re not. And in many cases, that is about who we serve. So for some agencies, they may niche through a deliverable, so, “We’re an SEO agency,” or, “We’re a web dev shop,” or “We’re a PR shop.” Other agencies may differentiate themselves by understanding an audience. “We are the agency you come to when you want to reach millennials, or you want to reach men over 55, or Hispanics.” And then the third, and probably the most common way to niche is by industry. So, “We are subject matter experts when it comes to the pharma industry when it is targeted at women over 50.” Or, “We are the subject matter experts when it comes to highly considered over $50,000 expensive equipment for agriculture or construction.” Those sorts of things.

And I talk about this all the time and I do believe that this is the way that agencies need to be thinking about themselves, but I also understand the difficulty of it. I understand that it’s difficult to leave money on the table. I understand that it’s hard to turn business away. I also think it’s very difficult, once you decide you do want a niche, what do you do with the clients that you already have that don’t fit the niches that you’ve defined? So I’m not suggesting that this whole niching idea is easy or simple, or even that it happens quickly. But I am suggesting to you that if you want your agency to be robust and profitable for years to come, this is something you need to seriously consider.

It is very difficult to survive and be a generalist today. So that’s why I invited David Baker to be on the show. So many of you are familiar with David. He runs a company called ReCourses. He owned an agency for a few years back in the late ’80s, early ’90s. And since then, he has been a consultant working with design firms, agencies of all shapes and sizes, basically anyone who runs a consultancy side kind of the business. And David has written a great book called The Business of Expertise, and it’s really all about this idea of, how do you define the subject matter expertise that you can own? And he’s got some great qualifiers, some things that have to be true for you to know whether or not this is a viable niche for you to consider. And that’s what we’re going to focus a lot of our attention today in our conversation.

I also want to tell you that I think David produces one of the best newsletters that goes out to agency folks on the planet. So if you have not gone over to davidcbaker.com and signed up for his newsletter, I strongly recommend that you do that. But in the meantime, let’s dig into this conversation of how and why should agencies niche? And how do you know if the direction you’re headed is a healthy direction for your agency? So this is one of those conversations that I know could easily go on for three or four hours so I do not want to dilly or dally, let’s just jump right into it. So, David, welcome to the podcast.

David Baker:

Thank you, Drew. It’s just so great to be here. I listen to your podcast all the time, and maybe I don’t know if I’ll listen to this one or not, but I sure do enjoy your podcast and I’m really grateful for the invitation to be a part of it.

Drew McLellan:

Isn’t that funny? I’m like that too. When I’ve been a guest on one, it’s harder for me to listen to, even if it’s one of my favorites. So I understand.

David Baker:

I hate my own voice. That’s part of it. Don’t we all hate our own voice? I just can’t stand to listen to myself.

Drew McLellan:

Well, I don’t know. I think that’s true of everybody, but I don’t sound like me to me. I’m sure I sound like me to everybody else, but to me, it’s like, “That’s not me.”

David Baker:

Right.

Drew McLellan:

Yeah, yeah. So you have been in the agency advice game for a long time. Tell everybody how you came to have that expertise and to decide to share that expertise.

David Baker:

Well, I owned my own firm for six years, and I’m not advising other firms because my firm was amazing. It was not amazing in any sense. It was a very typical, very average firm.

Drew McLellan:

And when was that, David?

David Baker:

So that was ’88 to ’94. So it’s been a long time, yeah. So 24 and a half years. And then I got into this through a strange set of circumstances, actually through a connection with Cam Foote who runs Creative Business, still a publication that’s out there. And he asked if I would be interested in doing some things for him. And the deal was I’d give him 10% of everything I made. And I didn’t think would go anywhere, but very quickly it took off so that it really took over my entire life. And so I’ve been doing this full-time now for 24 and a half, almost 25 years.

Drew McLellan:

So I’m curious, how do you think, or what do you think, so you think back to the early days of your advising 25 years ago, what was the big concern for agency owners back then? And is it the same or different from what you see today?

David Baker:

It’s very different, I think. Not only is the world that we’re serving so different, but the types of people that are running firms, very different. Back then it was, “Should I have a website?” This was before the world had been Googlized, and so all of our competition was basically local. So we hated everybody in our market and we were trying to win those battles. And that’s probably the biggest thing that’s changed, in that now the world is really our oyster, and thinking through positioning and lead generation seems to be really top of mind for people nowadays.

Drew McLellan:

So if you could wave your magic wand and you could change agency owners so that they stopped making what you believe is the most egregious mistake that they make as business owners, what mistake would you erase?

David Baker:

Oh, wow. Now, you’re catching me off guard here. Right? I think probably this is the one that comes up so much, and it’s this notion that they have to grow to be substantial in their marketplace. I wish I could wave that magic wand and help them get to the point where they understand exactly the implications of size, as in, “What does it mean for me, my role as a five-person or a 40-person firm?” Accept that and embrace it.

Drew McLellan:

And decide which one they want, right? Because I think you’re right. I think a lot of times they add more bodies and then they don’t love their job as much anymore.

David Baker:

They don’t. And then they find themselves feeding this machine. A corollary to this is every time they get more opportunity adding capacity so that then it just increases that pressure. “Now we’ve got to keep more bodies fed.” And that the father of all this compromise is financial pressure, it feels to me, and growth drives that because they’ve created this bigger, fatter machine. So that, I don’t know, I might have to go back and answer that question multiple ways, but at the moment, that’s the one that really hits me.

Drew McLellan:

In our work, I see the financials of all the agencies that are inside one of our networks, and I got to tell you, it’s not about size. And in fact, some of the big ones would kill for the profitability percentage and the net profit dollar-wise of some of the smaller ones.

David Baker:

Right, exactly. And if you don’t mind, I don’t want to take us too much off track, but I think one of the most amazing things about the work that you do and the work that I get to do as well is that we get to draw correlations between like systems and processes and positioning and financial performance. So we’re actually seeing, we’re not just reading something on a website and making assumptions. We’re actually seeing the implications of the advice. So you give an agency advice and you know whether it works or not. I think that’s a really rare window into how this works.

Drew McLellan:

Yeah. Well, I think it’s one of the privileges of the work that we do, is that we get to see the net result of when we’ve given good counsel and when we’ve coached someone to the desired outcome, we get to see the results of that, which is a more profitable agency, a more relaxed, happier owner getting to do the things that they love to do. And I think you’re right. I think for a lot of agency owners, they still equate seats on the bus with success. And I think they really have to rethink that, especially in today’s world where a lot of agencies are really moving to a hybrid model where they’re having to accept the fact that they’re not going to be bigger in terms of head count, because they’ve gotten smarter in terms of how they meet some of those client needs and demands with partners and contract labor and things that aren’t a full-time equivalent.

David Baker:

Right. And as clients take over more of the implementation away from the agencies themselves, there isn’t as a bigger need for a huge staff. And so they’re moving upstream, which means they don’t need as much people. And in another world, that might be viewed as a negative, but it’s really not a negative at all. I find it interesting, you go to a conference and you start talking to somebody, or you can overhear two agency principals talking to each other. And one of the questions that inevitably comes up is, “Where are you?” Of course, that’s easy to answer. And then, “Well, how many people do you have?” And then based on how they answer that question, they start to listen differently. If it’s like a 50-person firm, they listen more intently. If it’s a five-person firm, they’re not quite as interested. And that’s sad to me because some of the smaller firms are the most well-run most profitable firms as you said.

Drew McLellan:

Absolutely. I think a lot of this then leads right into the conversation, which is the crux of your book, which is this idea of establishing a subject matter expertise and owning a positioning for your agency. And so I want you to talk a little bit about the core premise of why that matters to agencies. And if you will, comment on, do you think it’s more or less important today?

David Baker:

It’s clearly more important than it ever has been. And I see that continuing to move in that direction. So the point of the work that I’m trying to cover in this book is that we need to craft a positioning so that we are less interchangeable in the marketplace. If we misunderstand the role of great positioning and lead generation though and we think that it’s about staying busy, then we are not going to listen in the same way. Really great positioning, great lead generation is about delivering a price premium for your work. And we can’t turn this into a price premium unless the client doesn’t have many options. They need to view us as one of two or three or 10 options, which justifies. And then it’s not just the positioning, but there’s also personality and process and all of that stuff. So it’s really about turning a position in the marketplace that’s very difficult to find elsewhere into a price premium.

Drew McLellan:

So really, I think you’re right. I think the commoditization of the business, the, “I have a Mac, I have Adobe tools, I’m an agency.” I mean, that, unfortunately there’s no barrier to entry to our business, and so I think you have to demonstrate how you’re different than someone else. And what I find interesting about this, and I’m curious about your take is, this is the same stuff agencies preach to their clients every day, all day, right? We teach branding and positioning. I mean, these are not new concepts. Why do you think it’s so difficult for agencies to wrap their… I think intellectually they get it. I think it’s the actual deciding to do it and then actually living the positioning that’s so difficult. Why do you think that is?

David Baker:

Part of it is that they’re inside their own jars and they can’t read their own labels, but it’s much bigger than that, because they could just work for each other, right? They could hire each other to do their own positioning. But I think it mainly stems from one thing, and that’s that as they walk down this path of positioning and try to narrow their influence in the marketplace, the biggest struggle is that they’re trying to draw a circle around as many things that they’ve done in the past as possible. So they’re afraid of leaving behind some of the hard-won experience that they have and it doesn’t make sense to them to craft a new positioning that doesn’t include as much of that as possible.

And so you end up with this horse designed by a committee looking thing where you just step back from it and say, “Wait a second, that doesn’t really make sense.” I mean, it makes sense if we’re trying to include as much of your past experience, but to somebody that’s never worked with you, they’re going to hear your positioning and it doesn’t make sense at all. Or they’re just simply… I read this website the other day from an agency, it said, “We’re a focused firm. We focus on B2B and B2C.”

Drew McLellan:

Wow. What’s left? Right.

David Baker:

I think, yeah, that pretty much covers all of it. Yeah, so it’s just this pressure to not waste any of their previous experience. I think that’s the biggest thing.

Drew McLellan:

Well, and I think too, I think it’s difficult because new business is challenging, and so it’s scary to leave money on the table. So I think of an agency, they’ll say, “Well, our expertise is in healthcare.” And I say, “Well, every agency has some expertise in healthcare. What part of healthcare?” “No, healthcare.” “No. Is it rural hospitals? Is it pharma for women over 50? Is it medical devices? What is it?” So I also think they struggle with narrowing far enough that it’s actually a differentiator.

David Baker:

Right, exactly. Some of the positioning choices we could have made in the past, like healthcare, like financial services, like tech, they’re just entering a room and now we see there are 13 doors here. We have to pick another door. Absolutely, yeah.

Drew McLellan:

And how far do you think, how narrow does the position need to be for it to be effective, do you think?

David Baker:

That was one of the pieces of research that I really enjoyed conducting for the book. So if we envision this firm that’s not differentiated at this point and let’s say they’re on the far right here and they’re walking to the left. And as they walk to the left, they’re making more and more choices about where they’re going to focus. And at some point, they’re watching this light and the light turns green. The light turns green at a certain point and they’re walking, they keep walking, they keep walking, and then the light turns red again. So there’s this beginning and end, and somewhere in there is the right choice for them.

It’s a little bit too simplistic, but it starts by saying, “Okay, we need to narrow this down until we have no more than 200 competitors and no more than about 10,000 prospects.” So that’s when the lights turn green, we keep walking, we keep walking. And ideally, if we have enough courage, we are going to keep walking when there are fewer than 10 competitors or fewer than 2,000 prospects, qualified prospects, then the red light comes on again.

Now, sometimes those two things do not occur at the same time. I was talking about this the other day with somebody who wants to specialize in industrial marketing for industrials, and there are hundreds of thousands of potential clients out there and very few firms that specialize in it. What’s the message? The message is that these industrial companies don’t care that much about working with a firm that specializes in it. So here we have fewer competitors and many more prospects. So there’s different ways to interpret all that, but in general, we want to have 10 to 200 competitors, 2,000 to 10,000 prospects.

Drew McLellan:

And how do you recommend, or how do you work with an agency to get that data? So is that subjective? Is that something they can actually quantify with research or in some other way, or am I really ballparking?

David Baker:

In some ways you’re ballparking that it’s easier to answer the question about how many competitors there are because you’re crafting a positioning for yourself that isn’t emerging from thin air. You’re already in that space, you know who [crosstalk 00:17:26]. I can sometimes answer that question, and of course, Google’s our friend. On the prospect side, that does involve some significant research, and we have to narrow that down too. You and I talk a lot about what makes for a qualified prospect. They have to be willing to spend this kind of money, they have to have used a firm like yours before, on and on and on. So that’s a little bit touchier.

We can go a little bit by instinct, but then I usually start with Data.com where I make all kinds of choices there and see how many prospects we have. I was doing this last week with a firm and there were 7,200 and some, so a perfect number. But it does require some research, for sure.

Drew McLellan:

As you’re leading an agency through this and you say… Because I am imagining my listeners when you said you stop when there’s about 2,000 prospects. And to them, that probably seems like such a small number. So I think part of it is I think agency owners, it’s a little like going to dinner with somebody at an all-you-can eat buffet and they load up their plate like they’re going to eat for seven days. Right? I mean, I think sometimes when it comes to new business, our eyes are a lot bigger than our stomachs. And agency owners don’t really do the math to understand you don’t need a lot of new clients. You need a few right-sized, good fit clients. So how do you talk an agency owner through the thought process of, “2,000 prospects is plenty for you?”

David Baker:

We can do a little bit of math, and then we have to do a little bit of psychology, and maybe added with some bourbon, I don’t know. But the math is that in professional services, and particularly in our space and the marketing space, you can safely assume that you can lock up 1% of the marketplace. So 1% of 2,000 is 20, and that is a big enough client base. So if you do everything right, so that’s the math that helps you relax just a little bit. The psychology comes in, and I’m not a psychologist. Goodness, I’ve worn out three of my own just trying to become a little bit more mentally healthy. And those of you listening here, hold your comments to yourself on that one.

Drew McLellan:

Right. So it’s good that this is a monologue, not a dialogue. Right?

David Baker:

Yeah. We operate from such a mindset of scarcity we’re terrified that we’re not going to have enough opportunity. That’s why… I’m sure you’ve seen the same thing. If I switch gears just a little bit; so let’s say we have a complete proposal where there’s no question about scope, the only thing missing is a price. And I make three copies of that, print it out three times and I put the three different stacks in front of three different people. One’s a principal, one is account person, one is an internal project manager.

The principal will invariably price that the lowest because they’re thinking of payroll. They’re thinking of, “Oh, my God, I’ve got to keep this train running.” And I don’t know exactly when this flips, but somehow the marketplace, not me, not you, the marketplace has to give them the confidence. And when they’re in the early days of positioning, they don’t yet have that confidence. And so it is terrifying. It’s very hard for them to make a bold enough choice.

Drew McLellan:

Right. Well, and typically, in a lot of agencies, they’re so far away from the work that they don’t really know anymore how much it takes to get it done. And to your point, they’re thinking, “Well, I’d rather have $5 in my pocket than no dollars,” even though it may take $8 to do the work.

David Baker:

Right. And they sometimes have overhired so they’re not in a position where they’re consistently turning work away. They’re accepting almost all the work that comes to them. Yeah, exactly right. So they’re thinking, “Okay, I know I should price this at $100, but I’m going to price it at 80 because this way I won’t have to lay people off.” And it just feeds itself. And I want to break that cycle. I want people to be running firms where they’re consistently turning work down because it’s not a great fit and not finding ways to say yes.

Drew McLellan:

One of the things that I talk about is if about a third of the time, the clients or the prospects don’t say no because of price, it means that your price is too low. I mean, if everybody says yes, then what that means is you’re leaving money on the table.

David Baker:

Yeah. It’s not a good sign, right? We want to interpret it. It’s a bad sign. Or if you’ve mentioned a price to a client right in a meeting and they immediately accepted and it’s like, “Oh, darn, man, that was too low.” Then yeah, your pricing should always terrify you. And it’s not terrify, maybe just make you nervous is probably a better way to say it. And as soon as you get comfortable with your pricing, you need to raise it a little bit more on the back of brilliant positioning and great research and all that stuff.

Drew McLellan:

Well, and I think when you believe that you are charging a premium price, I think there is a psychology that means that it reminds us that we need to be doing really good work. I think it’s easy to phone it in for clients when you feel like they’re getting a bargain.

David Baker:

There’s just something that allows you to sleep so well at night when you’re treating the client well enough so that it’s not a distraction. You’re not hiding poor positioning by over-servicing the client. So you’re treating them well enough so it’s not a distraction, and you are courageous and you’re coming up with concepts. It’s clear that you even care a little bit more than they do, and you have just done great work. And you don’t even care how the client responds all that much because you’re so confident in the work that you’re doing. That’s the kind of feeling that I want to replicate with agency owners out there.

Drew McLellan:

So if agencies are saying, “Okay, I get it, I need to lock into a position, I need to really define my subject matter expertise.” I know you have some rules, if you will, or some steps that they can take to evaluate their position. Can you walk us through a couple of those?

David Baker:

Sure. And some of those you could undertake beforehand. One of them, and probably the best one to start with is this number of competitors and number of prospects. The other one, and this is the one that’s a little bit harder to explain to me, but it just resonates so well in my head. And I just call it the “drop and give me 20.” So you pretend that you’re on the army training field and you do something wrong and the sergeant could say, “Drop and give me 20 pushups at the moment.” Or you’re on an athletic field and somebody says, “All right, run 10 laps.”

So the idea is that I’m on an airplane, I’m sitting next to somebody and I’m curious about what they do for a living because there’s this delay. And I ask them, “What do you do?” And it’s like, “Oh, that’s interesting.” You don’t know a lot about it, but you’re intelligent a fair bit, you’re well-read and so on. But in the ensuing conversation, you learn 20 things. That’s the “drop and give me 20.” You have 20 aha moments. And you’re intelligent and you’re pretty well-read, but you have 20 aha moments about their field that you learn immediately. They don’t have to go look them up. They know them off the top of their head.

Do you know those things about the positioning that you’re putting out there publicly? Where I pretend for a