The Waterfall of Differentiation

When it comes to positioning, David is still seeing creative firms failing to answer three essential questions in the proper sequence: category, specialization, and then secondary differentiators (or qualifying characteristics).

Transcript

Blair Enns: David, how long have you been doing this?

David C. Baker: 31 years last month.

Blair: Wow. I'm 23 years this month, so 54 years we've been doing this. Aren't you tired of talking about differentiation? [chuckling] Haven't we had this conversation, me, you, and all of our clients and everybody we've talked to over the last 54 years combined?

David: Yes. Sometimes I'm on a call with a client, and it's going really well, we're making a lot of progress, and they ask a question, and I'm thinking, "Weren't we talking about this yesterday?" It's like, "Oh no, that was with a different client." It was like, "Can I just send you the recording?" I don't know. It just continues to be really important, and this is just a deep source of consternation to me. [chuckles] People still aren't getting even some of the basic concepts, so I just thought, "Okay, let's start over here. Let's just define our terms so that at least we're not fooling ourselves thinking that we're really tightly positioned when we aren't." Also, there's this really weird twist about certain kinds of firms that throw the argument off, and so I just thought-- it was a little bit in desperation, honestly. It's like, "Okay, I got to just write some of this stuff out," because I am a little tired of talking about it. [chuckles]

Blair: It's one more subject where you'd like to be able to say, "I'll just send you a link." [chuckles]

David: Yes, right. People deserve to be treated carefully and patiently. It's hard to do. You think it wouldn't be this hard to do. It's like, that's the business that we're in. When you're doing it on yourself, it's almost like you start from scratch again.

Blair: Yes. Can you clarify something for me about the title, The Waterfall of Differentiation? Are you talking about waterfalls from a project management standpoint, like planning steps? Is that what you mean?

David: Yes, it's just another example of my amazing ability to name

[laughter]

episodes. Yes, it's waterfall like one, two, three, falling down. Like start somewhere and then go to the next place.

Blair: Okay, start us off with the goal of differentiation. This sounds so business 101. Why is it that we need to differentiate ourselves against our competitors?

[laughter]

David: Oh, I'd never thought about that. Okay, children. Essentially, what we're trying to do is to eliminate interchangeability. The way I like to think of it is, for some reason, the relationship you have with your client is over. Forget about the reason why, it doesn't matter. The relationship is over and now your client who was so happy with you up until this point is faced with a problem. How do I find a suitable substitute for this agency that I was working with, but now I cannot work with anymore?

Here's the weird twist, is that client gets to decide what interchangeable means. Otherwise, you get a little frustrated. You hear about who they hired in your place, and you look at each other, it's like, "Really? You think they're going to do the same level of work that we did?" Your opinion here doesn't matter. It's what does the client think a suitable substitute is? With that background, how long do you think it's going to take the client to find a suitable replacement for your expertise?

The length of that time it takes basically measures how differentiated you are in the marketplace. I keep saying there's 55,000 firms- I hope that's kind of correct -in the US alone and most of them are interchangeable in the client's eyes. What sort of pricing power do we have in the marketplace? What power do we have to influence the choices they make and move the needle on their behalf? Positioning is simply making sure that there are fewer suitable substitutes for what you do. That's what we're looking for.

Blair: Yes, changing the power dynamics in your favor. If you're the only one who does what the client needs, then you're in a position of strength. Now, we could probably talk about that at some point, maybe we'll talk about it right away, because if you're positioned as the only one in the space, something's probably wrong, isn't it?

David: Yes. You're either the first to market, and that's very rare and probably not the case, or what's more likely, is that a lot of people have tried that, and it didn't yield any power in the marketplace and so they abandoned it. We're not looking for a positioning where you're the only one. We're just looking for a positioning where there are far fewer competitors. The rough rule of thumb here is you're looking for something in the 10 to 200 competitor range.

I, obviously, favor something closer to the 10, so let's just say we want to keep narrowing the position until there's only 10 suitable substitutes. Then a corollary here, and these have to be done together is, okay, how many prospects does this yield? The number there, the range, is 2,000 to 10,000 based on research I did for the Business of Expertise book. Here we'd want to sort of nudge up to the higher number, so 10 competitors, 10,000 prospects, that's a great sort of starting place.

Sometimes these don't overlap. Sometimes there's 10 competitors, and then you look at the number of prospects, and there's a million prospects, and you think, "What is it about this particular choice that has yield this strangeness in how these things don't overlap?" That's a sign that you have an unsophisticated marketplace. That would be like manufacturing or industrial. It's a great place to focus, it's boring, but a lot of potential clients in that space don't think that they need a specialized firm like they would in other places.

In other times, the opposite happens where you have very few prospects but a lot more competitors. I just call that the pre-efficient market. If you think about the cannabis market, right, where you would think that that would yield a great positioning if you start focusing there, but it's new so everybody's running to it. The people who are buying are not as sophisticated as they will be five years from now and so on. Generally, aside from those things on the margins, we're looking for 10 to 200 competitors, ideally 10-ish, and 2,000 to 10,000 prospects, ideally 10,000-ish. Something like that.

Blair: Okay, so those are the basic numbers. Then let's start with the waterfall, the series of steps that you take. The first one is, you define it as a question, question number one, your category. What do you mean by category?

David: Just applying this to myself, I am a management consultant. I'm not an accountant, I'm a management consultant. I'm not a lawyer, I'm a management consultant. That's the category.

Blair: I would refer to that as your discipline.

David: Same thing. It's like, when you incorporate and the guy across the desk says, "Okay, we've got to write down your SIC code," or the NAICS code. What are you? You just pick it. You're not making one up. You're choosing from the available options. The reason I start with this is because a lot of people define the category they're in, and they think that that's it, that's all they have to do.

I'll ask them, "What makes you unique in the marketplace?" It's like, "Well, we're a branding firm," or whatever that answer is. It's like, no, that's a category. That's not the specialization. That's the category. You can't invent something. You have to give people some category that they're already familiar with. There's only so much you can expect to change their mind, to bend their thinking around something. You don't want to waste any of that on category.

Maybe you don't like being an ad agency. I don't care. If that's how the marketplace thinks of you, then you're an ad agency and don't try to fight that. You have to pick an established category that everybody immediately associates with something even though sometimes the associations aren't all positive. You just have to live with that and move beyond it. People spend way too much effort trying to change the category.

I'll tell you what. I'm going to rant a little bit here, okay?

Blair: Yes.

David: If you need to go get some coffee, that's fine.

Blair: [chuckles] I've got one right here.

David: There's too many firms out there that are selling this false promise like they are category creation firms. It's like and they say, "We work for Uber, and Uber as a category didn't exist until we brought them to market," or Airbnb. "What we do is we don't help you stand apart within a category. No, we create a new category where you are the only firm standing there." That is bullshit.

Now, it's not always bullshit because those stories, Uber, Airbnb, whatever, there's 50 of them, those are true, but you don't sell that false promise to a client. One of the biggest false promises to clients is that we are going to put you in a new category so that nobody else is in that category. That's just a waste of energy, and it bothers me when I see those promises being made.

Blair: I like the idea that there's only so much bending that you will be allowed to do or you're asking the client to do in their mind,- think of it as educating -and you should not be doing that bending or educating via a new category. It should be, they hear the category, they go check, got it, yes, I need somebody in that category. That's not the end of it, right? This is just the starting point. We're building on this.

David: Yes. I'm a consultant, right? Okay. There's, I don't know, millions of consultants, way too many, honestly, between you and me.

Blair: More every day.

David: Yes. I'm a consultant. Okay, that's the category. All right, so the next step is sort of the specialization within that category. There are all kinds of consultants. How am I specialized, just using myself as an example? I focus on marketing, creative, advertising, PR, all of that. Everything under the marketing umbrella. I am a consultant that works with people under the marketing umbrella broadly writ, right? That means I am now separate from all the other consultants that would advise banks or whatever, or retail firms. I work with marketing firms. That's question number two.

First, category, second specialization, and this narrows the consideration set, which to me seems entirely logical and basic. If I run a marketing firm, I would think, we all should think, I should hire a consultant that works with marketing firms, right? Now I'm a communications firm, or I'm a public relations firm. Okay, but there are 55,000 of those in that category, but I am different because we have a really unique process, or whatever.

No, that doesn't do it. That will come into play later. We need to follow the easiest steps and then the slightly easier, but not completely easy step, and so on. The first easy step is category, second is specialization. I'm not saying anything new in this episode. It's just how I'm putting it together. When you choose a specialization within a category, so you're a marketing firm or a dev shop or whatever, it's either horizontal, or it's vertical. You specialize in either serving like a particular narrow vertical, or you focus in a demographic or a particular tight service offering, and so on.

That demographic might be old people, Black people, rich, urban, educated leaders, whatever it is, people getting ready to face something, or a very tight service offering like IR, or recruitment, or whatever. Then the vertical, I don't need to define. You know what that means. This narrows the consideration down set. Before this, if it's just category, I'm an advertising agency. After I choose my specialization, I am an advertising agency that works with credit unions, or I work with firms just about ready to go public, or whatever.

Now that consideration set goes from 55,000 down to somewhere in the 10 to 200 range. If we do our job right, we narrow that down specifically. Like you talk a lot about how we're not looking for the perfect positioning, we're looking for a perfectible positioning. To get to that, we've got to have two things. We've got to have courage, and we've got to have information. Maybe we don't lack the courage. We'd make any decision that makes sense, but we don't have the information yet.

We narrow it down, not as narrow as it will be, but we narrow it down so that we can start to listen carefully and differently to the signals that we're getting from the marketplace, and that marketplace will give us the information which we then combine with our courage to then narrow it a little bit further. That's the whole process of specialization.

Blair: Say a little bit more about the courage, if you don't mind.

David: Sometimes people's lack of courage is masked as lack of information when, in fact, that's not really the case.

Blair: Oh, that is deep.

David: Yes, I say a lot of very deep things, if you haven't noticed.

[laughter]

They keep asking questions. They don't really need to know the answers. They're just putting off the courageous part that needs to be done. The courage is required because when people think about a tighter positioning, they usually are in need of something. It's not as if the business is going really well. You usually don't look at positioning until you're dragged, forced into it, and so this is the point in your firm's history where you are least likely to accept the idea that you want to limit your options.

That courage, the lack of it is palpable. You and I have talked about this. I love this image. It's like you built the firm, you got to this place by saying yes a lot. That boundary, it changes. You don't really know where it is, maybe it's three years, maybe it's six years, but if you're going to get to that next stage, you're going to have to flip entirely. Now it's about saying no. That's how you're going to grow. That is a very tough thing for humans to do. Especially ones that aren't super confident. When you're making a tough position decision, you need two things. You need courage and new information, and those both have to come together at the right time.

Blair: All right, that was well stated. We're doing this waterfall of differentiation, step one. Question number one is, what category are you in? Question number two is, what are you specializing in? What's your specialization? As you've pointed out, it can be a horizontal specialization or a vertical specialization. Then building on that is this idea of qualifying characteristics. Do you want to unpack that?

David: There probably is a better phrase for that. You pick the category, and there's really no choice. It's obvious. It's chosen for you. The specialization is a choice, and it emerges from something you've already done. You're just saying, okay, we've got three options here, two options. Which one makes the most sense for us? You're just making a choice between the available options that you have. That's where the pain comes in because you're essentially saying no to these other things.

When you've made that decision, so you've gone through category, you've gone through specialization, after you've made that decision, there are still multiple options for the client. You're not yet the only option for them to choose. They've narrowed the consideration set down and now there's, let's say, 10 firms all which looked like they would do a pretty good job. How do I make a selection between these- let's make it smaller.

There's three firms they're looking at. They're all specialized in what they think is important -how do I choose between these three firms? That's where these qualifying characteristics come into play. Things like maybe you have some proprietary IP. I'll just stop there and illustrate this. My category is consulting. My specialization is marketing firms. There are a lot of people that do consulting to marketing firms. Why am I different from those other ones? We have four specific pieces of IP that nobody else has.

Then, of course, there's other little things like doing it for a while and so on. Maybe you have some proprietary IP that the other firms that also serve the same marketplace don't have. Maybe you have some data-driven research methodology, or how your service is delivered. This one's pretty interesting. Maybe you do Staff Log. Maybe you lease entire teams to them and so on. That could be the difference that sets you apart enough to make the decision easier.

Maybe it's how you price. Maybe it's how you onboard clients. Maybe there's some portals or some unique process or a diagnostic in-person workshop that you pull off. That's a big one nowadays. Maybe it's the way you productize your services. Firms that are nervous about specialization, they go from that first step to the third step, and it doesn't work. These qualifying characteristics are very powerful once they're applied to a firm that's already specialized.

If you think any of these will do the work for you, in most cases, they will not. This is one of the big messages I wanted to get across. These things are all very valuable, but they're more valuable if we're just distinguishing between 10 firms and not 55,000 firms.

Blair: The way you just sewed all that together makes a lot of sense to me. I just want to recap what I think I heard you say. You've got your three categories or the three steps that you take. First is define your category. It's already defined for you, is your point. The second one is choose a specialization, and it can be based on horizontal or vertical. The third one, you call it qualifying characteristics. I might refer to them as secondary differentiators. Those apart from the first two.

If you think of the first two combined, what is your category? What do you do, and then for whom do you do it? Then the secondary differentiators are what you call your qualifying characteristics. You've listed a bunch here: proprietary IP, data-driven research methodology, productization, introducing uniqueness, et cetera. Your key point here is, and this is really resonating with me, is a lot of firm owners, in their attempts to positioning their business, they do step one, they identify a category.

Often it's a misstep because they're making up a category, but as you point out, you can look at your tax return, what's your SIC code or your NAICS code that you selected, and then they skip over the definition of the market, who they do it for, and they lean too heavily on these what you call qualifying characteristics, and what I'm thinking of as secondary differentiators of proprietary.

It's how we do it, the way we onboard, et cetera. Your point is, these things are valuable, but they are not a substitute for step two of choosing a specialization. They're what you do after you choose a specialization. These three things together help you articulate a meaningfully differentiated expertise. Is that a good summary?

David: Yes. Those three things together narrow the choice down to one, right? It's like, oh, this is so clearly the firm we should go with. Everything falls together beautifully, right? I'm such a believer in all of these defining-- how did you phrase that? I liked your phrase better.

Blair: Secondary differentiators?

David: Secondary differentiators. All of those things are really important, but it's a hook on the wall. If you hang your positioning on that hook, it's going to get pulled out of the wall. It's just like, no, this is powerful, but it's not powerful enough to replace positioning. It's just what helps a prospective client narrow down the choice from 10 to just you. All of these things work together if they are done in order. That's the big point.

Blair: A branding agency with a proprietary process is not enough.

David: No, it's not. A branding firm that focuses on retail shelf stuff, packaging, maybe, that has a proprietary process, now that's a powerful story.

Blair: Right. There's a twist here, though.

David: Yes. Right. Picture me in, or you, in a conversation with a client trying to talk them into specialization. Immediately, they're looking for outs to this. They're thinking, "Okay, who are the firms that I would like to be like, and are they specialized?" They'll frequently throw those back at me and say, "Wait a second, this doesn't seem to really make sense, because look at these firms."

Blair: They cite the exception that proves the rule. The rock star.

David: Yes. We want to be IDEO or Pentagram or whatever it is, right? In your particular industry, whoever that one is. They'll say, "Well, I don't understand your point. They're not specialized, and they're very successful, and I want to be like them." That's true, right? It's not always true. There are some cases where you think they're very successful and then if the numbers, they really aren't. Let's just assume that it's true, that they're very successful.

There are two ways to get around this. One of them, I don't know how to help you with it, the other one I do. One is that they're just super confident. I'm going to list a specific name here. Brian Collins. He just walks into a room, and he knows what he's worth. There just isn't any argument about it, right?

Blair: He's got the body of work to back it up. He's got the swagger. He's got the total package. Now, if you just had the swagger without the talent or the talent without the swagger, doesn't work, does it?

David: Yes. It's a self-confirming thing, too, right? You get a big client, and it's like, oh, I guess maybe I'll be the next big client. That's one. I've talked a lot about that in other places. I won't go into that here.

Blair: Shout out to Brian, by the way.

David: Yes, Brian's great. Then the second would be that they're large. This is the one that people miss. Normally, this three-step waterfall is category, specialization, and qualifying characteristics. Okay, those three things in that order. Now, in some cases, projects are so important or multinational or too big to fail kinds of things that part of the consideration set is, we need a big firm with a deep bench.

Instead of category, specialization, and qualifying characteristics, instead, it looks different. It's category and then second, are they big enough? Are they big enough so that I'm not going to lose my job here even if things go bad because it seemed like the logical choice category. Then you insert big enough, and then specialization, and then these secondary features or qualifying characteristics or whatever we call it.

Pay attention to that. When you see a big firm that you want to be like that doesn't seem to be specialized, recognize that, in many cases, they are large enough now that big enough becomes like if you're not big enough, you're just not going to be in the consideration set. Once you are in the right category, and you are big enough, then the next thing, it's not usually called specialization at that point. Usually it's just called category experience. Have you done this sort of work before? Then there's still 10 firms left, let's figure out how to make the final choice. That's where these qualifying characteristics or secondary things come into play.

Blair: Lacking that, a pitch.

David: Lacking that, a pitch?

Blair: Yes.

David: What do you mean?

Blair: All right, we need a firm. We need an ad agency that's big enough that has this category experience. There's 10 of them.

David: Oh, right. Yes.

Blair: Lacking the secondary differentiators that we call the qualifying characteristics as well, let's just have a creative pitch. Let's have a shootout.

David: Let's let each of them tell us about their guaranteed process. [laughs]

Blair: Yes. Okay.

David: None of this is new that I've talked about here. I just want to make sure people get these in the right order. I probably could have said this about five minutes, but it took a little longer to say. Do it in order and recognize the importance of the size, how that gets inserted between number two and three in certain cases.

Blair: There's two or three profound things here for me. The three steps are, identify your category, choose a specialization, and then identify your qualifying characteristics or secondary differentiators. You pointed out that most firms, many firms, skip the second part, specialization, vertical or horizontal, and they lean too heavily on the qualifying characteristics. Then the interesting twist that there are clients and projects of such size that, in addition to category specialization and qualifying characteristics, there is this hurdle that they have to clear of, is the firm big enough?

Your point, which I think is really well taken here, that in these examples where the client needs a firm of a certain size, this third step or question of specialization gets changed from, we don't necessarily want somebody who specialized in this. We just want somebody with some deep category experience. You know what? Congratulations, David. You did it. You took an old topic, and you taught an old dog some new tricks.

David: Made it interesting, finally.

Blair: Very well done. I hope the listener got as much out of this as I did. Thanks, David.

David: Thanks, Blair.