2Bobs

Embrace the Marketing Mess

2Bobs with David C. Baker and Blair Enns

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Blair shares what stuck in his mind about marketing success from listening to a recent podcast interview with Rory Sutherland on Liam Curley’s Undisputed Authority.

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“Embrace the Marketing Mess” article by Blair Enns for winwithoutpitching.com

Rory Sutherland podcast interview on Liam Curley’s Undisputed Authority

Transcript

David C. Baker: All right, Blair, today, I'm going to talk to you about embracing the marketing mess. This one is very different for me. It feels like I've been in the backroom for this because we both know Liam Curley. We got a chance to spend some time with him when we were doing a 2Bobs gathering in London last year. He had me on his podcast, he had you on the podcast, and then he had Rory Sutherland on the podcast.

Blair Enns: Whom we also saw in London on the same trip.

David: Oh, that's right. Yes, we had dinner with him. Afterwards, I said, "Hey, Liam, I just love your podcast. It's great, but here are some people you need on here." I introduced him to Nancy Duarte, Marty Neumeier, Anne Hanley, Dorie Clark, and Rory Sutherland, who I would not have known if it weren't for you. All those people, I think, are on the podcast. I'm just loving listening to it. You listened to a recent episode where he interviewed your friend Rory. That's what prompted this talk about embracing the marketing mess. I just loved reading this article you wrote.

Blair: Yes, I was doing the five-hour drive to the airport. I was going to Miami to speak at a conference, the Agency Hackers Conference, where Rory was also speaking. Then I was just looking for five hours' worth of podcasts. I saw Liam had some new podcasts. I saw Nancy Duarte was on there. I listened to that one, too. I listened to Rory's twice. I listened to it. I thought, "Oh, my God, this is so good. I feel like I'm pretty familiar with this content." I didn't tell him I'd wrote a post on it. I think the post dropped the day I saw him.

David: Is he going to be okay with it when he reads it?

Blair: Oh, yes. It's not like I'm throwing him under the bus or anything. I listened to it. Liam, first, he did these case studies, and then he turned them into a podcast. You've been a guest, and I've been a guest. He is so good at this. A, it's a really well-produced podcast. It's not like a typical podcast.

David: Like 2Bobs. It's like you and I rock up. [laughs]

Blair: What are we talking about? Okay, I open up my post. It's like, "Let's chit-chat about something we wrote."

David: He's done so much research.

Blair: I don't know how he does it.

David: This guy's actually prepared. It's called Undisputed Authority, for those of you that want to look it up.

Blair: Yes, Undisputed Authority. It is so good. Liam is so thorough in the research that he does, and he clips. He probably did this to you when he interviewed you. He said to me, "Okay, I've already done most of the work. I've read all your books, most of your posts, and I've listened to a bunch of podcasts that you've been on. I thought, how do you find the time to do that? Who puts that kind of preparation into a podcast?" Well, Liam does, and it sure showed in his interview with Rory.

He had done all this work, and he'd clipped all this other stuff from different podcasts, different sources. There's a lot of source material on Rory Sutherland. I've read his book multiple times. I've interviewed him. You and I had dinner with him. We trade emails from time to time. I'm pretty familiar with his work, but I was really blown away by how Liam had organized everything into some really tight organizing principles around the Rory Sutherland magic. I was just completely taken by it, and I started to write a small post, which turned into a lengthy post.

David: Before we go on, some people may have noticed something you said in passing. You had a five-hour drive to the airport. You either have a really shitty car, or you're a long way from the airport.

Blair: She's listening. She doesn't like to--

David: [chuckles] Yes, you live out in a village in BC, Canada. When you want to get to the airport, it takes a long time. When Liam interviews somebody, there's usually some theme. The theme that kept coming up as I was reading your article about that episode is that so much of it is accidental, but then there are certain principles that are really important. I think you put together three principles here, right? Let's just go through these, and I want to ask some questions along the way, too.

Blair: Yes, and I've been thinking about our own marketing a lot lately. Then, obviously, most of our clients are in the marketing business in some form or another. I've read the canon of literature and all the good marketing books, so I feel like I know what marketing is. I know good marketing from bad marketing. This point that Rory has made many times, I didn't really hear it, I guess, until Liam had him make the point on this podcast, is that marketing success is fat-tailed.

He told the story. I don't remember if he told me this or it was on another podcast of his. He remembered the moment when he was having dinner with his friend, Nassim Taleb, the statistician and philosopher, I guess you would call him. He refers to himself as a flâneur, one who wanders. Taleb made the comment to him that marketing is fat-tailed. If you think of a classic bell curve shape of distribution of anything, so this would be the distribution of marketing success.

A thin-tailed bell curve is what most of us are used to where the curve just tails off down to zero or the bottom. Fat tails, the tails don't hit the bottom of the graph. What does that mean? It means that a small number of random outliers can actually have a really big effect on the average. What Taleb meant by this, and what Rory means by this, marketing success is fat-tailed, is you think it's logical, and marketing success happens through a steady increment of small successes. The reality is you should see your marketing as a series of experiments.

It's more like a hit-maker model, like a studio model or a VC model, where 9 out of 10 investments aren't going to work. The 10th one is going to work big time. That's how you should think about marketing. That insight that marketing success is fat-tailed and it's often accidental and even illogical just is a great reminder to all of us that marketing planning is important. At the end of the day, we are better off viewing our own marketing and the marketing that we might do for our clients as a series of experiments, most of which will fail, and we need to be comfortable with the fact that most of them will fail.

David: I would say we don't have a problem starting all those experiments. We have a problem stopping them in time.

Blair: Oh, great point.

David: We're not comfortable just saying, "Oh, I don't think that's working." Even if mathematically, you're not sure that's the case. You just follow your instinct and say, "Oh, no problem. Okay, we tried that. What's next?" One of the things that we talked about in an earlier episode, I should have looked this up, and I didn't, was about how both you and I were recommending that people do lots of things and see what works.

Then later, we both came to the point, it's like, "Okay, once you find what works, then simplify and dive in." Is it true that there's a time-based thing here at work where you do experiment a lot. When you do find something that works, you should simplify and stick with that, or do you think you should just keep experimenting with marketing?

Blair: Oh, that's a really good question. I don't know the answer. I suspect it's a little of both. You find something that works, you pour gasoline on it, right? Can you just light this up? Can you 10x this? Can you 100x this? Depending on what the thing is, maybe you got lucky in a campaign with the creative, and maybe that has a shelf life. It does its job, and then it burns out. I'm thinking of the Shreddies commercial. Do you remember about 10 years ago, Shreddies introduced a new diamond-shaped Shreddies?

David: No.

Blair: Where they basically took the square and they turned it, rotated it a little bit, so it was shape of a diamond. It was a tongue-in-cheek ad campaign introducing new diamonds. Nothing had changed. They just changed the orientation of the Shreddy, and sales were at 20%. I don't remember the exact number, but it was not 3% or 4%. It was a significant bump. Now, that bump from that creative campaign, it's only going to last so long. Do you keep pushing diamond-shaped Shreddies? No, you go in search of the next weird, completely illogical experiment that the finance people would look at and say, "You are crazy. There's no way we're doing that."

David: I think that's the problem with marketing is that we have clients who kill things. You go to an in-house agency, and the marketing people stand out because they're the ones that have got to have a Mac, and the IT department is like, "Oh, God, they got to have something different." They don't follow the dress code. Then marketing, it's simultaneously knowing the best practices, and then figuring out which ones to break, because for marketing to really work, you have to stand out from the crowd, but you can't stand out from the crowd by not knowing best practices.

You have to pick and choose which ones you're going to violate, and then quickly kill an experiment if it doesn't work. We've also talked about how early firms need to be generalists to keep trying different things, and then they'll land on something that's a tighter focus, and then that might even change over time. I don't know. It was just so interesting to hear somebody as smart as Rory Sutherland talk about the accidental nature of marketing. It's really refreshing.

Blair: When it comes to fame, and we'll talk about that in a minute, in talking about his own fame, Rory was asking him about his various inflection points, and almost every one of them he described as just accidental or random. On the illogical point, like this first principle of the three principles I learned from Rory from this podcast, the first principle is that marketing success is fat-tailed, often accidental, and even illogical.

What Rory says is, in marketing, most of the logical things have already been tried by somebody in the category. By that very definition, you should pursue illogical things. Because it's accidental, you should see it as a series of random experiments. Again, the problem is, clients and finance people and the left-brain people, you got to make a rational argument for doing random illogical things and actually wasting money. I think if you explain to whoever your finance-oriented audience is, that it is, no, it's more like a studio model or a hit-maker model or a venture capital model.

The idea is, we're looking to get-- you can't say lucky. We're going to try a bunch of different things. Our expectation is a whole bunch of them aren't going to work. Some are going to work, just a moderate amount, but we're not going to build this brand, this business, sell this product, whatever it is you're trying to do, through this steady building. It looks like steady building, but it's not. It's steady activity with these occasional big hits in there. Then, when you look at it over time, it looks like steady building, but it's not.

David: The way I'm going to leave this first point is that you need to learn the basics of marketing, and then you can feel free to violate them carefully. You don't just jump into violating without at least understanding the basics of marketing. That's how I'm going to combine these two. The first principle, without asking for your permission here, I'm just going to say, so the first principle is that marketing success is often fat-tailed, accidental, and even illogical. Now, the second principle is very unexpected as well, and it's this, that you must survive long enough to get lucky, because I guess these are tied together, right? If we're looking for accidents, then you still have to exist long enough until those accidents happen.

Blair: Yes, that applies to business, too. I've thought about this in my own business for years. There are times when you're growing, and you're optimistic, and you're thinking all these wonderful things. There are times when it's like flat, or even times of economic uncertainty. I remember the beginning of COVID, going from thinking, "I'm on top of the world," to, "Are we going out of business?"

That only lasted a few weeks, fortunately enough, but there are times when I think I would say the last couple of years, I know a lot of agencies were in survival mode. They even maintained profitability, but they did that with the top-line shrinking and by lowering their expenses as well. That's survival mode. There's a couple of ideas wrapped up in this idea of survival. The first rule is don't die, right? [laughs]

David: Yes, it's not hard to remember that one.

Blair: [laughs] Yes, so you don't embrace existential threat. There are times when your legitimate goal is to survive, and then you can get back to a place where you can fund experiments again. The first rule is don't die. Don't do anything that's existentially dangerous, that threatens your very existence. You could probably think of some marketing campaigns. I don't want to throw anybody under the bus, but you could probably think of some marketing campaigns where it's like, "Oh, that was so risky. It almost killed the brand."

David: Bud Light, anybody?

Blair: Bud Light, yes, almost killed the brand. That's close to an existential threat, and I'm sure nobody saw it as an existential threat at the moment. Well, maybe some did. I don't know. It would be really interesting to know what the conversations were that were going on behind the scenes at the time. Not taking sides of this issue, we're just observing that a brand was damaged by a marketing decision. I don't think they've regained the number one spot as the number one beer in America. I think Modelo still has it, don't they?

David: I don't know. I think they're regaining ground. They've hired people that more represent their audience, their drinkers. Here, we've been talking about a marketing campaign that is or is not an existential risk. What are the existential risks that agencies take? If they're at a certain point, they just need to exist. What are the existential risks they need to stay away from? I'm not talking about the campaigns they do for clients. What about for themselves? What are those existential risks?

Blair: Yes, it's a good question. I haven't thought about it in the marketing contest, but, obviously, an existential risk in marketing would be you basically bet the firm on a campaign or a strategy. We don't have very much money left to spend in marketing, but we're going to spend it all on this one thing and hope it pays off. I can't actually think of an example for you.

David: How about not doing any marketing at all? That seems like an existential risk to me.

Blair: Yes, but that's an existential risk that's spread out over time.

David: [laughs]

Blair: It's the same thing, but it's different when you take action, and you actively embrace risk. I don't want to get into politics, but when the US government struck Iran, my first reaction was, "That's a high-risk decision." However you feel about it aside, just looking at it analytically, I thought, "Oh, that's a risky decision," but then the flip side of that is, "Well, Iran is a risk generally spread out over time that's getting worse and worse, so not taking action is as risky."

I'm not trying to defend anybody or knock anybody for this, but when you take action, you are embracing that risk in the moment.

David: Got it.

Blair: Doing nothing is diluting the risk and spreading it out over time. Making a decision to go do something, that requires some bravery or insanity, depending on your perspective, but it's embracing the risk. What's the equivalent for agency marketing? I can't think of any. I don't think agencies are guilty of taking existential risk when it comes to their own marketing. Again, like I said, when I think about this principle in my own business, it's just like the business needs to survive. Don't take any existential risk of any kind.

David: Yes, that's an interesting point we should talk about more at some point outside this podcast episode. Why do they try to talk clients into taking marketing risks, and they don't do it themselves very often? That's interesting.

Blair: Also, under the second point of surviving, I talk about Taleb's idea of barbell-shaped risk, which means you should do a high number of low-risk experiments, and you should do a small number of high-risk experiments, but not so high risk that any of them are existential. First of all, never take any existential risk. Avoid existential risk, but then, again, this is Taleb again. He says we should all probably take more risks in our lives. We should take a lot more, higher volume of low-risk activities, a low volume of high-risk activities, and nothing in the middle.

In the middle, there's this dead zone where the risk-return ratio doesn't really work out. It's like, I think we've talked about this before, in exercising, Zone 3, maybe a little bit of Zone 4. When you're in training for whatever your sport is, you want to stay out of Zone 3, largely stay out of Zone 4. It's known as the dead zone. You're exercising in Zone 2 and Zone 5, and you're avoiding the middle. That's the way we should think about risk as well.

David: Well, I just got back from a motorcycle trip, and I do also very dangerous things. I think I need to do a little bit less existential things. Maybe you could help me with that offline here.

Blair: [laughs] I can help you have a more boring life. Yes, I'm here for you.

David: The first principle is that marketing success is often fat-tailed, accidental, even illogical. I want to say something about this before we go on. I see these LinkedIn posts that confuse correlation and causation. They see some famous brand, and then they say, "This is why it was successful." It's like, "No." They tried lots of things, and this worked. Good luck emulating that.

Blair: Anytime anybody says this is the reason for anything, I always hear in my own mind, "This is a design-thinking thing, I think." There is never a reason. There are only ever reasons, plural.

David: Right. First principle, marketing success is often fat-tailed, accidental, even illogical. Second one is just avoid existential risk. Survive long enough to get lucky. The final one is that you should probably strive to become famous, which seems like a pretty obvious statement, but there are some interesting twists to this.

Blair: It seems obvious, but when you say it that directly, "You should become famous," this has never sat well with me. Part of me recognizes this is true, but then it's like, okay, when you say to yourself or others, "I want to become famous," it just seems so shallow. I just think of the Kardashians. I apologize to anybody who loves the Kardashians or knows why they love the Kardashians or why they're famous. I don't get it. I get that it seems shallow, but Rory made this point. He says, "When you're not famous, you have to find your customers, and when you're famous, they will find you."

David: I think there's a better way to say this, and I said it in a LinkedIn post recently that got a lot of people thinking. I said, really, it's a two-pronged thing. You want to be known and trusted. I think "known" is a better word than "famous."

Blair: Yes.

David: That took you a while to answer.

Blair: Well, I'm thinking about it.

David: [laughs]

Blair: There's something I love about how uncomfortable the word makes me. Instead of avoiding it, I feel like I really should run towards it. I even said in this post, so I said, "The third principle is you should probably strive to become famous." I said, I put the modifier probably in there because I'm a little uncomfortable with it. Then, Rory says, "When you're not famous, you have to find your customers. When you're famous, they'll find you." Then I think, "I don't like having to find customers." [laughs]

David: He'll lower your standards, "Okay, I'll be famous."

Blair: I'm pretty happy with them finding me. That told me, "I myself need to embrace this, and I should probably strive to become famous."

David: Well, you are in a way.

Blair: Well, I think you and I are appropriately niche famous, and we both have good businesses and good lives because of it. It served both of us well. Neither of us has to work too hard on the marketing or lead generation front as a result of it. We both could work harder. We were talking about that before we hit record.

David: Speak for yourself, bud.

Blair: [laughs] We both could work harder, but neither of us are hustlers.

David: I think I am well-known and trusted by most people, not everybody, but that was not my goal ever. My goal was to provide value to people. Then, when I did become more well-known, I was surprised and grateful. Everything has been accidental. There was this small group in Sacramento that asked if I'd come speak to them, and I was like, "Really? Okay," and then I just poured my heart into doing it. Then, this guy in my neighborhood needed to write a column for USA Today, and he heard about me and said, "Hey, can I write about you?" I said, "Oh, yes, of course."

Then somebody, the managing editor of Fast Company, read an answer I typed into Quora one time and turned it into an article. I didn't ask for any of this stuff. To me, I think the right image is go into your business wanting to help people, and then be willing to play the basement bars late at night with not that many people there and a few hecklers, and just recognize if you do the right things, good things will generally happen. If they don't, fine, life isn't fair. I don't know. It's a weird approach to personal branding, but I like everything that Rory has said in here. It just makes sense to me, but it also surprises me that somebody who is really famous, like Rory admits all this stuff.

Blair: Admits about the accidental nature of it or the value of being famous?

David: The accidental nature of it. He's very humble about the whole thing. He admits. It's like, "No, I just was in the right place at the right time. I was doing the right things. Fortune smiled on me, and I used those opportunities to remain an interesting person to listen to," and he definitely is. It's really good. All right. Anything else we should add here, Blair?

Blair: One of the things that as I was writing the post, I realized the importance of a book. You and I have both written books. You recently did a one-day seminar for people on writing books. I'm doing a thing on it. It'll probably have passed by the time this comes out. Just the value of having a book, even if the book doesn't make you famous. I think Rory had his TED Talk before he had his book. Then he does his TED Talk, and then the publishers come to you.

It just occurred to me that whether the book leads to fame or is a byproduct of the fame, even in this video-first era, we still assign a certain vaunted level of expertise to those who do write books. The book isn't a promise that you're going to be seen as an expert or become famous. There are very few people other than actors, but there are very few famous professionals who don't have a book.

David: Yes. You just write it for yourself. It forces you to spend time, and good things will happen. It's an exercise, a discipline that you're spending time thinking about something on other people's behalf. It's just a wonderful thing to do. I wish more people would do it. Yes, I'm really with you on that. All right, so, Blair, give us the takeaway from this episode. Somebody just got in the car. They missed the first 25 minutes of this. They want to know, "Okay, what did I miss? What's the takeaway here?"

Blair: Marketing is messy. There are very few rules. Treat it as a series of accidents. Stay alive long enough for some of those accidents to pay off. Happy accidents are more likely if you become famous.

David: [laughs] You're quite the motivational speaker.

Blair: [laughs] I told you beforehand; I am working on that. I'm working on smiling from a stage. I haven't been able to do it yet, but I'm always smiling when I podcast. Maybe I should bring you with me. We should just podcast from the stage.

David: Yes, there we go. This has been a great month. Thank you, Blair.

Blair: Thanks, David.

Firms Most at Risk

2Bobs with David C. Baker and Blair Enns

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Which segments of our field will thrive in the near future and which ones will slowly lose relevance, and why? David wants creative entrepreneurs to continue being resilient and reinventing themselves every two years while keeping a watchful eye on constantly evolving industry practices and technologies (including AI).

Links

“Most At-Risk Shops” by David C. Baker for punctuation.com

Transcript

David: This one is going to be an interesting recording, Blair. I just wrote this thing a month ago. I don't even know if I believe it all still.

Blair: You probably never believed any of it. [laughter] Oh, my God. Our topic today, folks, is 'Most at Risk Shops.' If you haven't discerned by now, I will be interviewing David about an article he wrote, but he's now second-guessing. This is your favorite interview. It's like, "Oh, give him enough rope to hang himself." I can die after this. [laughs] No, but I was saying I identify with it every once in a while, when you're trying to predict the future, which is essentially what you're doing here, you don't have a responsibility to be right. You have a responsibility to provoke and to give people new things to think about, "Oh, well, I'm good at that, so we're good."

I appreciate you saying you don't know how much of this you believe. We'll get into the details here because there's a lot of detail and there's some of it, I think, "Oh, yes, that's smart, I get that." Some of it I don't understand, and some of it maybe I'll push back on a little bit, but I think it'll be a good conversation. I was going to open until you gifted us that cold open. I was going to open with, "David, Most at Risk Shops, is this an AI episode?"

David: We keep sneaking up on AI without doing AI, don't we?

Blair: Keep circling around it, doing the dance, but is it an AI episode?

David: No, no. I'm still not even close to doing an AI episode. There's just not enough clarity in my head about it. Even though I'm a really heavy user of it, I've got many clients who are heavy into it, it's not clear to me yet.

Blair: Where's the risk coming from then?

David: Oh God, I hate it when you ask these kind of questions.

Blair: [laughs] AI. The answer is AI.

David: I think AI is what prompted this article, but I think I would have written basically the same thing even if AI were not a part of our world. In other words, I think AI is probably just hastening it.

Blair: Yes, I get that.

David: I could have written this article four years ago, before AI was really big. No, it's not the AI episode. Quit trying to trap me.

Blair: Well, we'll get into the details here. You're basically taking a guess at firms that are likely to survive at some point in the future, and then you've got a list of the strongest traits or elements that you'd favor in any position. Then you've got the most at risk and then the most endangered species. You do have a section titled "The Role of AI," but like you said earlier, we're not doing direct AI episodes, but that's informing a lot of what we're doing. I'm going to skip down a little bit. At the top of the list of firms that you have as most at risk, you've got software platforms.

I think you mean something else. I just realized that you're talking about the platforms that some agencies have relied upon, like being a HubSpot agency, a Shopify agency, or WordPress specialist. You mean being all in on a platform? Is that what you mean by that?

David: Yes. I'm not saying dev shops here, and I'm not saying that SaaS is under siege, even though both of those things might be true. I'm saying that agencies that hitch themselves to a platform are probably the most at risk. That's what I mean by that.

Blair: Yes, and I think there's always a risk. Our friend Philip Morgan has written about this. We've referenced the post before. It's called, When the King Gets Hungry, about when the platforms see people making money off the platform, it's good for them initially, but at some point, in search for more margin, they start to eye that revenue and find ways to claim it for themselves. Just back to, is this an AI episode or not? You said even without AI, some of these things would still be relevant. I immediately thought of SaaS, and yet there's this idea that AI is killing SaaS or having a serious detrimental effect on SaaS businesses, but we were in a software recession. We were headed into a software recession before COVID, and then all the free Covid money sloshing around basically put that recession on hold for two plus years, and then it resumed afterwards.

I think there are a lot of agencies out there that rely on SAS as their client. I think that's one that, even if AI hadn't come along and given another nudge, it would still be an area that would be vulnerable.

David: Yes, I agree. I think it wasn't just the free money sloshing around, it was the fact that people weren't shopping, which drove e-commerce. They weren't shopping in person at the beginning, drove e-commerce, and they were working remotely, which drove lots of other SaaS platforms that were necessary to make this work for the gears of commerce to keep working. We are in a SaaS recession if you compare now to two or three years ago. I'm not sure we're really in a SaaS recession if you compare now with 2019 or something. I have to look that up to see. I would have said this regardless of AI. That's why this is not an AI episode, because the fact that I don't think you should be tying yourself to a software platform, or you need to be very careful about it, that has nothing to do with AI.

It's something I wrote six, seven years ago, and I keep sending people this article and saying, “Be really careful. You're downstream. You don't have much control.” People have already made the big strategic decisions, and now they're looking for an implementation team. It's just lots of bad signals there. I'm not saying you can't make a good living doing this. You can, but you don't have the same control. In the article, there was an illustration that showed when you're hitching your agency to a software platform, you're on a train track. The only choice you have is this isn't really true, but kind of. Big choice you have is how fast you want to grow. You're not in an off-road vehicle, where you can go anywhere you want. No, you're following the tracks that somebody else has laid, and there's some danger in that. The most at-risk firms, one of those categories, is anybody tied to a software platform, which has nothing to do with AI in my mind.

Blair: Since we're on most at risk, do you want to touch on the others here first before we go to the ones that you think have a better shot?

David: Yes. I think small firms are at risk. I don't like to say this because I feel very ambivalent about how big your firm is. I just don't care. I think the size of your firm ought to be shaped by the role that you want to play. If you're good with people, if you're okay with financial risk, if you like systems and processes and all that, and you're okay with lots of new business activity, then growth is a fantastic choice for you. If all those things are not true, and you don't like the financial risk, you don't like to be in the people business, you don't like to spend all your life doing new business, then being a smaller firm, especially if you like being close to the work, is exactly what you should be. Here I am saying, "That might not be a great choice."

Now, if you're going to be a small firm, though, I think the solution is you need to be very tightly focused. In fact, there's an inverse relationship between the need to be focused and the size of your firm, measured in people. You can still be a small firm, but my God, if you want to be a small generalist firm, like maybe you can get away with right now, you don't have much of a future. That's what I mean by this.

Blair: What don't you like about small firms?

David: Oh, I love small firms.

Blair: Maybe you just explained it, and I missed it. Just small generalist firms?

David: It's mainly small generalist firms, yes, because a lot of small firms are generalists. What I should say here is that the firms most at risk are, we've talked about firms tied to software platform, second is small, generalist firms. I should have that qualifier in there. Otherwise, I'm fine with small firms.

Blair: Do you think with all the AI tools and the massive increase in productivity that some people and some businesses are realizing, do you think the future is a whole lot more smaller firms, because that's what I'm anticipating? I'm anticipating smaller firms, where a 12-person firm is now a four-person firm, a 20-person firm is now an 8-person firm, and a 5-person firm is now a 1 or 2-person firm. Are you seeing that in your crystal ball?

David: I think that's a possibility, but I don't really know if that's going to happen or not. I read this really interesting post this morning from a PE guy, and they talked about their eight AI agents. They've named them, and they treat them like employees and so on. They're spending as much in tokens as they might spend for an employee compensation package. That's one approach that people are playing with. I don't know if that's going to happen or not. I just have no idea.

It could. If that does happen, you could see it going one of two ways. You could see it going down the efficiency route, where that's their primary advantage, and they can do so much more with the money, and maybe they get away with being a generalist firm. That's not my approach. If you would have been five people and now you're one or two, then I think your best path is to be really, really tightly specialized. I think AI search engine answers are going to reward that. I don't see how you're going to get around that from a new business standpoint. New businesses are going to be more complicated than it ever has been. There's going to be so much more noise around there. The only firm recommendations that surface are going to be very tightly positioned firms, especially if they're small.

Blair: Then the third thing on your list of at-risk firms is affinity positioning. A bunch of things come to mind, but you want to go through the examples? I can hear it in your voice saying, "Yes, you're not a big fan of this." Neither am I.

David: Again, yes. I have probably 50, 60 clients that fall under this umbrella. It's not like they're not wonderful people doing wonderful work, but there is a weariness around this nonprofit B Corp purpose-driven mantra. I know that there's not an exact overlap between those three things I just mentioned. Historically, this started around 2007 or so, and then it's just gotten bigger and bigger. In the beginning, it was, "Okay, we just got Obama elected. Now, what do we do? Well, we'll start a firm that has that same outlook."

Now it's not driven by that. It's driven by folks in the space who are very progressive, very well-meaning, very educated, very urban, who want to find clients who align with their personal values. It's a very laudable thing, but it's not a positioning. It's more of an affinity. It's like we want to work with clients who believe like we do. Some of these firms follow that up with a deep expertise in that, but a lot of firms don't. I think there's too many of them, just too many of them, and not enough expertise. I would say that the future of those affinity-driven firms is bleaker even than it is right now. That's just an opinion. It's a perspective. Obviously, I don't know if I'm right here.

Blair: For those listening, wondering about the reference to the Obama campaign in 2007, that really was a sea-change of a campaign in a campaign style. He recruited a lot of tech-savvy younger people to the campaign, had a big impact. Once he got elected, there were indeed a lot of young, technical savvy, progressive communication specialists who went on to form their own agencies. You and I have spoken to groups of these, and to a person, wonderful people, and some of them ran some very excellent businesses. That really was the beginning of aligning your business to an ideology.

David: Exactly right. We'll see what happens there. That's not news. Folks in this space, they feel the pressure already, and many of them are understanding the role of a tighter positioning and are embracing that and are doing fine.

Blair: I want to go to the most endangered species, which we would typically cover at the end, but we're right here. You've cited three that are most at risk. Anybody who's tied to a software platform, small firms, but especially small generalist firms, and the affinity positioning, what's most endangered.

David: I wrote this a month ago, and I'm already questioning myself. My answer a month ago was the small generalist dev shop, but what I wonder is, well, maybe that will be the most disrupted, not necessarily the most in danger. As long as you're willing to ride that disruption wave, maybe you'll be fine. You're facing a lot of people who have very little background in dev work, who are starting with vibe coding. Oh, my God. If I read another website of a firm that is now, "We are AI-first." Four years ago, I bought a massage chair, and one of them was $1,000 more, and it was AI-driven. I asked the guy, "What's the difference here?" He said, "I don't know. It's just a label." I bought it anyway. [laughter]

Blair: An AI-driven massage chair.

David: Yes. Maybe this is the most disruptive, maybe not the most at risk, because it feels to me like a small dev shop of three to four people that's fully embraced AI, and they're mid to high-level dev people, deeply experienced, who know how to use AI, maybe they'll be getting a lot done. Who's going to trust a three - four person firm with a massive, very important project? I'm not sure. There are a whole lot of small dev shops who are not well-positioned, and I would say they might be the most at risk. If not, they'll be the most disrupted. I didn't list it here, but in that category, it would probably be pure content firms as well as SEO firms. I don't know. This is why I'm not ready to do an AI episode because I'm not sure how to predict that.

Blair: We're recording this at the end of March. I don't know when it'll drop, and things may have changed by then. I've noticed in the last week, speaking of content firms, all of a sudden, there's all these people on LinkedIn who are AI content generation, and various expressions of that idea. creating all of this, what I'll call bullshit AI content out there, and I've railed about this on LinkedIn quite a bit. I think I'm known as the anti-AI guy on LinkedIn. I'm not anti-AI at all. I'm pro-AI. I'm for robot overlords. Speaking of Vibe coding, our new website just went live, and it's completely Vibe-coded. There's no CMS, there's no backend, there's no outside designer or developer. You could pick at it. It's still early days, but the idea that we could do this and save tens of thousands of dollars, do it on our own, and take back full control of this, we do have some dev skills in-house, some technical skills that were helpful.

Back to the AI-generated content on LinkedIn, I'm outing people who are using AI-generated comments, and I have noticed in the last week or two weeks a sharp drop in the number of AI-generated comments on LinkedIn. I've noticed that in your feed. I've noticed that in my feed. I've noticed that all over the place. There's still tons of AI-generated content, but there was this wave for a few months of people getting on this hack of having AI generate comments for you and boost the LinkedIn algorithm, and that seems to be waning and waning quickly. I don't think the AI-generated content is going to go away anytime soon, but it's clear to me it's either a change in the algorithm or, I think more likely, these growth hackers have figured out that the net effect of this hack is zero to negative. What do you think?

David: We can only hope that gives them a lot more credit than I would. I hope you're right. 1 in 15 of the comments on my threads on LinkedIn strike me as AI-generated. It's always longer than it needs to be. It's always very even. It feels like it's written by a robot. It's like somebody that I don't hate, but I don't want to talk to at a party, like somebody that's rehearsed something, memorized it, rehearsed it, and then they tell me it's just, "[disgusted]." This feels so negative, but I am really bullish on this market as long as you incorporate certain things into it. I'm very bullish on this market. I just want to raise my hand and say, "Listen, if you are a small generalist firm, you're screwed, but there's a bright future for you if you're willing to do certain things."

Blair: We're down here at the bottom. I want you to address the issue of the role of AI because this is something that I thought we should talk about. The role of AI and your use of AI, or the term AI in your positioning. What's your point of view on how firms should or should not leverage AI in their claim of expertise?

David: I don't think I'd talk about it unless it comes up. If it comes up, then I would quickly, without any hesitation, explain how you've woven it into your workflow and some of the guards you've put around it, and so on. Some of the fences you've put around it, but I think you ought to experiment with it a lot. You ought to set aside a lot of money to do it. This is so weird to me, especially the data center argument. It wasn't too long ago, especially during the pandemic, when some folks were saying that internet access was a fundamental human right because here we have people who can't go to work, they live in rural settings, they don't have internet. That seems to not be fair.

Now we have a data center debate, and it's like if AI is going to be a net positive for mankind, then it seems like AI needs to be a basic human right too, and there ain't going to be any AI without data centers. It's just sort of interesting to think about the impact of all of that. I just think it's going to be ubiquitous. Nobody thinks about internet access. Back when I was first running an agency, I had to dial up internet to download updates to software. We didn't have Ethernet even. We had Apple Link done over twisted pair, four-wire phone lines, and now we don't even think about it.

We're going to get to the point where we just don't think about it, so ubiquitous. The people who are going to lose are the people who haven't incorporated it thoughtfully into what they do, but the internet did wipe out things. Cars didn't wipe out things. Railroads didn't wipe out things. There's going to be creative destruction, obviously. Yes, we said this wasn't AI talk, but it's going to be creative destruction. The ones who lose are the ones who just say, "This changes everything," or "This changes nothing, and we don't want anything to do with it." It's like, no, just don't have your head in the sand. I guess that's my perspective at the moment.

Blair: You say in this post, "There may be a one-time opportunity to bring your clients up to speed on it, but that will be one and done, and I pity the firm that treats AI adoption as the new digital transformation. It will be short-lived and not a game-changer except in very small pockets with custom AI applications." I have noticed, and I think you have too, I think we've talked about it, is there are some firms that are just caught flat-footed by AI, and it's like the tidal wave that's swamping them. There are these digital transformation agencies that made their living under that banner for a decade or so that really are at the front now of AI adoption and helping their clients use it.

I'm seeing those firms are quite successful today. You and I think maybe we're fans of digital transformation early, but we're suspicious of how long it would last. Then at some point it was like, "Okay, this is over. It's no longer a valid claim." I think you're saying we'll go through the same thing with AI, but at a much faster pace. Is that what you're saying?

David: Yes. Now, you think about the typical agency. They have a client that's bigger, slower-moving, not as experimental, doesn't take as many risks, and so on. They're seeing this agency further ahead than they are. It's natural for them to say, "Hey, could you help us implement some of this, maybe save some money, maybe get more done with the same time and money, and so on?" Of course, if you're an agency, you should say yes to that because you're getting paid to experiment. Don't think that this is your new positioning. Whereas digital transformation, the height of digital transformation, I think, lasted maybe five or six years, and people were stringing it out to a decade. That's not going to last. It's not going to be that long for AI. That is not your new positioning.

It may be a service offering underneath a positioning. That's the big point I'd like to make. AI enablement for your clients is a service offering underneath a positioning. You still need a tight positioning, and this is just a service offering. Don't think that it's your positioning. All of a sudden, there's going to be 55,000 agencies doing that, and you're not going to stand out from the rest of them.

Blair: About 30% of the people in my LinkedIn feed appear to be making this mistake.

David: Yes, welcome to LinkedIn.

[laughter]

Blair: All right. We're out of time here, but we didn't cover-- you've got to give us something on the strongest points. What are the elements that you'd favor in any positioning? You've got about eight here, and we could go deep into any one of these. A few of them I wanted to, but we ended up going at this backwards. Which ones do you want to call out?

David: Data collection, for sure. There is such a need for zero and first-party data, and agencies should be at the front of that.

Blair: I'm sorry. What's zero-party data?

David: Zero first-party data, it's the closest, it's the data you already have about your clients. The privacy issues are not as serious. You're not buying data from somebody else. This is data you already have from the transactions that are happening. You ought to be a part of that collection and using that data. I'll skip over some of these. Storytelling and creativity, I just think those are never going to get old. That's not a differentiator, but it's going to really make your work stand out for sure. Hyper-targeting is really going to be big that we'll move away from personas that are built around demographics. We'll be working around demographics that are more about shared interests that have nothing to do with age or gender or anything like that. Live action is going to be big. Not so much animation, but live action that really looks live action-y.

Blair: Non-CGI live action, is that what you mean?

David: Exactly, yes.

Blair: Why is that? Is that a backlash to all of the fake stuff out there?

David: Yes, exactly.

Blair: I have to push back on storytelling. You and I have railed against the storytelling positioning for a while. Here it is on your list of positionings that will survive. Do you want to say more about that? Am I mishearing you?

David: I said that's one of the things I would favor in a positioning. It's not a positioning.

Blair: Got You.

David: Storytelling is not a positioning, but really being good at it, I think, is really critical to your success.

Blair: Then you say emotive storytelling, not manipulative storytelling. Not always trying to sell something, but rather the kind of connection that only real humans make with their next-door neighbors.

David: If you think about how our guard is up against all the messages trying to get through our barrier and sell to us, it's worse than it ever has been. I just feel bombarded every day. Some of that could be my own emotional issues. I don't know. I think a lot of people are going to simply dismiss any brand that's manipulative in any way. They are going to relax their guard around brands that treat humans like humans and not as somebody to send them money, but maybe that could just be wishful thinking on my part.

Blair: I think you're right. I think trust is going to be more important. I think you will erode trust when you start creating content that starts with, "I noticed, I experienced," when you didn't notice, or you didn't experience, and I think I know myself. I just like, "No, done. Done with you. You're lying to me, we're done."

David: I said on LinkedIn this morning, I wrote this post, or maybe it was last night, and I said, "Listen, I think we can boil new business down to a two-part phrase. It's to be known and trusted." If you're trustworthy and not known, that's not going to help you all that much, right? If you're known and not trusted, that's not going to help you. Known is pretty easy, that depends on a tight positioning. Being trusted is way more complex. It's about being human. It's about admitting when you don't know something. It's about sharing your expertise with this perspective of really helping your potential customers, even before they are potential customers. I just think it's a good way to live for a brand as well, not just a consultant or an agency.

Blair: Our topic today has been Most At-Risk Shops. This was not an AI episode, regardless of what you think. Thank you, David.

David: Thanks, Blair.

Pricing Resentment

2Bobs with David C. Baker and Blair Enns

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Blair sees creative entrepreneurs opening themselves up to pricing resentment from their clients when the value of their contributions diminishes over time, especially when they've created significant economic value at the beginning of a long-term engagement.

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"Is Your Pricing Creating Resentment?" by Blair Enns for winwithoutpitching.com

Transcript

David C. Baker: All right, Blair, today I am interviewing you about, is your pricing creating resentment? [chuckles]

Blair Enns: I thought we could just broaden this out and just talk about all resentments. Let's have the airing of the grievances. You go first.

David: Oh, that is one of my favorite episodes.

Blair Enns: Of Seinfeld.

David: Yes. What's interesting to me about this topic, and I read your article, and listeners, this is based on an article called Is Your Pricing Creating Resentment? As I read through this, I thought, "Wait a second, I thought that performance-based pricing wouldn't create resentment because people hate paying for something that doesn't bring them results." If we say, "Okay, you're only going to pay for results, how in the world could that build resentment?" It was just interesting to see how those two things collided in my head.

Blair: The impetus for this was I got a note from a colleague who was running the idea past me of an advisory relationship where they would get paid a percentage of the revenue that they helped create over the course of the year. My initial reaction was, "That's too long." He said, "Well, why is it too long?" I had to think through it. I knew it in my gut, but I hadn't fully articulated it. As is my need, I had to write about it for me to understand why I knew it was wrong.

It wasn't until I wrote through it that I fully understand that the bottom line is the performance pay can work great, but I've seen cases, including some of my own engagements, not very many, but some of them where the way the deal is structured, if you do your job, you get paid a lot of money initially, and the client's generally happy to pay you that money, a lot of money initially. As things keep going, they forget the situation they were in before you arrived and saved them or took them to a new level of revenue. Then that creates all kinds of problems, including sometimes legal problems or the client just not paying. There, that's basically the episode.

David: Okay. We're done. Back to something you said. I don't think I understood that. You said in this scenario, a client might pay a lot of money at the beginning and the resentment might build later. Why would they pay a lot of money at the beginning and be happy with that if this is performance pay?

Blair: Imagine somebody's got a problem and they've invested money with different providers to help solve the problem. Let's say it's a revenue problem. It could be lead generation. Like in my world, it could be lead gen or it could be closing, could be average proposal value, gross margin. They've got a problem. They've tried to solve it. They spent a bunch of money a few different times. They don't want to spend money on the problem again because their experience says nobody can solve this problem.

Then along comes somebody who says, "Listen, I can solve your problem," and they think, "Yes, that's what everybody told me, and nobody solved it so far." This new expert says, "You won't have to pay or you won't have to pay much until I solve the problem. How does that sound? I understand, based on your experience, you think I'm not going to solve the problem, but I'm willing to take that risk. If I do solve the problem, you're going to end up paying me more. Are you okay with that?"

The client says, "If you can do it, I'll pay you that much money." It's a deal that makes sense at the time. It sounds fantastic. When the expert proves that they can indeed solve the problem, unless it's a massive amount of money, usually, that first payment the client is okay making.

David: Oh, because they see the future, or they assume this future out here, and they're happy with it, like this is a new solution to something. I'm trying to think about how that relates to-- You remember that I had a TBR package, a Total Business Reset package. I forget what I called it, but it was the super package.

Blair: Where somebody could follow you around? That one?

David: That was a different one, yes. That was a disaster, too.

Blair: A different super package.

David: That was a different disaster.

Blair: That was the super duper package.

[laughter]

David: No, this is one where you paid a fair bit more money, but you got a lot more from me. The catch was that for me to make a lot of money, I had to really impact your situation, which was essentially performance pay. The only way to really measure that was to wait for a whole year. I had two clients take me up on it, and they were happy to do it, but one of them refused to share their financials with me at the end of the year because that's how I would have made more money.

The other one fell apart where I was too eager to take it. I wasn't choosy enough because I thought this would be really great. I guess the point is that it's not necessarily a panacea. It comes with pros and cons around all of it. What got you to writing about this? Was it whining about hotel breakfasts or what?

Blair: [laughs] I opened the post talking about how expensive everything is. No, it was that example of a colleague who was in that situation. My point was, there's some nuance here. In the situation where I was advising somebody, in the post I wrote about myself as an example, and this person's business is close enough to my own that we could pick either one. In the example of the engagement that this person was considering pricing on a performance basis, there was a hefty amount of knowledge transfer going on in the engagement.

We could talk, we could do a whole episode on knowledge transfer. Knowledge transfer is a form of value that is typically undervalued and underpriced by the expert who's offering it. The client really values it, and they're rarely asked to pay for it. Now, in my business, I run a training business that is effectively a knowledge transfer business. We don't do things for you. We teach you how to do things.

Now, if you're an expert, let's say practitioner advisor, where you're going to go into your client's business and you're going to do something for them that will increase revenue or decrease costs, if you do it yourself, you could do that on a performance pay model. If by doing what you're doing, doing the practitioner thing, you are also at the same time advising your client or in some way enabling some knowledge transfer, creating a situation where every time you close a deal, the client has a better understanding of how to do what you're doing, at some point they no longer need you.

In this example, where I was advising a friend of mine, the first maybe couple of months, I was putting myself in the client's situation, thinking, "Okay, the client will probably happily pay you on a performance pay basis for the first, let's say, quarter." After that, they're going to see what you're doing, they're going to learn how to do it themselves, and they'll either say, "No, no, I'll do it myself," or if there's something in the contract that says they're locked in for a year and they have to paying you on this basis, they're just going to quit paying you.

They're going to break the contract because now they're looking at what you're doing and thinking, "You're no longer creating value the way you did because you also created this other form of value, which is knowledge transfer, which means I don't need you to do what you're doing. Therefore, I don't want to keep paying you the way I've been paying you." Does that make sense?

David: Yes. Using that definition, the people listening to this, the folks running digital shops and agencies and so on, they're not in the knowledge transfer business primarily, right?

Blair: They're not, but I would ask the listener, how many situations have you been in where the client has internal resources and they bring in an outside expert like you because their internal people don't know how to do this particular type of thing? In how many of those situations, by the end of you doing this particular thing, maybe just once, maybe once or twice, does the client then say, "All right, that's good enough, thank you, we'll take it from here because our people can now do this?"

That is knowledge transfer, whether it was intended, whether it was overtly priced or not. That's a form of knowledge transfer that I would suggest happens a meaningful amount of times whenever the agency's client has an in-house department that can also do what they do.

David: Ah, right, right. There's some interchangeability, whether or not it's true in the client's mind. There is, yes. We can see this happen in relationships as well. It's like, "You're only successful because of me." Both parties are overestimating the role that they had in creating this. I guess performance pay would be easier to do if the results were very clearly attributable to either party. You're not saying people shouldn't do this. You're saying that it should be structured in a way that takes timing and reluctance and overconfidence and all of that into account, right? You're just saying think about it carefully, not don't do it.

Blair: Let's put ourselves in the shoes of the sales and marketing advisor again. They're going to increase the top line through their efforts. Let's say they're a fractional person going to work for an agency and they're getting paid on a performance basis.

David: And they're doing new business?

Blair: Yes, they're doing new business.

David: Okay, yes.

Blair: Let's say it's a Win Without Pitching coach going in. We don't do this, but let's say it's a Win Without Pitching coach going in and doing business development on a fractional basis, and they're getting paid a small salary and performance based on outcomes. I talk about how if you have a black box solution, you can get away with this for longer. In this analogy, the coach is showing up and working their Win Without Pitching magic and closing more business at higher prices. The senior people in the agency are observing, and they're learning as this person goes.

There's knowledge transfer, whether it's intended or not. One way that person could protect themselves and continue to earn on a performance pay basis is if the whole thing was a black box. What I mean by that is the client can't see what's going on inside, which would mean that the fractional business development person would not only not include the agency principal or any senior team members in the deals, in the sales, they would purposefully exclude them and not show them how they were working their magic. Does that make sense?

David: Right. So that if they stopped that engagement, then the new business would stop, and they would have no way of replicating it.

Blair: Yes. I'm not sure about the black box approach. I put it in there because it occurred to me that if you did have a black box, then there's no knowledge transfer in a black box. I don't know that that's the case for a black box approach to these engagements, where it's understood that you're not going to reveal your secrets of how you do what you do to your client. Does that pass any kind of litmus test for you?

David: It raises the hair on my arm, honestly. I don't know if this is the right approach, but it definitely is the approach I take, and I feel really good about it, and that's the advice I give my clients all the time. The client is not the enemy. Your job is to get the client to the point where they don't need you anymore.

At the heart of that premise is, "No, we're not going to hide things from you. We're not going to make ourselves indispensable. You'd have to have a different approach to performance pricing if your approach is to not hide anything and to get the client to the point where they don't need you anymore."

Blair: Yes. I think both parties are better off if they have an open discussion about knowledge transfer. Even this fractional person, let's say that they go in and they've got a one-year agreement. They might structure the first quarter or, say, maybe the first half of the year. Maybe you could argue that that's not enough time in this domain of agency business development. Maybe it's another domain where a fractional salesperson can have a quicker effect.

Let's say it's performance pay over the first quarter or two quarters, and then there's an open discussion, an acknowledgement that the knowledge transfer will take place. I think the expert would position the engagement in a way that says, "It's going to start out with me doing it myself, and I'll get you to the results you want to achieve. If I do, you're going to pay me a percentage of those results as per this formula. At some point, when we get far enough into this, you're not going to want to keep paying me that way. You're going to want me to teach your people how to do it."

The second half of the engagement is about knowledge transfer, and the incentive portion of the agreement tamps down. Maybe the committed compensation part in the form of salary or monthly fee to the expert goes up, maybe it doesn't, but there's an understanding that you're going to pay me a lot of money early, and then that's going to ramp down as I ramp up your internal capabilities. If that's the way that the value creation is going to work in your engagements, then you should break this box or this model of thinking, "I do it one way for a long period of time, and I get paid the same way."

My second book, which is now out of print, Pricing Creativity, it's called Pricing Creativity for a reason. That double entendre of how do you price creativity, but also the creativity of pricing. I think we should just be more creative, open-minded about how we price these engagements, and the sign that you're creating resentment. As I point out in the post, resentment only arises in your existing client relationships. You don't lose deals because of pricing resentment. That doesn't show up as resentment. It shows up as lost deals.

Resentment builds in existing relationships that started out pretty solid, where both parties thought the agreement was fair, and then at some point, one party thinks, "This isn't fair. Things have changed." What's usually changed is you front-loaded the value in the engagement. Your highest value was at the beginning, and you're continuing to get paid the same way even though the value you're creating is dropping. The reason your value is dropping might just be because you've now shown your client how to do what you do.

David: Yes, it's just those lines converge. It's not that you have failed somehow in delivering value. It's just that you haven't recognized that these lines, how you price and how much value you deliver, they're moving apart, and the client's going to notice that. One of the statements you made in this article was, "I should have structured the deal so that my pay was highest when my value was." Another way to say that is the value and the price needs to move in concert over time. That's part A of what I wanted to say.

Part B is when I read this article, the most striking thing about it to me was something that was missing from the article. I fully expected you to say something about recurring revenue arrangements, and you didn't. I want to tie that together with this statement that I just read, "I should have structured the deal so that my pay was highest when my value was."

There's a lot of great reasons to do recurring revenue arrangements. I'm not completely against them. I just think that when they go bad, they go bad really badly. I think one of the reasons they go bad is because the payment is always on the same day of the month, but that's not necessarily when the client is feeling the most value that they're getting. When's the best time to send an invoice to a client?

Blair: Right after they say thank you for the great job.

David: Yes, exactly. Those two things don't match. When the client gets this bill and they're immediately prompted to think, "What have they done for me recently?" I don't feel the same way about them that I did earlier, and then they start looking for reasons to reevaluate the relationship. I just think that's part of it because the lines move in different directions at certain parts of the month.

Blair: Yes. In some ways, the broader topic here is the disconnection between your price and the value you're creating, and not a gross disconnection, but how they depart from each other over time. I'm doing a talk tomorrow to a group of PR firms. It's a podcast on a PR podcast. I did one for these guys recently. When we were wrapping up, one of the hosts made a comment about a deal they were closing. I forget the exact details, but I made the cheeky comment of, "Aha, you took the client's budget and divided it by 12, right?" They laughed sheepishly and went, "Yes." I said, "That's it. Everybody does. PR firms do that all the time." He said, "Can you come back on the show and talk about that?"

That's what we're talking about tomorrow. It's the same idea. It's a client's got a problem. Let's say it's $120,000 budget to solve the problem. They don't want a relationship. They bring in a few PR firms to talk about hiring one of them to help them with the problem. Every one of those PR firms takes the $120,000, divides it by 12 to get $10,000 a month, and stretches the engagement out to match their pricing model.

David: Yes. Like you say, match compensation to value creation, which is absolutely true. We could also add a little note to that and say, and the timing needs to match, too.

Blair: Yes.

David: When I had to work with an attorney one time, I was in trouble, and he said, "All right, we can start this for $10,000." At the time, $10,000 was a whole lot of money to me. I didn't have any choice, and I was happy to pay it because I felt like, "Man, if I didn't have this guy's help, I was really going to be in trouble." Sure enough, he saved me and everything. It was the timing, not just matching the price to the value.

Blair: Yes. This is a tangential topic, but I love the way attorneys do retainers. I think people who are in the retainer business should think about it this way. It's, you give me a chunk of money up front. If you're going to sell time, you shouldn't sell time, but if you're going to sell time, you should do it this way. You give me a chunk of money up front, I'll start working away. When that pile of money is getting low, I'm going to come back to you, you give me another pile of money. They are never chasing bad debt.

David: No.

Blair: That's the way to do retainers.

David: If they have to come back to you and ask for a second batch of money, you're only going to pay that if you felt like you've gotten value over that first batch of money, which is fair.

Blair: Yes. That's the lesson: Align your pricing in time to the value that you create. Performance pay can be fantastic. Just be aware of getting a little bit greedy in those performance pay terms where you're proposing to get paid past the point where the client actually appreciates that value.

David: Yes. The second lesson is, lock the door before your rude Great Dane comes in and destroys your recording. [chuckles]

Blair: What does Frida weigh?

David: [chuckles] 160 pounds, [laughs] and she's taller than me. Her head's above my head when she's standing.

Blair: Thank you, Frida. The 3Bobs.

David: All right. Thanks, Blair.

Blair: Thanks, David.

People vs. Profits

2Bobs with David C. Baker and Blair Enns

Download

Prompted by a recent trip to Europe, David considers how the differences between worker protection laws in Europe compared to North America affect starting and running an agency in this fast-changing global economy.

Links

“Employment Law + Economic Flexibility” by David C. Baker for punctuation.com

2Bobs in Tuscany

Join David, Blair, six other business owners and their spouses for four days and nights of creative business exploration in an intimate countryside villa designed for long meals, deep conversations, and unhurried thinking.

Learn more and apply at 2Bobs.com/events

Transcript

Blair Enns: David, is this the political episode?

David C. Baker: I'm inching up to getting canceled slowly. [laughs]

Blair Enns: Let's speed that up a little.

David C. Baker: Every time I hit send, it's like, "Oh shit, is this it?" No, I don't think it's that bad. It's not going to be controversial to the principles of firms. It could be difficult for some employees to hear, I would think.

Blair Enns: Okay. The topic of your post that we're referencing here is "Employment Law and Economic Flexibility," but I think one of your subtitles later on, "Profits vs People," is really the subject. Where do you come down on this seesaw, maybe, or spectrum of profits at one end and taking care of your people at the other end? The impetus for this post, as you say right at the top, is you were where doing what?

David C. Baker: I was in Portugal. I do three or four photo adventures by myself a year.

Blair Enns: Or eight. [chuckles]

David C. Baker: Or eight, depending on the money. I was in Aveiro, Portugal, and then later went to Porto. I was thinking about employment law in Europe and how there's parts of the US that are not that far behind Europe. It's a tough topic to write about because there's nothing you can say that's going to make a certain group happy here. I guess I just wanted to say, "Okay, even if you don't agree with my perspective, let's at least shine a spotlight on this because there are some things that are going to impact you quite a bit over time, and that's this whole notion of employment law."

Forget about the reasons for a minute. Just objectively speaking, forget about the politics, how much more economically successful is the US? 20 of the 25 most valuable companies in the world are headquartered in the US, and most of those companies were started in the US. Again, forget about the politics for a minute. Why is the US an economic powerhouse? There are lots of reasons for that. Part of it is geographic. We have an ocean on both sides of it. Part of it is the entrepreneurial nature. We have the looser regulations.

I would say that the entrepreneurial environment in the US is largely better because of employment law. What I mean specifically, this is where it gets ugly, is because it's easy to fire people. It's easy to fire people. If it's easier to fire people, that means it's easier to hire people. I didn't even realize that until I'm talking with my clients. We've got clients in dozens and dozens of countries, many in Europe. I'm talking with them, and they're so hesitant to grow by adding people because that is a big decision. You can't just fire somebody over there. It's very different.

One of the quotes I have in here that was written by an anonymous bigwig in Europe says, "In Europe, if you hire someone, you're responsible for that person for their entire life." Now, that's not really true, but it's easier to put a kid up for adoption than it is to get rid of a junior marketing analyst in Italy. A lot of this thinking is so sweet in a way. That's a controversial statement to make, but it is kind of true if you recognize that he's exaggerating.

Blair Enns: I wrote a post in the Win Without Pitching Academy this morning, our client portal, basically. I'm basically getting rid of a whole bunch of books that we have in Europe. I said, "We're simplifying how we sell books in Europe*." Then, below the post where I speak to the asterisk, I say, "I might write a post about this for the few people out there who want to know the ins and outs of self-publishing."

First, I say, "Amazon's increasingly adding fees, et cetera, but the EU is increasingly adding their own fees, regulations, and red tape. Doing business in Europe, even just selling books, keeps getting more complicated. I don't think it's just employment law." We're going to sound like two anti-government, anti-regulation, free marketeer libertarians.

David C. Baker: Well, it's all true.

[laughter]

Blair Enns: Well, I don't put myself in the libertarian camp. I joke there are no libertarians in Canada because the definition of a Canadian is somebody who's willing to sacrifice a little bit of freedom for order. That really resonates with me, but it grates against libertarians. I am sympathetic to some of the issues. You're in the US, I'm in Canada. We have similar but maybe slightly different points of view on how easy or difficult it is to do business in various parts of the world.

I'm with you. I think my bravest clients are my European clients who hire people. For those in North America who are listening to this, if you don't have any direct interaction with these people, if you don't have a sense of it, man, have you got things easy? It is so easy for you to get a permit to start a business. It's easy for you to add people. It's easy for you to get rid of people. It is not like that in many other parts of the world. It certainly isn't like that in Europe. Is that the point of this post and podcast? Are we bitching about overregulation in Europe?

David C. Baker: If this is a bitching session, then I would absolutely sign on for that. There's way too much regulation in Europe. I think there's way too much regulation in parts of the US as well. There's different lenses you can look at the world through. You can look at the world through either freedom or safety, or oppressor or oppressed, and so on. I've been an employee and loved that experience. I think I had five or six jobs. I loved three of them. I've been a business owner. I love that experience. I don't think one is better than the other.

I'll just say it like this. The role of employer is changing, just like the role of formal education is changing. In the early days, the job was education. Now it's nutrition, it's social services, it's physical education. There's some health. I'm not saying those things are bad. I'm just saying that the expectations are different. The expectations for business are different.

It used to be you give me labor, I will give you money. Now it's very different. There's mission creep. Now, as employers, we have to take care of employees. That's part of our mandate. The equation, how you think about hiring somebody, is very different. It's not, do I want this person's labor, which of course is always a part of it, but do I also want to take care of this person? That changes the equation. I think there's something happening in the entrepreneurial mind that has not actually faced that head-on.

I think some entrepreneurs are getting weary of having to take care of people. They're not getting weary of employing people and exchanging money for effort. They're getting tired of having to take care of people. That's not what they signed up for. This is part of the mission creep that's coming into the US, partly from Europe. We're 30 years away from Europe. Is that good or is that bad? That's the decision for you to make. I'm just saying, objectively, it's changing, and you're going to have to deal with it.

Blair Enns: You talk about this false promise of profits versus people. Are you still a B Corp?

David C. Baker: I'm a benefit corp, not a B Corp. When people hear B Corp, that's something you apply for and everything. In Tennessee, they have public benefit corps, where you simply say this is what's true about your company, but it's not the same as a B Corp.

Blair Enns: Got you. B Corp, different from benefit corp, I think arose in the idea that it can't all be about profits. Milton Friedman, he wrote an op-ed. It was either The New York Times or The Wall Street Journal. I think it was 1970, give or take a couple of years. That's when he put forward his thesis that the only goal of a public corporation is to maximize profit for shareholders.

There are some people that say that was the beginning of a wrong turn where we valued only one form of success and we devalued other forms of success, like providing lifelong careers for people, taking care of our people. If you go back to some of these old-world companies, I'd listened to some podcasts recently on the founders of Bugatti and Ferrari, These really were family businesses.

You went to work in these businesses, and you effectively became part of the extended family. Barring disaster, you could have a job for life. Everybody felt like they were signing on for life, and the employer felt like they had a responsibility to take care of people for life. I actually think that's a beautiful romantic vision of a simpler time.

David C. Baker: It is, yes.

Blair Enns: Would you say that today the reality is things move much quicker, therefore businesses need to be more nimble, therefore they can't burden themselves with such obligations?

David C. Baker: Well, the world is changing much faster. That is a factor for sure. Back to your example of employment, like in the late 1800s, early 1900s, there was a two-way loyalty among many companies and the workforce. I think it was a very good thing. The side that broke that loyalty first was not the workers. It was the companies following the mandate that you quoted about maximizing returns.

Here's where I think we have to separate public companies and the entrepreneurial folks that are listening to this podcast. In public companies, they are there to maximize profit because they're thinking on a quarterly basis, and whoever the CEO is who's brought on by the board is not going to be there for more than three or seven years or something like that, so there aren't a lot of incentives for long-term decisions that are best for everybody.

That's very different in an entrepreneurial setting because you are close to the people you're working, you're not separated from them with 100,000 employees, and what you decide doesn't have much impact on your personal life, it just impacts them, and you don't even see them. In a small firm of 20, 50 people, these are people that you're with all the time and you care about them. You're not going to make decisions that are evil or wrong, and you need them to build something that's in your personal, long-term best interest. You want to make money over the long term, and you realize that you need people and you need to treat them well to make that happen. It's not people or profit, it's people and profit.

That's where we've separated things. In the public companies, there's no loyalty to employees. Employees aren't loyal to the companies either. That's just the way it is. It's sad. In smaller companies, it's very difficult. It's like you still have to be kind and appropriate and fair to your people, but you still need economic flexibility, you still need the ability to dismiss them. It all comes back to haunt you in a way.

If you run a really solid company, the people that are working for you know that you're not going to lay people off willy-nilly, but they also know that at some point you may have to make an adjustment, and it's just this very good self-correcting sort of a thing. Now, when legislation steps in to tie your hands, what happens? Well, there's this immediate better world for the employees, but there's this much worse long-term world for them because the employers don't have the flexibility to hire and fire. You can mandate whatever you want to help you work around evil employers, that's not going to help all that much. What you're really doing is you're tying the hands of the good employers who need that flexibility. Anyway, is that a little rant?

Interviewer: No, this is good. I wonder, is there any advice in here? You're making an observation about the state of regulation in two different parts of the world, Europe vs the United States, and the implications of those regulations on general economic success. Then, at the more micro level, the ability of an entrepreneur to spin up a business, adapt a business to changing economic environments, et cetera. Is there any advice in here for the firm owner, whether you're in Europe or in North America?

David C. Baker: Yes. It's basically the same advice, and that's to run a really good firm so that you don't have to lay people off, and when you do, it's because of something that you just couldn't anticipate, and nobody expects you to have anticipated that. If you do have a client concentration issue, make sure you manage that with more cash. Make sure you have a tight positioning, make sure you have lots of opportunity, make sure you don't say yes to all that opportunity so that you can keep saying no and maintain your standards.

It's the same thing I would say to anybody, whether they're running a firm in Belgium or Nashville. Even if you do those things in either one of those environments, your opportunities for growth are going to be a little bit more constrained because you have to be more careful in Belgium than you do in Nashville. That's just something you have to live with. You're not picking where you live so you can run a business there. You're running a business based on where you live, and you just have to live with that. That's the advice I would give everybody, and thank you for that reminder. Run a really strong business so that these things don't come up as often.

Interviewer: You made the point in the post that if you're able to fire quickly, then you will hire quickly. It gives you the freedom at both ends of the spectrum. If you're not able to fire or downsize, let people go as the economy adjusts, then you're going to be really slow to hire. I would imagine the implications of that are, when we're coming out of a difficult economic period and things are getting better, you're going to see the economic rebound first in an economy that allows people to fire because they're not worried about hiring people.

David C. Baker: Yes, exactly. I have three immediate family members who are looking for work right now, and it is not a good environment for that. In some cases, you can see why somebody's more hesitant to hire, partly because of this. We're recording this in mid-April, looking out at the chaos in the world at the moment, not really knowing what's going to happen next. You can see why somebody might be hesitant to hire if that decision means, okay, I'm stuck with this person for quite a while, whereas they could say, "Well, I don't really know what's going to happen in the future, but as long as this person knows that I'm hiring them with that in mind, as long as they're okay with that, then let's go ahead and go for it. I might have to adjust, but the fact that I can adjust gives me the confidence to go ahead and do this because I can make an adjustment later."

Blair Enns: Do you think it's true that in a regulatory environment that allows firing-- we've already stated that in such an environment, the incentives are there to hire when it's appropriate, because the burden of having to let people go isn't there. It seems to me that, probably part and parcel of that is the idea of the employee that, "Well, you can fire me, and I can quit." I don't know if this is true today, you might have some statistics on it, but I know we've talked about it in years past, where typically when people are climbing the career ladder these days, they do it by leaving the firm they're at and going to another firm. They can move up faster that way.

It seems to me that'that's part of the understanding between employer and employee. Yes, you can fire me, and somebody else can hire me, and I've been here a year, two years. I've gotten what I want out of this relationship. Here's my notice, I'm going to work for a competitor, and for the most part, the employer's okay with that.

David C. Baker: Yes, and I think they should be, honestly. I don't think we ought to hold onto people forever because it infuses new blood into our firm. It requires us to have systems and processes that can onboard these people better. The other thing, too, is it just holds back salary inflation. If you try to keep people too long in this world, they're always going to compare what you couldn't pay them with what they're going to get on the other side, and I don't think you should compete in that environment except in very rare circumstances.

Yes, it's not like employees are all that loyal either, but I don't blame them at all. It's like, in this environment, no, you should do what's in your best interest, but always keeping your reputation in mind so that when you meet somebody on the street where you quit a job or somebody you just fired, you can still hug and say, "Listen, I'm sorry the way this worked out, but I sure had a great experience working for you or employing you when we were together."

Blair Enns: Yes, makes sense. I think that some of the bravest entrepreneurs I know are in France. I do a little bit of business over there, and I have friends over there who own businesses, and it's like, oh, I don't know how you do it. Just even getting a business permit is not a simple, straightforward thing. Then the way you're hamstrung with how you deal with your people. Now, if you grow up in that environment, that's what you know. You and I have grown up in this environment in North America where there's this, call it freedom of movement among the employees and the freedom to move them of the employers. I think net-net, I certainly feel like I'd rather operate in this environment than my friends in Europe. I honestly do not know how they do it, and it is not getting easier.

David C. Baker: It's not. I just had this group together in Atlanta last week, and there were 14 of us from 3 different countries. I was being facetious. I don't quite mean it this way, but I said, "Listen, I really admire you folks for being entrepreneurs in other countries outside the US. I have a very high level of admiration for you." I said, "If you can't make it in the US, you're just incompetent." I didn't really mean it that way, but I was just trying to be funny. That's the point, like, listen, if you think it's hard here, you should go do it somewhere else. That's a lot harder. [laughs]

Blair Enns: There are times in good economic times in North America where you're in a creative business of some kind, AI might be changing this, but there are some times when anybody can make money. Now is not one of those times. I know lots of people are making really good money, lots of entrepreneurs, but it's not one of these simple, easy times where the money's slowing and you'd be hard pressed not to make money, but they do exist, these periods of time.

David C. Baker: Yes. This is not the time to be in business if you're faint of heart. There's so much change happening right now.

Blair Enns: Hey, since we're at the end of this podcast--

David C. Baker: Uh-oh. I hate it when your voice tone changes.

Blair Enns: My late-night DJ radio, and we're talking about Europe. Why don't we drop a little hidden gem here?

David C. Baker: Why don't we go to Europe?

Blair Enns: Yes.

David C. Baker: Now that we've just beat them to a pulp, let's go visit them.

Blair Enns: Here's the deal, listener. If you're listening to this, you're getting a sneak preview on this and the first chance to sign up. David and I have rented a villa in Tuscany in September, four days and nights. There are nine rooms. David and his wife Julia are taking one, Collet and I are taking the other. We have seven that we're selling, four days and nights together. There'll be a 2Bobs kind of curriculum discussions each of the four mornings, dinner together, the rest of the day is on your own, all your food and beverages taken care of, your accommodations are taken care of, you just have to get there. Go to 2Bobs.com/events, and find the Tuscany page. You have to apply rather than signing up. We're just trying to keep the lunatics out.

David C. Baker: We already have two signed up.

[laughter]

Blair Enns: It's a two lunatic maximum. It's just a little vetting, business owners only. You're encouraged to bring your spouse, but you don't have to. 2Bobs in Tuscany, September 2026.

David C. Baker: Okay, is this where you say thank you, David?

Blair Enns: You're coming right, David?

David C. Baker: I'm coming, yes, I'm coming.

Blair Enns: All right. Yes, we love Europe. We're just grateful that we don't have to run businesses there.

[laughter]

David C. Baker: Forget everything we said. See you in-

Blair Enns: Tuscana. Thanks, David.

David C. Bair: Thanks, Blair.

Three Patterns of Lost Opportunities

2Bobs with David C. Baker and Blair Enns

Download

Blair identifies three recurring categories of lost sales in creative firms and offers solutions to each. Fixing two of these patterns can reap the dividends immediately, and adjusting your sales approach for all three will pay off for years.

Links

“Three Patterns of Lost Opportunities” article by Blair Enns for winwithoutpitching.com

Brigadoon.live

“Slapping Down Your Childlike Glee” 2Bobs episode

“Debriefing After a New Business Call” 2Bobs episode

“Assume an Advantaged Player” 2Bobs episode

“The Rungs You Can Reach on the Ladder of Lead Generation” 2Bobs episode

Transcript

David C. Baker: All right, Blair. We saw each other yesterday, right? That was fun.

Blair Enns: How have you been? [chuckles]

David: Since yesterday, I've been good.

Blair: Since like 12 hours ago.

David: You and I were just in Sundance, Utah, at an event. It was really fun, really great.

Blair: Should we say what the event is, or is it supposed to continue to be a secret?

David: I think we should say, yes. Brigadoon.

Blair: Brigadoon.

David: Tell people about it because it was such a great idea, and it gathered so many interesting people from different perspectives.

Blair: Our friend, Marc Ross, who's a global geopolitical strategist from DC, fascinating guy, writes a daily post. His business is called Caracal, where he writes a daily post of what's going on in the world. He ingests all of the world's news every morning-

David: Poor guy.

Blair: -and then spits it out. Then companies and politicians hire him to get advice on, "Hey, we're thinking of doing this in this country. What's going on? What do we need to know? Who do we need to know?" He's been running this event for 13 years, I think, in Sundance, Utah. He brings together about 50 people from different walks of life. You and I were there. I don't know what you would call us. Consultants, I guess.

David: [chuckles]

Blair: Robotics people, AI people, a doctor, cardiologist.

David: Fashion people.

Blair: Fashion, academics.

David: Two agencies.

Blair: Two agencies. No name tags, no PowerPoint presentations. Really cool environment. Lots of small talks. Great conversations over meals. Really interesting. If you like being exposed to smart people from outside of your industry and like these collisions where you have lots of interesting conversations about you don't know what you're going to talk about going in, man, it is super cool.

David: What's unique about the event is the people that come. The content's going to be good because of the people that are presenting it, but that's not the core theme. You go to it because the quality of the people. I think that's going to be the future of really great events. It comes down to what people want to hang around you. What kind of people are they? How do they think? How open are they?

Blair: It's Brigadoon. I think there's a website. It's not exactly a secret. I think you can sign up if you're not invited, but you might have to be invited. Anyway, if you're interested, reach out to David or me for next year. I assume it's happening next year. I think Marc also does dinners in various cities around the world. We just recorded a commercial for Brigadoon. Marc, expect the invoice in the mail. That's Marc Ross. If you're interested, let us know, and if you're interesting enough, we'll introduce you to Marc Ross.

David: [chuckles]

Blair: Maybe you'll get an invite to Brigadoon.

David: It has nothing to do with what we're recording today.

Blair: I don't even remember what we're recording today now. We got off on a tangent.

David: Yes. Today, I'm interviewing you on three patterns of lost opportunities, so now you have about 10 seconds to go review that topic-

Blair: [laughs]

David: -while I ask you. The three are poor fit, someone else was the advantaged player, and mistaking interest for intent. Let's dive into the first one. Really, what we're talking about is if you looked back over the opportunities that you were pursuing in some way and you didn't get them, and if you grouped the reasons, what are those three things? You're saying that in most cases, it probably fits into one of these buckets. The first one is it wasn't a good fit in the first place, right?

Blair: Yes, you pursued a poor fit. I think especially in creative firms, the thing about being a creative is you're so excited about the thing you've never done before, so you're prone to maybe a little bit of self-delusion about whether or not this opportunity really is a good fit for you. It's going to seem interesting and therefore good for you because you've never done it before. I think that might be the most common. Maybe not even the most common, but it is a common pattern when I'm debriefing with a client on, "Oh, this didn't go well. Didn't win that deal."

David: You're saying they did it because it sounded interesting, and then you lost it because it wasn't a fit. I was thinking, if somebody said, "Hey, gun to your head, David, what's the primary reason why it's not a fit?" I would say that it wasn't the interesting opportunity that made them do it. It was like, "I need the money."

Blair: Oh, that's why they pursued it to the end.

David: Yes. It wasn't that it was interesting. It was like, "Oh, I need the money."

[chuckling]

Blair: I don't know why that didn't even occur to me, but yes, that's a thing.

David: [laughs] It's a thing, yes. Money is interesting. Here's a question for you. If this ends up being the reason why it didn't work, it just wasn't a fit, I presume you're saying that the prospect thinks it wasn't a fit. How early in the process do you think the agency, if they're being honest with themselves, would say, "You know what? This isn't a fit."? When does that occur to them?

Blair: It should occur to them in the qualifying conversation. In hindsight, it's almost always perfectly clear, but sometimes it takes an objective third-party person to ask the question, looking back now, can you see, were there any signs early on in the first conversation, the qualifying conversation, where you thought, "Ah, I don't know about this," or you discerned that the client was thinking, "Ah, I don't know about this."? The answer is almost always yes.

It's not specific to creative people either. It's salespeople in general. Anybody who's got an opportunity in front of them, they're excited about it, and they overweigh the excitement, the pros over the cons, and it's really hard to be discerning. That's the key to the qualifying conversation. You should be in discernment mode. I say in the post you really do need to slap down that childlike glee. There, I'm referencing a podcast episode you and I did on that subject.

David: Yes, that was a great one. This is where I like the idea of a regular new business meeting with other people at the firm. It's maybe the only reason I like it, but you as the person who's leading this charge, you should be faced with an interrogation from your coworkers who should not let up on you. If you're starting to talk them into why we should do this, then that's probably a sign that maybe you need to think more carefully about fit. This is where your coworkers can help you be more objective about it, right?

Blair: Yes, and get the most discerning, most cynical person to drive that review.

David: [laughs]

Blair: We did a post called Debriefing After a New Business Call. You should get systematic about that. If it's not every conversation, it's certainly every lost deal you should debrief on. You'll see the patterns. It's not that everybody has this pattern, but if it comes up once or twice, it's probably coming up a lot. The bottom line is it's poor qualifying, and you need to just remind yourself going into a qualifying conversation, which in my model is the second conversation, but it's the first person-to-person conversation because the probative conversation before it is the one you have without you being present. Topic for another day.

You need to go into that qualifying conversation like a discerning clinical professional who is-- When I say discerning, you're trying on, "Is that really your situation? Is that really what you need? Are you really a good fit for me? Do you really have the money to spend with us? Is this really in our sweet spot? Are we going to be better off for having worked with you? Are we really going to create value for you? Are we really going to be able to work together?" All of those questions, those are the questions you want to ask and you want the answers early on.

David: Right, you're not afraid of the truth.

Blair: The common mistake is you go into those meetings excited. Don't be excited in a qualifying conversation.

David: [laughs]

Blair: Once you qualify them in, then you can let your natural enthusiasm bubble up a little bit, but not in that first person-to-person interaction. You should be in discernment mode.

David: They will take advantage of you if you're excited, and you will drop your standards if you're excited. [chuckles]

Blair: You will take advantage of you if you're excited.

David: Yes. To me, this is such a powerful argument for running a firm that has enough cash on hand, that has a good new business plan that's constantly dropping opportunity into the top of the funnel because you want to remove that pressure you feel of having to close this thing. That's the way you can be so much more honest about whether this is a fit, if it really honestly doesn't matter if you get it or not. You're just thinking of fit and not filling some desperate financial need. It's just such a powerful argument for running a good firm.

Blair: Yes. I've said five or six times on this podcast, not this episode, but over the years, you want to get better at selling? Three words. No sunk costs. The biggest sunk cost is your emotions.

David: Yes. Not just money, but time, too. That's the first one, poor fit. We're talking about the three patterns of lost opportunities where something doesn't happen, and you look back and you try to categorize them, and you can frequently throw those into three buckets. One of them is, oh, it was a poor fit. That's why you probably should never have pursued it in the first place. The second one is this notion that somebody else, not you, was the advantaged player. If you wanted to dive into this more, we did an episode just on this called Assume an Advantaged Player. It was in November 2024, if you want to dive deeper, but summarize that for people first.

Blair: This is where the flip doesn't happen. What's the flip? I alluded to the probative conversation, the first conversation that happens without you present, it happens through your agents of thought leadership and referrers. The objective of the probative conversation is to move in the mind of the client from this relatively powerless position of just another vendor to the more powerful position of the expert. The moment in time when the probative conversation objective is reached, we call it the flip. You flip in their mind from being just another option, maybe even another commoditized option, to the one that they see is meaningfully different, the one whose expertise they really recognize and value. That's the flip.

Ideally, through the probative conversation, which is you building a reputation in the marketplace by proving your expertise in public domains, you drive the flip, you obtain this expert position in the mind of the prospect, and you drive an inbound inquiry where they already see you as meaningfully different. Even in a competitive sale with multiple other experts under consideration, you have the inside track. You are the advantaged player.

Now, in that podcast episode you alluded to, I said there's basically two games that you play, and the mistake is to combine the outcomes of those two different games. You need to separate them. The ones that you play where the flip has happened, you are the advantaged player, you win more often than not. The ones where the flip has not happened, you are not the advantaged player, your odds of winning are about 1/2N, with N being the number of firms under consideration. Four firms under consideration, your odds of winning are about one in eight.

They're really two different games, and one of the things you're trying to do in the qualifying conversation is to determine whether or not the flip has happened. If the flip has happened, you're seen as the expert, you're seen as meaningfully different, and you can get them to prove that by asking for concessions and seeing if those concessions are granted. Those are the games you play, because you're highly likely to win those games. All these other ones, you're highly unlikely to not win those games.

Is there a pattern in your losses where the flip hasn't happened? You're always a long shot and you're telling yourself, "It's just a numbers game. On average, four firms under consideration, we're going to win one in four." That's true if the flip is happening some of the time, but if the flip is never happening, you're not winning one in four. Your win rate is closer to one in eight.

David: The short-term goal would be think carefully about whether you want to even-- You definitely don't want to sink a whole lot of costs into a scenario where, after all these questions you've asked, it's pretty clear the flip hasn't occurred, you're not the advantaged player. The long-term goal is to create a scenario where you are the advantaged player more frequently, whether that's your thought leadership, maybe it's a book.

In the future, if you come up in an AI search, I would think that would help you be more likely in that category of the advantaged player if AI thinks that you are an advantaged player, like you come up in the search. There's all kinds of other ways to think about that. There's a short-term and a long-term way to think about this.

Blair: Yes, and it's mostly long-term. Of these three patterns of lost opportunities, the first one that we talked about, you pursued a poor fit, you can fix that tomorrow by being more discerning in a qualifying conversation. The last one, where you mistake interest for intent, you can do the same. You can fix that one fairly quickly. We'll talk about that next. This middle one of someone else was the advantaged player, that's a problem you solve over the long term by building reputation, by having a probative conversation.

It starts with having a look at your positioning, and then it moves to, how are you generating leads? You do need to climb the ladder of lead generation over time, so you need a plan to help you do that. We've done an episode on the ladder of lead generation. We'll link to it in the show notes. That's basically going from outreach and maybe even some marketing-based activities to more reputation-building activities that still drive inbound inquiries. That doesn't get fixed overnight.

As you pointed out, asking the right questions the way you show up in the sale when somebody isn't the advantaged player at the beginning of the sale, and that high ground is still there to be won, you can get better at occupying that high ground before somebody else does. That's largely a function of how you behave in the sale. You're showing up like a needy vendor, or you're showing up like the expert.

David: That's an important qualifier here that was actually going to my next question. Ideally, you're the advantaged player because of all of your thought leadership activity and so on. If you're not in a particular scenario, you're saying that you could become the advantaged player by how you conduct yourself in the sale, even if you weren't the advantaged player at the outset?

Blair: Yes. You should always assume there's an advantaged player. Now, is there always an advantaged player? No, not at the beginning. I can't prove this, but I know it to be true. Just live with this idea or embody this idea that the winner is almost always decided well before they're declared. You're not the advantaged player. You're asking yourself, "Can I become the advantaged player? Let me be more discerning in the qualifying conversation. Let me put some obstacles in front of the client, and let me ask for some small concessions and see if they grant them, and then maybe I can move--"

We talked more about this in that episode of becoming the advantaged player. If you don't occupy the high ground at the beginning, you are not the advantaged player, you're next trying to determine whether or not you can become the advantaged player. Maybe you can.

David: If the incumbent is part of this pitch, we'll use that word, are they always the advantaged player?

Blair: No. Sometimes they are. I always love a competitive sale where the incumbent is invited to defend. It can be frustrating, but the reason I love it is it just makes for an interesting conversation, but most people don't have the conversation.

David: You love to be the incumbent or you love to participate when the incumbent is there?

Blair: No. Let's say you're invited to a competitive shootout against an incumbent. Somebody says, "Hey, we're talking to three different firms and yourself. We're looking for whatever it is we're looking for." As part of your qualifying conversation framework, you would have questions around who else is involved. Three other firms. "Who are the firms you're talking to?" They give you some names. "Is the incumbent involved?" That should be a question that you ask directly in any competitive sale. "Yes, the incumbent is involved."

Then from here, it gets interesting. "That's interesting. I'm curious, why didn't you just fire them?" Oh, some bullshit reason. "Are you just trying to create some pricing pressure for them?" I'm embodying the win without pitching principle of say what you're thinking. All these thoughts running through your mind, speak them. "Why is the incumbent still involved? If they did such a poor job, why don't you just fire them? Are you just trying to keep them on their toes? If we were your agency, would you do that to us?"

David: [chuckles] Wow.

Blair: "Are you being fully honest with them? What you just said to me about them, have you said that to them?"

David: Would you ask that? Would you really say that?

Blair: Wouldn't you?

David: I would, but I don't have any social skills.

Blair: [laughs]

David: You have them. You just proved that over the last 48 hours.

[laughter]

David: Even I winced at some of those. You would actually say those things?

Blair: Why wouldn't you ask the direct question?

David: [chuckles]

Blair: There are reasons why people wouldn't ask them, because they don't often get asked. It's like, "Oh, I'm afraid I'll blow the opportunity," but if the question is running through your mind, the only thing you have to worry about is framing the question politely. Because we're talking about a hypothetical here and effectively role-playing, maybe I'm modeling something that's a little bit too direct, but the questions themselves are perfectly valid questions.

David: I find myself just sitting up in my chair. It's like, "Oh, damn, I want to listen to this conversation that somebody's having."

Blair: What you just said to me about the agency, have you said that to them?

David: Not really. [chuckles]

Blair: What have you said to them? They don't know that they've done a horrible job?

David: Yes. [chuckles] Keep going, man. You're making your own bed here.

Blair: You sound like a great client.

David: [laughs]

Blair: Whoa, can't wait to work for you.

[laughter]

David: Oh, man, this would be fun, especially if you really didn't care.

Blair: It occurs to me I should not be in the advice-giving business.

[laughter]

Blair: I may have aged out of this job.

David: Oh, that's good.

Blair: I think those are all perfectly legitimate questions in all seriousness. Just obviously take a minute to think about how you frame the question, but these are questions that come to mind, and there are questions you would ask. Then these are examples of questions that maybe the flip happens through these questions.

David: Yes. Like you could soften it and say, "How did they respond when you talked to them about that?" Then they're going to say, "Oh, we didn't tell them." Right?

Blair: Yes.

David: [chuckles] Oh, that's really good. First is poor fit. That's the burst bucket. You shouldn't have done this in the first place. You should have figured that out early. If you're not afraid of the truth, then get the truth as soon as you can. Second, the one we've just been talking about, is someone else was the advantaged player. You at least need to make a guess about how much of a risk you're willing to accept here and then try to figure out if you can become the advantaged player by how you conduct yourself in the sale. That's core to the way you teach sales. The third bucket is mistaking interest for intent. I keep thinking about dating here, but I'll try to stay out of that.

[chuckling]

Blair: The world is waiting for your dating advice. Guy's been married for 75 years.

[laughter]

Blair: This might be the most common-- I can't quantify it, but to me, it's the most common mistake out there, a sales mistake in the selling of expertise is mistaking interest for intent. Again, this comes back to poor qualifying, and it comes back to us taking advantage of ourselves through our excitability. As I like to say, somebody says, "That's interesting, tell me more," and we get so excited. We crank up the pitch machine, and we start applying resources against somebody who just said, "That's interesting, tell me more. Hmm, yes, I've been thinking about that lately." We see that as a buying signal. In the greater sales world, they talk about buying signals.

To me, interest is not a buying signal. A time frame in which to take action, that's a buying signal. Some people might dispute it as a buying signal, but it's very, very early stages. What we have to understand, I don't want to dissuade people from pursuing opportunities where the person is interested, we do pursue them, but we also remain quite practical and remember that interest does not readily translate to intent.

There are things that we can do to help escalate interest to intent and move people along the stages, the buying stages, the stages of change, but what we should not do is assume that this person is ready to buy and we should be writing a proposal and scheduling a closing conversation for somebody who's still contemplating their problem and assessing the pros and cons and thinking about whether or not it actually makes sense to take action.

David: Yes. This is where I think my slightly twisted view of humanity comes up because I see people treating the sales process with such kid gloves. It's like, "Oh, God, I've got to remind myself to follow up with them by a certain date," or like, "Okay, what's the next step before you let them go on the phone," or something, as if this is so fragile. My perspective is, and this is where you should quit listening to me, but it's a little bit more like Whac-A-Mole in my mind. If this isn't meant to happen, if there's real intent and not just interest, there's much less you could do to kill this. It's probably going to keep coming to you.

You throw something in front of the bus, does it keep rolling towards you? You don't need to think about this so carefully. Again, this comes from a desperation that people feel, right? There's a balance there, obviously, which I need to maintain. It needs to be treated with respect and care and proper follow-up, but no, I love some of the questions that you ask. If you're not sure if it's interest or intent, you suggest some very specific questions like money, time frame, how important this is, and so on.

They're all natural questions that somebody on the other end would expect to hear, and it just serves to separate the interest from the intent. Again, you're not afraid of the truth here. You're not afraid of discovering that, oh, they're just interested, they're not really serious. That's not bad information. That's actually information that could save you a lot of time.

Blair: Yes, you're going to want to know that earlier than later. I don't think it's desperation again. I think it's just over-excitement, where we get carried away, we mistake something for buying signals. You're alluding to the questions. Again, this comes back to the qualifying conversation. It's a misqualification, or actually, I think this is a poorly understood idea.

Everybody understands the idea of buying stages, and they might use different models for defining what those stages are. I think it's a poorly understood idea that it starts with interest and then it moves to intent, but it doesn't always move to intent, and there are some roadblocks to moving to intent. There are steps that people have to take to actually move themselves from interest to intent.

One of those steps is anchoring their change in behavior to a date. That's why in your qualifying conversation, you're asking qualifying questions. If we use, as we do at Win Without Pitching, a version of BANT, the T stands for time frame in that acronym. You have your time frame questions. Why do you ask time frame questions? The obvious reason is for resource allocation. When do they need to get this done? Can we actually do it in that timeframe?

The non-obvious reason is timeframe is a surrogate for intent. When somebody has committed to a date, either a start date or an end date, that's a sign that they have moved from interested to intent. They anchor their change in behavior to a date, then they start allocating resources like people and budgets. That's when you start asking budget questions. It's all this logical progression. This is a pattern if you continually mistake interest for intent.

The sign would be you have all of these deals that are closed, lost, where the client didn't buy from you, they didn't buy from anybody. You might conflate this with a larger ghosting problem. I think when we did that episode on being ghosted, I said, "How many of these opportunities are you really being ghosted versus just misqualified?" There was never really intent there.

If you want to get better at this, make sure you ask your timeframe questions. You're hearing all this good news, and then you say, "When do you need to have a solution in place, or when do you need to get started?" You might hear, "I don't know. Sometime in the summer." There's no intent there. I say in this post that my favorite timeframe question actually has nothing to do with timeframe. It's, is this on the wish list or is this on the to-do list? That'll get you the answer of whether this person is interested or intent.

David: If the prospect never hired anybody, you didn't lose this. That was just interest. It wasn't intent. We're thinking about putting a backup generator in. We live in middle Tennessee, outside Nashville. The sales guy for that was pretty smart. Maybe he'd read your book. He asked that timeframe question, and my answer was clear. We'd just gotten out of the ice storm, and I said, "Ideally, we'd have this in place by the tornado season, where we always lose power a couple of times." He may not have been asking it for that reason, but that was the time thing, like, "Oh, they're serious about that because they have in mind when they'd like to have this done by, tornado season."

Blair: That's a great example. You could have cited the triggering event, the ice storm. A lot of salespeople would take that on face value. Let's say the person asks you the question, "Why now?" "We just had this ice storm." That doesn't tell me anything about intent. Then the follow-up question, "When do you need to have it in place?" "I think before tornado season would be a good idea." "I think you're right. It's really smart of you to get this in place before tornado season. Now, we can work backward from there." Now he knows you have intent. Now we can move on to budget.

David: He's got me. Now he needs to find out who the advantaged player is.

[laughter]

David: I'm going to ask him if he read your book. Three, poor fit. Someone else was the advantaged player, or you mistook interest for intent. If you categorize why you didn't close something between these three, it's going to cover most of them, is what you're saying?

Blair: Yes.

David: Again, review your lost opportunities and see if you can spot the patterns. These are the three common patterns. You have this pattern of pursuing poor fits, of going too far into a sale where you should qualify out early. Someone else was the advantaged player. You haven't built a reputation in the marketplace. There's no probative conversation that's happening, or you're routinely mistaking interest for intent, writing proposals for people who not only don't buy your proposals, they don't buy from anybody because their interest never translated to intent, or they just weren't ready to buy.

These are the three common patterns. Have a look, see what pattern you find in your firm, and then if you want to read the post for a little bit more detailed guidance on what to do if these patterns emerge, we talked about it, but they're in the post. The post is called Three Patterns of Lost Opportunities on winwithoutpitching.com. We'll post the link in the show notes. Thank you, Blair.

Blair: Thanks, David.

Why Clients Come, Stay, and Leave

2Bobs with David C. Baker and Blair Enns

Download

David sees a lot of creative agencies making bad assumptions about their client relationships by not making the distinction between the reasons why clients come to them in the first place, why they choose to continue working with them as time passes, and then why they ultimately move on.

Links

"Distinguishing Between Why Clients Come, Stay, and Leave" by David C. Baker for punctuation.com

"The Waterfall of Differentiation" 2Bobs episode

Transcript

Blair Enns: David, today we're talking about the revolving door at the front of your agency, more specifically, distinguishing between why clients come, stay, and leave. Isn't it all the same you're great, or you're shit?

David C. Baker: [chuckles] Well, you think now we can just end this? I don't need to talk?

Blair: [laughs] Yes. We were just talking before we recorded about how we're both trying to write shorter blog posts.

David: Maybe we should say a little more. I don't know. Maybe a little more. Come, stay, and leave. Obviously, there's going to be a little bit of overlap here. I just had this thought before we start, and it's not really in my article. Let me just say this and see if you agree. Whenever you work for a new client, they're almost always coming to you from another agency. The implication is you probably shouldn't be the first agency they work with. How do you feel about that statement?

Blair: We talk about this quite a bit. It's one of the things that you've said many times, and I still wrestle with. I think you're right, but I don't know. I put myself in the shoes of somebody running an agency, and somebody comes to me who's never worked with an agency before. I don't think I'm going to rule them out on that basis. I might need to be extra diligent in the qualifying. I need to make sure I do a great job of taking control of the relationship in the sale, so I can demonstrate to myself that I'll be able to have some control in the engagement. I don't know that I would rule somebody out on that basis, but I see why a larger firm might.

David: Yes, because if somebody hasn't used an agency before, they often are shocked at how long it takes to get results, and they're definitely shocked about the cost. Now, I'm not talking about, let's say, a startup where the decision maker has worked with agencies before somewhere else. That wouldn't bother me at all. When I make that statement, everybody listening is immediately going to the one client that was the first agency experience this client had with them, and it went great. They're forgetting the 10 others that didn't. Obviously, there's exceptions to this. Generally, when somebody comes to work for you, they have left another agency. That's an important point later. Anyway, I just thought that was interesting to think about, provocative.

Blair: I don't know how much this is going to preempt what we're going to talk about. I have quoted you many times on the difference between why clients hire you versus why they fire you. I'll say in the words of David C. Baker, you're not hired for service. You're fired for lack of service. You're hired for your expertise.

David: Yes, that's exactly it. Actually, we could stop right there.

Blair: See, I have been paying attention.

[laughter]

David: That's the crux of everything I'm saying. Here's the main problem that made me write this article. You're an agency, and you have a new client coming to you, and they are leaving another agency. In the process of the conversations you're having with this agency, you ask them why they're leaving. You listen to all these things, and you say, " Ah, so we don't do that." They say, "They're not leading us. They're not listening. They keep changing our--" You say, "Oh, in order to be successful, we need to be the opposite of that. We listen to you. We do strategy at the beginning. We try to not change your contact unnecessarily, yada, yada, yada."

No, flip this around. Now, this client comes to you for whatever reason, and then they leave you because they're always going to leave you at some point. The next agency interviews them, and they're going to ask, "Why did you leave?" They're going to say the same thing. Put these in different categories. The reasons people come to you are different than the reasons they leave you or stay with you.

Blair: We're going to go through each of these. We're going to go through why they come, why they stay, and then why they no longer stay or why they leave. I want to flip this around a little bit. Let's start with why they leave. You've just talked about this a little bit. This is why they're leaving the agency, they're leaving. These are the things that you're hearing that you've just pointed out. It's like, "Oh, yes, we're not going to do that." Is it okay if we start there?

David: Yes, sure.

Blair: Why clients have left the previous agency? You've got a list of reasons here.

David: They're being taken for granted. They're not really earning the relationship. If you think about the beginning when you're trying to win, it's like you're on your best behavior, you dress nicely, you're careful about your jokes, you put all kinds of effort into an unpaid proposal. Shame on you, and so on. It's like then, after the client's there, you're taking them for granted. That's one, or you change their main client contact and don't handle it well. There are good ways to handle that, or there's some breakdown in trust or some reasons that are out of your control, too. There's two big ones. The CMO that your decision maker leaves and the new one wants to bring their own person in, or there's somebody in the finance department or procurement that says, "Hey, we've got 28 agencies here. We need to whittle this down to seven. Let's have a review." Those are the two that aren't in your control, but all the rest of them are around, just basically taking the relationship for granted.

Blair: Taking it for granted, cycling through the contact. I think of my agency business development days. The first piece of business I ever won was I heard that this client that I really wanted, the agency serving that client had just replaced the account manager again. I pursued it and won it without a pitch. That's always a sign for me as somebody who was back in the day trying to pick off my competitors' accounts.

Then, taking the client for granted, not earning a relationship, you can see it the way the client is describing the client-agency relationship. They're starting to get a little exasperated with them. That's pretty common, too. Then you've got the ones where something happens on the personnel side, on the client side. We've talked about this before. I think you've got, if not a policy, a strong suggestion for how agencies should handle that change in CMO position. Do you want to just refresh our memories on that?

David: Yes. There aren't enough people who hate me, so I'll just add to that group with this suggestion.

Blair: Oh, no, I think you're doing just fine.

[laughter]

David: I honestly would do this, and I did it once with my agency when it occurred to me. There's a new contact, and they inherited you. It's like a general manager that's hired, and they inherit the coach that's already on the team. It could work out, but it might not. You just go to this person and say, "Hey, listen, you have no idea how much we'd like to keep your account. In fact, we're very excited about it, but we want this to be your decision. Here's a resignation to make this easier for you.

Tear it up if you want to keep using us. By the way, if you're open to it, we'd like to give you some suggestions about the things that we wanted to do, but we weren't able in the past, if you would be open to some of those ideas. If you decide to go in another direction, we will not drag our feet. We'll do everything we can to make this easier for you." That makes this person truly in charge, and it can work really well.

Let me just add something else, too, about changing contacts. Your clients get attached to your account managers. I have a suggestion about how you manage that, too. It has to change. Sometimes you can't just promise forever. When that happens, involve the client and say, "Hey, Tom has to leave. Lori is our best account person. Would you be willing to meet with her and just give us your feedback about whether or not you think you'd be comfortable working with her?" Sometimes these clients push back on your choice, not because the choice is bad, but because they didn't have any feedback in the choice. Give them that opportunity for feedback.

Blair: The commonality in those two things is giving the client a sense of control. Back to the changing CMO, I think you suggested three things there. I think what's brilliant about that is, if somebody just hears the resignation part, maybe they close down to the rest of it. In combination, that is super powerful. The first one is we're really excited about the account. We really want to keep it. Number one.

Number two, I understand you might want to do things your own way. Here's our resignation. Tear it up if you don't want to work with us, but if you accept it, that's fine. We fully understand. Number three, I'd love to be able to share our perspective on things that could be done differently. That's a great combination no matter what happens. Now, it's harder to do when it's a guerrilla client, isn't it? Which is a different topic.

David: Yes. It's easier for me sitting here at a hotel room on a microphone telling you how to run your business.

Blair: We get to the crux of being an advisor and a podcaster. It's so easy. I don't understand why you're not doing this. That's why clients leave. Now, let's imagine one of these or a combination of these things has just happened at your competitors, and now a client comes to you, and you ask them, "Why did you leave?" Do you think clients are typically honest? I don't mean the opposite of that would be being purposely dishonest, but do you think they appropriately rationalize and understand the real reasons why they're leaving? Do you think when asked, they communicate those clearly and honestly?

David: No. [laughs] They're humans. In fact, there's some things that would be easy for them to talk about, like they made two successive massive mistakes, and we just couldn't recover from that, or something that isn't personal at all, but it was pretty destructive. There's all kinds of things that happen that I just think they're not comfortable talking about like they didn't laugh at my joke, or they embarrassed me. They should have taken the blame for something or whatever. Elliot Aronson, the social psychologist, said, "Human beings aren't rational animals. We're rationalizing animals who want to appear reasonable to ourselves." Then I would add to others as well. You got to read between the lines, and there's some things people just aren't going to talk about.

Blair: Reminds me of the line, I forget who said it first, "People don't want to be right. They want to feel right." Let's talk about why clients come. If somebody just left the agency, they're coming to you, they're in conversation with you, why are they going to hire you?

David: If you would like to dive more into this and you're newer to mine and your content, you might want to look at an article called The Waterfall of Differentiation. That explains that for smaller firms, specialization is the first factor that they'll consider. For a larger firm above 40, 45 people, the first factor, and this slips in here, is that you're big enough. You can be trusted, that there's a deep enough bench that if something goes wrong, I'm sure you're going to be able to fix it. You'll stand behind it.

Then there's what's called category experience instead of specialization. There are all those reasons, and I don't want to argue against myself, but I do think there are lots of other reasons why firms come to you. In some cases, it's just a referral. Somebody that they trust as referral source, and the referral source says, "You should go work with them." Then they just check the boxes, or they have their mind off. There's all kinds of other reasons why they might come to you, like how you staff an account or your pricing methodology, I think, is more important than it used to be.

Maybe you have some unique IP or way of using data that you haven't seen in the other agencies that they interviewed. Could some connection to you, so there's this trust that's already established. Maybe distance, although that is less and less important. Your reputation in the marketplace is probably going to give you a first opportunity, but it's not going to be enough. Those are the big reasons, but always it's specialization. That's why they come to you. There are a couple of exceptions to that, but we just need to remember that it's a complex decision. Humans make decisions in complex ways.

Here's where we have to contrast the reasons why they come and the reasons why they leave, because if you jump in on the reasons why they leave and talk about, our service is great. We're responsive, yada, yada, yada, none of those things can be verified until they're in the relationship. These things, all the things that I've talked about, can be verified by a prospect before they jump ship to you. That's important to keep in mind, too. The reasons they come to you should be things that they can verify before they work with you.

Blair: That's a powerful point. I think there's probably an exception to that. That is, if you have a good referral, let's say you're being referred by one of your best clients, and they can attest to all of those little things that drove that new client crazy with their old agency, you don't do that. This service is great. You guys are polite. You're delightful to work with. That's probably a good use of referrals. I'm reminded of this idea in sales that people don't make a decision to move away from their pain until they can see, they can envision the beautiful world they're moving to.

These two things aren't necessarily directly correlated, the cause of your pain and the cause of your enthusiasm or the source of your enthusiasm in the future that you're getting excited about. I guess that's the gist of this whole post and podcast, that the reasons clients leave another agency to come work for you are not the same reasons why they choose you.

David: Instead, we have websites that are littered with the reasons why clients leave instead of the reasons why clients stay. I think that the reasons clients stay are just sort of table stakes. They ought to be true of every firm. Every client ought to be getting great service. Every client ought to be listened to. Every client ought to have strategy first. It's like a big duh when I read this stuff. "What else are you going to do?" It's like, "Well, we tried listening to clients, and it was interesting for a week, but then it slowed things down. Damn it, we're not listening to clients anymore. If that's what you're looking for--"

Blair: Put it on the website. That'll differentiate us. You've just listed it off, and you cover it in more detail in the post, reasons why clients stay. Are these the value propositions, in air quotes, or even unique propositions that are on agency websites?

David: Yes, I think so.

Blair: You've got here, it's a door to a future topic, and it came up in our last recording. You don't lock them into recurring revenue engagements that are more in your interest than theirs. Do you want to walk through that door now or save it?

David: Oh, I think I've got room for one more arrow in my body. I'll leave that one for later. Here's what I'll say about that in this context. I'm not against recurring revenue engagements entirely. If you are in a recurring revenue arrangement with a client, when it starts to tip in the wrong direction, it's going to tip faster and you are less likely to recover it because there's something psychological about sending a firm a check every month where the person sending the check-- I know it's not a real check but the person sending the check expects a certain amount of stuff from the client and it becomes an entitlement in their mind, and they're more sensitive to when you aren't earning that every month. I'm not saying you shouldn't have recurring revenue arrangements, I'm just saying you should be a lot more careful about the relationship going off the rails than if you didn't have them.

Blair: I think that's one of the arguments against retainers, and I'm not fully against retainers. I think there are right ways and wrong ways to do retainers. We may have even done a podcast on it. I don't remember. It's been so long now. It's been my experience that in a retainer relationship, usually one party feels aggrieved. They're not getting their share, the agency isn't earning enough money for what they're doing, or the client isn't getting enough for what they're paying.

David: When you do have recurring revenue arrangements, I always urge you to rebalance them every quarter and fix that. If you're over-servicing or overpricing, then fix it so that the party isn't aggrieved either one of the parties. We'll talk about that later.

Blair: Do you want to put a bow around all of this and give some final advice to our listeners on how to continue to think about these three different, distinct phases?

David: The most important thing is really to keep leading clients as if you just got them. Just think about it as if you're so grateful that you just landed this client, even though you've had them for 17 years, because you're far less likely to lose them if you don't take that relationship for granted. We just celebrated our 45th wedding anniversary, and this is so true of marriages as well. I think it's a great example of not taking somebody else for granted, even if the period of time is long.

It's easier and easier to do that. Yes, don't take your clients for granted. Keep leading them, and leading means pushing back kindly. It doesn't mean just being a great order taker. It means doing what's in the client's best interest. You and I were on a call this week with somebody, and you really emphasized that. It's like that's the mantra. Tell people what you were talking about there. What's the mantra about doing what's in the client's best interest?

Blair: Somebody had a challenge with a large gorilla client, and your initial advice was you got to keep leading. The big mistake is server responder mode. You may have to keep leading even though you've got this fear of losing the account. I said the hierarchy that I have in mind in these situations is first you do the right thing for the brand or the client organization. That's number one in the priority stack. Number two in the priority stack is your client, this person. Number three in the priority stack is the agency. You don't count in there. If you're in there at all, you're number four, but brand client agency. In this situation, I think what you and I were guarding against with our advice was resist the urge to put the agency's needs above the client's.

David: You can sleep better at night, and in the end, it's just the right thing to do.

Blair: I was going to say, we have a first here on 2Bobs. We've got a caller. Go ahead. Julie Baker, go ahead and respond.

[laughter]

David: I know Julie Baker. She would not call this podcast.

Blair: I know. All right, David. This was awesome. Thank you very much.

David: Thank you, Blair.

Is AI Going to Kill Labor-based Pricing?

2Bobs with David C. Baker and Blair Enns

Blair is stunned that he still encounters so many advisory businesses like ad agencies, consulting firms, legal and accounting practices — large and small — that are still selling time. So he and David discuss what new revenue models should look like as we all adapt to how AI is changing our businesses.

Links

“Time’s Up, Babycakes” by Blair Enns for winwithoutpitching.com

Time's Up!: The Subscription Business Model for Professional Firmsby Paul Dunn and Ronald J. Baker

The Automatic Customer: Creating a Subscription Business in Any Industry by John Warrillow

The Forever Transaction by Robbie Kellman Baxter

Subscribed: Why the Subscription Model Will Be Your Company's Future – and What to Do About Itby Tien Tzuo and Gabe Weisert

TranscriptDavid C. Baker: I have not written about AI intentionally. I kind of mouth off about it on LinkedIn every once in a while, but I haven't written anything about it because I just don't have any cogent thoughts, even though I'm a heavy user. Is this your way of sneaking AI in, forcing me to embarrass myself about it, or is this about timekeeping? What are we doing here, man?

Blair Enns: This is not an AI episode.

David: Whew [exhales].

Blair: We are never doing an AI episode, but AI is infiltrating all episodes.

David: [chuckles]

Blair: In fact, Blair couldn't make it today. Clarence, his AI, will be conducting this podcast.

David: [chuckles] I'm actually looking forward to this. I am going to have a better time training Clarence than I am Blair.

[laughter]

Blair: Well, we're having a hell of a time training him, but that's another topic.

David: You originally titled this "Time's Up Baby Cakes", and that may not be the title we end up with, but [chuckles] all I could think of was you calling me up and saying, "Hey, David, I've--" You have this tone of voice when you want something from me. You're all excited like this is something I'm going to want. "Can you build me this beautiful, I don't know, sort of a coffin out of bird's eye maple?" I get all excited. "What are you putting in this thing?" I asked finally. You say, "Timekeeping." You've already put 13 nails. Okay, there's only 14 nail holes. Is this your last nail hole to fill in the timekeeping coffin? Probably not.

Blair: So--

David: Haa, I got you. It took you a minute to think, didn't it?

Blair: Wait, it took me a minute to process that elaborate opening, wondering where you were going. There are some topics I'm sure you will agree where you feel like you don't need to write about them or speak about them anymore because we, all of us, we've had this conversation long enough. Everybody understands what you understand. There's no need to keep going on on this topic. Do you know the feeling? Positioning anyone?

David: Yes, right.

Blair: Timesheets, anyone?

David: Recurring revenue arrangements? Yes. You said something in this article that got this started for me. You said something in here that appears really obvious, but it hit me in a new way. I want you to start by explaining it. You said procurement departments are demanding timekeeping. Can you just unpack that a little bit? Why are they demanding timekeeping? I guess it makes more sense if they're demanding timekeeping, but they're also capping what the hourly rate could be. Is there something about timekeeping that is in their best interest?

Blair: Yes. Well, first of all, labor-based pricing is dead. They haven't buried the body yet in your beautiful bird's eye maple coffin.

David: It's just lying there stinking.

Blair: I was pinch-hitting for a coach on a call with a client not too long ago, and they made the comment that they're a large agency and all of their relationships are still labor-based. It's interesting. If you look at what the leaders in marketing procurement are writing, they're all saying, "Listen, agencies, we're ready to go past hourly rates. It doesn't make sense anymore. We're leading the charge to move away from the billable hour."

In reality, that's bullshit. I know some of the lofty consultants that are friends of mine and of yours who are out there leading voices who aren't actually employed by any of these brand marketers. They're trying to make that happen. When it comes to the procurement people on the ground, they are clinging to labor-based pricing, hourly rates, prices for FTEs, et cetera, in the age of AI, where every agency is rapidly getting more productive.

David: Or at least supposedly, or will if they aren't yet.

Blair: I don't even think that's a hypothetical discussion anymore. I think we can make the blanket statement that everybody is far more productive today on a per capita basis than they were a year ago or even six months ago. There are productivity gains being had. If you're charging for your time, you're effectively losing money. You're being more productive in the same amount of time, you have to move away from labor-based pricing. I feel like everybody should know this, and everybody's known this for a year or two, that you can't get away with labor-based pricing in a market where AI is running rampant and changing everything, dramatically increasing everybody's productivity.

Then I was in a coaching call with a client, a large agency. They made the point that all of their relationships, all of their engagements are labor-based. I was shocked. Their response to my shock was, "Procurement won't have it any other way." They said, "This is the way procurement wants to hire us." I said, "Of course, it's the way procurement wants to hire you. You're getting more productive, more efficient by the week, certainly by the month. Do not look to procurement to be the party that moves these relationships away from labor-based pricing.

David: There have been these pressures over the last 20 years, maybe 30 years actually. Is it your opinion that AI is the forcing function that we've never quite had before? It may not do away with it, but it will force us to rethink it. I think about another segment of the professional services industry, like law firms, they're very time-based and making a lot of money, not because they've gotten away from time-based, but because they charge a lot more per hour.

On the other hand, they are facing a whole lot more scrutiny than our industry is because of AI. In fact, if you look at some of the sell-offs in the software side, the SaaS side around legal, then it's pretty dramatic. Anyway, back to this, is that what you're saying, that this is finally the forcing function that we can't ignore?

Blair: Yes, it's the last great forcing function that will ultimately kill labor-based pricing in 90% of the businesses out there, including almost all professional services firms. I just don't see any way around this recording early February of 2026. In 2027, that's going to come fast, but I just don't see how it's tenable today.

David: We have control over how quickly we change. We don't really have much control over how quickly procurement changes. Might they not just stay with hourly-based, but just demand more from the hour that maybe it just cements timekeeping?

Blair: What I say, I don't remember if I said it in this post or a post that I published in the Win Without Pitching Academy for our clients, and I said, of course, procurement wants to keep insisting on paying you by the hour, and they're going to keep insisting on paying you by the hour. Meanwhile, they're going to in-house a large majority of what it is that you're doing, because the tools will now enable them to do it. Of the few remaining things that they can't do, the really high-value, magic, maybe highly creative stuff, they're going to hire somebody else to do it for them.

They're going to hire a younger, smaller, more nimble, more forward-thinking shop to do the small amount of remaining high-value stuff. I say in this post, I don't know how they're going to pay that other firm, but I can promise you that other firm will not be charging for their time. If you think this is inevitable, it's inevitable. What's the metaphor? You're in a car, you're going down a lane, the lane goes over a cliff. Boy, that's a pretty shitty metaphor. You can do better than that. You're Mr. Metaphor, David. Anyway, you feel like you're in between these guardrails, you can't get off this road. The road goes over a cliff, so you're going to have to find a way off.

David: Now, if you're listening to this, you're running a firm, it's still time-based, and you start, for the first time, to feel this pressure, this forcing function. What's the first thing you would want them to think about?

Blair: The first thing I would have you think is this idea that you reinvent the firm one new client at a time. You draw a line in time that's today, and you say, after today, new pricing model. Every new business conversation that we're in, when it gets to talking about money, we're going to price differently. We no longer sell time to new clients. The typical creative firm turns over its client base in three to four years, so in three to four years, at a minimum, you have everybody on the new pricing model. Then the second thing you do is you try to think about how do you convert existing clients.

David: Past this line that you've drawn in the sand, if you don't have an answer to this, that's fine, but is there something that you would experiment first with this new model, like productization or subscriptions, or is there something that comes to mind that you would want them to start first?

Blair: Yes, we have a list of models that we can talk about here, subscriptions, productized services, unified programs and platforms, outcome-based retainers, value pricing, and performance pay. I would start by thinking about productized services. Now, this is a blemish on my record for many years, as you know, David.

David: Oh, I know. So many things came to mind as soon as you said productization. I wanted to rewind some of our talks from the past.

Blair: I know. Jonathan Stark he's interviewed me, I think, three times over the years on productized services. The first one's like, I was adamant, "Don't do it." Then a couple of years later, it's like, "Yes, maybe a little bit." I don't remember if we've completed the trilogy where I said, "Yes, you should think seriously about productizing." We've talked about this a little bit before, AI, because it's changing your revenue model, it's changing a little bit of your business model. If you want to start pricing deliverables for sure, let's put aside value-based pricing. There are basically three things you can price and sell. Inputs of time and materials, the outputs of the deliverable, the thing that the client is buying from you, the website, the campaign, et cetera, or the outcomes that you create or value. Inputs, outputs, value. Let's put value aside, I'm saying inputs is off the table. Value aside for now, we'll come back to it because it's hard. It's harder to sell. It takes longer to sell, et cetera. I don't think it's the panacea that I used to think it is. I think we should explore that and the elements of it.

Let's just move to deliverables. Let's just say the easiest path from selling inputs, pricing inputs is now to pricing outputs. You're pricing deliverables. Then you should think about packaging those deliverables up into these discrete packages. In one of the most recent episodes that we did, where you talked about if you were launching a professional services firm today, you made the point of saying you would productize your services, and you had a specific number of products in mind. Do you want to just refresh the listener?

David: Yes. It was 16 loose products, but they would be combined individually for each client. 16 isn't a magic number. I just think that's roughly about right.

Blair: I don't think I asked you for your motivation on that. What was the rationale of what's the basis of productization, and then 16 or roughly that number?

David: Part of it is to get away from timekeeping. There is one big element of timekeeping still in my professional life, which I can talk about at some point. That's one reason to get away from it. Also, it's just so much easier to sell. It's so much easier to train a team to deliver. It's so much easier to manage scope. Not to the point where you're just mailing it in with clients, but as a starting point for sure.

Blair: It's easier to scale a productized service because so much of the magic in a customized service is the individual who's B, customizing the service, but A, who's pricing and selling it.

David: Yes.

Blair: That's one of the challenges with value-based pricing. It takes a certain level of skill to be able to have these value conversations and to come up with numbers on the fly and price really big and be comfortable when the client is uncomfortable in a discussion that includes a really broad price range initially and then gets narrower.

David: You mentioned something a few minutes ago, and I just want to say it again because I think it really captures what we're talking about here. It announces what you think is happening, but then suggests what to do next, and that's the way you divided all of this into three options. We start at the bottom. You sell based on inputs. That would be timekeeping. What you're suggesting is maybe not jump all the way to the top value pricing, which is really an amazing thing, but difficult to pull off, especially if you're going straight from inputs to value pricing.

Instead, you go to this middle one where you're pricing outputs, and outputs are essentially another way to describe productization. I just don't want people to miss that because all of a sudden, I think the fog clears in people's minds when they hear it that way. Let's move from inputs to outputs and experiment with value pricing, but let's just think more about output.

Blair: Yes, outputs doesn't necessarily mean productization, but it really-- productization is the next step because if you're pricing outputs, what's the basis of the price? It's almost certainly your inputs of time and materials. Once you standardize your products, you set the price, however you set it, even if it's on time and materials initially, just think of this. As you repeatedly deliver on more and more of the same productized services, what happens? You get better at it, you get faster at it, you get better outcomes. The price stays the same, maybe even goes up. Maybe you even reserve the right to not price the product, but price the customer. Now that's value-based pricing with productized services. That's the most we've talked about this before. I forget the source of this, and maybe I've patched this together, but that seems to be the most lucrative business model in professional firms where you standardize or productize the delivery, so productize services, and you price the customer rather than the products.

David: Right. Moving from that second to the third level. Timekeeping on its own, I don't think we should view it as the enemy. I wrote an article that is one of the top ten articles I've written in terms of reactions from people. It essentially says that the default is no timekeeping. That doesn't mean that timekeeping doesn't have a purpose to it. Here, I don't want to put words in your mouth. You may not agree with all this. I then suggest that there are five times when timekeeping on a temporary basis makes sense. One of those is to figure out how to price an output. It doesn't mean that it caps the timekeeping caps what you can price that, it just means that it gives you information. I think it's valuable information, but you just use it as that. Then once you've figured out how you need to do something, then you can just stop it. The only timekeeping sheets that are accurate are from contractors who get paid for what they do, and that's going to change, too, by the way. Even those have lies in them. On the employee side, there's probably more lies in timesheets than anywhere else.

Blair: I would agree with that. That's my fundamental problem with timesheets is it's like the drunk looking for his car keys under the street lamp, not because he lost them there, but because the light's better there.

David: That's a great image. You've used that one before. This is a forcing function, or should be, moving us away from inputs to outputs and productization. It certainly is something that you would explore. What else would you add to this?

Blair: After productization, then I would look at the various pricing models because productization isn't a pricing model per se. You do have to decide whether or not you're going to price the product or price the client. I'm a big fan of pricing the client. There are variations of like pure value pricing, where the pricer could reserve the right to charge almost anything, versus you could have tiers of prices based on certain markers of value. I'll give you an example. I don't know if you still price the total business review, or what's the full name of the TBR?

David: Total business reset. It has a flat price up to a certain number of 20 people, and then it's so much per person above that.

Blair: That tier, so much per person above that, that's a surrogate for value. The idea that the value, it would be greater-- maybe your rationale is, "It's going to cost me more to deliver the work," but it is also a surrogate or a marker for value. You could use certain markers like this, in your case, the headcount of the firm, as a demarker of pricing levels. That's a simple way of embracing value-based pricing. Also subscriptions. I'm spending a day with Ron Baker next month, and I'm rereading his book, Time's Up. The subtitle is the subscription business model for professional firms. As you know, everything Ron Baker writes is worth reading. There's a ton of valuable stuff in here.

I'm also rereading the canon of other great books on subscriptions, like The Automatic Customer by John Warrillow, whom you know, The Forever Transaction by Robbie Kellman Baxter. There's one more. Oh yes, Subscribed by Teen Zoo. There's a lot of great stuff out here on subscriptions. I haven't written much on subscriptions because it's such a massive topic. There are so many different types of subscriptions, and I don't fully have my head around it. Maybe once I get a download from Ron, I'll have a better or stronger point of view on subscriptions, but I think subscriptions are something a lot of businesses should be considering.

I've said for years, when software moved from this capitalized expense where you buy it once, and then you rebuy it every four years after that, when it moved from that to SaaS, I predicted the future in which everybody who did website design and or dev would move to monthly pricing. You can call it leasing, you can call it subscription, you can call it whatever you want. It really is this idea of subscribing to a website. It only happened in really tight vertical niches where somebody does the same type of website for the exact same type of business. I'm surprised. I think now is the time. It remains to be seen how long the website business is going to continue to be a business.

I don't want to get distracted by that, but that just strikes me as an example of something where people should be subscribing to a website. Website owners, when they buy a website, they typically buy some sort of maintenance contract afterwards. That maintenance and the high-level design and development and optimization, and constant improvement, that should all be bundled together in a subscription.

David: I wonder if the reason that hasn't really taken off is because there are very few firms that have the staying power or the trust level of an Adobe. That's what they did, basically. Instead of buying Photoshop, now you subscribe to it. There isn't much question about whether Adobe will be around. I think most of these firms are 10, 30, 40 person firms. I'm not sure the client believes in the staying power of these things. I don't know. It's just curious-- I'm writing another article on recurring revenue. That should be under my bonnet all the time. One thing that strikes me, there's so much love for recurring revenue, I think largely for the wrong reasons, but it's still there. What strikes me is so funny about the importance of recurring revenue to people is that it really reinforces the timekeeping model more than anything. It just makes the timekeeping more even. People are not using recurring revenue as subscriptions to something. They're using recurring revenue as a fixed amount of billable time.

Blair: Well, that's one model. We have a recurring revenue product called the conversation, where I talk about something once a month. I go deep into a topic once a month. I just did the monthly one earlier today, and that has nothing to do with time. A, I love that product. B, I love the consistency of the revenue from month to month. Previous to this, many years ago now, I did 10 years of the monthly Win Without Pitching webcast.

Every month, I did something similar to the conversation. Back then, it was all me going deep into a topic for about 55 minutes and then 5 minutes of Q&A, and this one's flipped, so quite similar. Even back then, in 2008, 2009, when we went into a recession, I was really grateful to that monthly recurring revenue. I absolutely see the appeal of recurring revenue. I understand your concerns. I can't wait for you to publish the post and for us to do a podcast on it.

David: You're a little too eager to poke holes in my model. I can hear it already.

[laughter]

David: I think this is a case where sometimes my own personal preference differences as a consumer have maybe too much sway over some of my perspectives about this, but I don't know.

Blair: That's valid, though. That's the biggest argument I have against subscription services, is I feel like I am over-subscribed. It drives me crazy how many services I want to buy are trying to force a subscription on me. I think there's a subscription backlash. I don't know if it's the same in a B2B world. If you go back to software, this idea of capitalizing this expense. What business wouldn't rather take that expense that they used to incur once every four years and divide it up into 48 payments and never have to go through the cycle, have the website always be optimal? That's a no-brainer to me. To this day, I can't figure out why more firms didn't do it. I've advised lots of firms on it who've done it. I think most have been pretty successful at that pricing model. I'm surprised why it hasn't just taken over universally, but I think we're at the point where now it has to.

David: Now there's a subscription you can get, you can pay for monthly, that helps you cancel your subscriptions. Now, how ironic is that? I forget the name of it.

Blair: What's more ironic is my wife came up with that idea two or three years ago, and my kids and I were all dismissive of it, and now she just keeps rubbing our faces in it, as she should.

David: [laughs] Time's up, baby. You've been saying time's up for a while. What do you really think? Is not what do you want will happen in, say, three years. Let's fast forward three years, and we look at this industry and how they've responded. Not what you want to be true in three years, but what do you think will be true in three years?

Blair: I think AI is the driver, where, previous to AI, it would have been my hope that most businesses get away from selling time most of the time. I could always see the occasional case for selling time. I don't think you go to hell for selling time. I think AI has changed this. I think there are very few businesses left where you are going to be selling ideas and advice in units of doing.

David: I am still selling time in one platform. I think you were on it at one time. You probably don't use it anymore.

Blair: Is that Clarity? Clarity.fm.

David: Yes, clarity.fm. Two months ago, I sent the founder of the thing an email. I said, "Hey, I've got to get off your platform. I cannot live within the maximum hourly rate you have set, and I'm just going to have to find another platform." He said, "Oh, no, no, don't leave here. What do you want it to be? We'll just change it." They did. They made an exception.

Blair: $10,000 an hour.

David: No, but there is one person on there that is charging about that. I was at the cap of 1,000, and I said, "I don't know, 1200." It allows me to help some people that wouldn't buy one of the productized services I have. It fills in gaps for them and for me, and there's no chit-chat. That's the most beautiful thing about it.

Blair: I used to like that model. It was like, you could accept the occasional thing. It would be an hour or less. There's no preparation, there's no reports afterwards. There's no collecting money. It's all handled for you. Dan Martel started that business. He wrote a book called Buy Back Your Time. He since sold it to somebody else. I'm not sure who owns it now.

David: Oh, okay.

Blair: Dan's moved on to other things.

David: I still think it's fine. In fact, I read this thing on LinkedIn. Somebody was saying-- I think it was a ghost writer, and they said, "Hey, I'd like to buy you by the hour to fix this." She said, "I don't sell my time by the hour." I popped in and said, "I'd sell my time by the hour. Let's talk about the hourly rate. You're not going to like the hourly rate. You're not going to do that." Fundamentally, selling your time by the hour, I don't think it's a sin necessarily. It's just more the whole system around it that doesn't allow for you to capture some of the value. This is an area where, if you just look across the firms and you say, "What are the best practices?"

I would have to say most of the best practices are wrong, and that's because most innovation comes from a small corner, and when the majority of the people doing the best practices look at it, they say that'll never work. Sometimes they're right, sometimes they're wrong. I think a lot of what we do in this field is wrong. I just have to pick my battles because I'm just not going to win in many of them, and in some cases, I don't know what I'm talking about, but I think we need to keep looking at where we could do things differently. This is an area where we could do things differently.

Blair: I always say about pitching, and I saw you in a discussion with some agency person going on about how agencies are horrible at pitches, and you tried to steer them in another direction, but I always say the best of bad practices are still bad practices.

David: Yes, right. They capture the lemming-like approach of everybody out here. That's the problem with some of the discussion groups you see out there. It just discourages the innovative people who get whipped down by everybody who says that's not possible. You've been saying for a long time, as have been another half dozen people, the same sorts of things, and now maybe people will be forced to listen a little bit because of AI. That's what you're predicting.

Blair: Yes, and some won't. They're on a road going down the road. There are guardrails on either side of the road, and one side, it's the client, and the other side, it's your habits, and that road goes off a cliff sometime in the next 12 months.

David: You're such a motivational speaker. This is why you don't get hired to be a motivational speaker.

Blair: Half the people in the village I live in think I'm a motivational speaker.

David: Really?

Blair: Yes, and I say I'm more of a de-motivational speaker.

David: All right, thanks, Blair.

Blair: Thanks, David.

If I Were Starting a New Firm

2Bobs with David C. Baker and Blair Enns

Download

Blair interviews David about a recent article he’s been receiving a lot of feedback on, in which he lists all of the things he would try to incorporate into a brand new creative agency, based on what he’s seen and learned from working with thousands of firms over the years.

Links

“If I Started A New Firm, Now” by David C. Baker for punctuation.com

TranscriptBlair Enns: David, well, you've written a recent post that has struck a nerve with people.

David C. Baker: You act like that's unusual.

[laughter]

Blair Enns: I thought you were going to give me my line back to me.

David C. Baker: That's Tuesday for me. That's what you said.

Blair Enns: Yes, it's Tuesday. [laughs]

David C. Baker: Yes. Before we started recording, I said, "I write something every week, and once a year, something like really unexpectedly pops," and they gets tons of feedback. I never know exactly which ones are. Usually, the ones that are a tad more controversial, I guess. There was a lot of feedback on this one.

Blair Enns: I don't think it's much controversy, but it's what would I do in your shoes? A big, broad question. The question somebody posed to you, if you're starting a professional service from scratch, how would you do it and why? You didn't list the points, but there are 39 pieces of advice, 39 bullet points that you've offered. I saw the post on LinkedIn. Man, you got a lot of feedback. Some people were posting videos of them using this as a diagnostic tool in their own firm. Lots of positive feedback. Any weird stuff?

David C. Baker: Yes, for sure. Stuff that just blows my mind. I can really understand why any individual might push back against some of these things. Some of the pushback just surprises me. Like one person said, "Well, there is no way this would work because we could not orchestrate having two company-wide meetings a year." It's like, "Really? That's your issue?" You think that's what's going to be the obstacle here? One of the points I said, I would absolutely not have a mixed firm, a hybrid firm. It would either be all in person or it would be all remote. No in the middle.

I said, "I'd reluctantly have to be remote." It's not my first choice, but there's no way I could get this many good people unless I allowed remote. If we're going to do remote, then there's going to be a mandatory meeting every six months. Of course, if you've got a family emergency or something, well, then you can't come. I understand that. That was the big thing that she objected to. It's like, "Oh, we could never make that work."

Blair Enns: Was the objection the logistics or the cost?

David C. Baker: The cost.

Blair Enns: I think you've probably made this point before. You should take what used to be your facility's expense and reallocate that to travel for this purpose, right?

David C. Baker: Exactly. 6% of your fee base is anywhere from 4% to 6%. It helps build culture. That's why a lot of firms during the pandemic, when they went to remote, they didn't have much of an adjustment. That's because the people had worked together face-to-face, and so they knew each other. They spoke common languages and so on. I don't mean English. They had a cultural fabric underneath them. It's like, if you don't have that, then you've got to build it somehow. That was my point.

Blair Enns: I want to go through, not point by point. I've highlighted what I think are the most interesting points for us to dive into. You did speak to this issue of not being hybrid, either being all remote or all on-site. It's somewhat related to another point you made. You said in terms of the website and the presence in the world, you would anchor the firm to a location, a city. Why is that?

David C. Baker: Because when I go look at firms' websites, a lot of them, you have no idea where anybody is unless you go to their LinkedIn profile. I just think that, as humans, we like to anchor people that we're going to trust to a location. Even if it's a fully remote firm, I think we ought to give people that hook, that geographic hook. I haven't done any research on it, but I just think, as humans, it's hard for us to trust somebody where we can't picture where they are.

Blair Enns: I smiled when I read that because I have the same feeling. I can't point to any evidence on how this would impact the business. From my own experience, when I'm learning about a firm, whether I want to hire them or they're thinking of hiring us, I want to know where they are.

David C. Baker: Yes, right. You're in Kaslo, right?

Blair Enns: Yes.

David C. Baker: I've been there. [laughs] It's a towering city with massive traffic issues and office towers. Yes, that's Kaslo.

Blair Enns: We have one flashing light, no escalators. All right. Let's get through the list. Starting at the top, the category is ownership and leadership. You said, "I wouldn't mind having partners, but it wouldn't have any equal ones." You want to speak to that? I've already seen people question you on that on LinkedIn. What's your rationale for that?

David C. Baker: It's not like I haven't seen a lot of really healthy firms with equal partners. Usually, it's two equal, sometimes three. I might do three equal partners because then you could break a tie. That's really at the root of why I would not want to have equal partners. Now, if I did have equal partners, I could think of some people that I would partner with. There would be a really strong buy-sell or bylaws ownership agreement that specified how we would handle disputes, and if the firm needed to split, there would be a formula for the valuation, there would be terms over which that would be paid. Everything would be spelled out.

All we have to do is say, "Okay, I'm out." Like, "Okay, we got a call on this agreement that we both agreed to." Partly that comes from the fact that in our M&A practice, I handle all the non-conforming work, so pulling these things apart or putting them together in the right way. I've just seen too many problems with equal partners where they're disagreeing on something.

Blair Enns: I guess your perspective on that would be, let's just call it valid, because of all the situations you've seen and all the difficult ones you've handled. I think that would be reassuring to all parties if all of these things were pre-thought out and covered in the partnership agreement. You also said, from the outset, you would begin with a strong board of advisors from different business backgrounds, and they would be paid. Talk to us a little bit about that, and how much are these people paid?

David C. Baker: Somebody asked me that question when I posted this on LinkedIn, and I said 20,000 a year is about right for four meetings. I would say that very few firms have formal advisory boards. A few of them do. Many of them have informal advisory boards. I think this is something that's missing from our industry. We're a little bit too ingrown. We listen too much to other people in the industry. We ought to be listening to somebody that maybe started a PE firm or somebody that runs a law firm, or an accounting firm, or something.

I just think we should formalize this. It probably isn't necessary when the firm is smaller, and I'm not sure you could carry that expense as a smaller firm, but I think as a larger firm-- How would you answer that, by the way, if I flip this around? All the firms, hundreds and thousands of firms you know, how many have advisory firms, and what's the impact?

Blair Enns: I have no idea, but I know it's a lot higher in the UK than it is in the US. Just anecdotally, it is far more common in the UK than it is in the US. I think that issue of cost, though, and that you said from the outset, so you're adding an extra $100,000 to the overhead right at the outset, so it might not make sense initially, but you would imagine there would be some revenue point at which it does make sense, and your point is, no, do it at the beginning.

David C. Baker: If you can, yes, and it might be free at the beginning, but if you step back and look at this firm, it's clear we are going to make a whole lot of money. 100,000 is nothing to us.

[laughter]

Blair Enns: The confidence of the entrepreneur, planning the business on paper from scratch.

David C. Baker: Start with projections, right.

Blair Enns: One other interesting thing about the leadership team, leadership team would consist of all equity partners and department heads, but not every member would be invited to each meeting. How does that work and why?

David C. Baker: It's so unnecessary. If I could inscribe my own tombstone, it would be like, "Fewer meetings." That was his message in the world. I've been in many of these meetings, like when I'm in a consulting engagement with a firm. There are times when we're talking about moving to a new accounting program or something, why does everybody have to be in that meeting?

Just pick and choose the relevant people for each meeting, and then if somebody really wants to come and they aren't invited, that's probably fine, but I just think we ought to be a lot more intentional instead of the way these meetings are happening, even on the leadership team. It's like, okay, we meet every Thursday at here. It'll be fun. We'll have snacks. We'll talk. We'll gossip, whatever. We don't get a lot done, and some of these people didn't need to be in the meeting, so I just want us to rethink meetings as a whole, including leadership team meetings.

Blair Enns: Intriguing, I think, is the label I would put. I'm wondering how you execute on that, but I like the idea of it. Your next category was positioning and marketing. Obviously, David C. Baker's firm would be well-positioned, but you surprised me a little bit, and you said basically the discipline would be marketing.

David C. Baker: Right.

Blair Enns: It's pretty broad. What would narrow and how?

David C. Baker: It would be marketing broadly described but very narrowly applied. It could be a vertical, or it could be a horizontal. I want it to be a consulting firm that also understands marketing, but I just don't see that as a category that people will understand. This is how somebody would say that. They would say, "We're at the intersection of consulting and marketing." Well, that's what you say when you haven't made a decision. I don't think any of us would be big enough to reinvent a category.

The answer for me would be this is how you would know what kind of firm you are, who hires you. If it's the CMO that's hiring you, you're clearly a marketing firm, but if the president or CEO is involved in that decision, then it could very well be bigger than marketing, and that's the relationship I want. Even though we want to impact how well a firm does, we want the freedom. We want a hunting license to the whole property. We want to be able to speak to staffing, and Ops, and tech, and so on, but in the end, we're going to be measured similarly to how a marketing firm is measured.

Blair Enns: Your specific words here were the category would be marketing, but it would have very little to do with what's called unaccountable spend, where there's a dedicated budget. Is that what you mean?

David C. Baker: What I mean is I don't think our foot in the door would be a million-dollar unaccountable spend. That's what branding is called. That's what people call it. They don't necessarily like it. I'm just acknowledging that phrase. I'm okay doing that sort of work, but I don't want us to be known for that primarily. I want us to be known for a firm that impacts business results in a measurable way. If part of doing that is unaccountable spend branding, I love it, because I really believe in that. I just think that we're going to get lost in the maze of all the other firms if we're known primarily for branding work. I don't want to be known primarily for branding work.

Blair Enns: Got you. Here's something on your list, and you've mentioned this many times before. I don't remember if I've brought up my-- not my objection to it, not objecting to it, but how unique I think this is. "Clients must have worked with a firm like ours before, either here or in another business life." That limits your market, or maybe it doesn't. Maybe it's only in my own mind. Then I have some follow-up questions to it, and it's tied to some other things you've said, but what's the rationale for that?

David C. Baker: Somebody who hasn't worked with a firm like this one before, there's two things usually true. They don't realize how long it takes to get results, and they don't have any idea how expensive it is. I'm fine working with a startup, but whoever is our contact at that new company needs to have worked with a firm like ours before. That would be a non-negotiable to me, along with a few other things.

Blair Enns: Then I'm going to marry that to a couple of points you made on references. You said, "Regardless of the source, we would require references from professional services firms they've worked with in the past." Then you say, "If they wanted references from us, we would trade references." That's a pretty ballsy move.

David C. Baker: Pretty cheeky. Yes. I don't see us nailing these theses to the church door and then starting out like this. I would view starting a new firm as a public experiment. I would want to blog about, like, "This is what we thought would work, this is what we tried, here's where it didn't work, here's where we landed instead." All of these things would be subject to learning in the marketplace. This one might not work, but I love the idea of trading references. When you want references, fine, we give you references, but we'd like some as well. I want to flip the whole process around emotionally. I want it to be clear that we are also interviewing you.

There's all these NFL head coaching vacancies right now. It's very clear to me that the teams are interviewing these candidates, but the candidates are interviewing the teams. In fact, three people have withdrawn their name, because, from their standpoint, they didn't think that it was a good situation for them. That's why I think it's great to trade, because I want to signal that we are also interviewing you, but it also limits some of the work, because anything they ask of me, that's fine, but we need to flip that around and ask you as well.

Blair Enns: I can't believe I hadn't thought of that before. I'm going to use that the next time somebody asks for references.

David C. Baker: There are so many things you have not thought of. We do not have the time today.

Blair Enns: Most of them stupid.

[laughter]

David C. Baker: Yes.

Blair Enns: A couple of things I'll just knock off quickly. You would dedicate a minimum of 5% of your revenue and 5% of your labor to getting the word out to prospects, so that's marketing, so you would sufficiently budget to marketing. You would have account managers. Yes, we would have the best account managers in the world, but what I really want to talk to you about was Matilda. Tell us about who Matilda is, and what Matilda would do in this firm of yours.

David C. Baker: Oh, God. I thought I was going to get a lot of pushback on this.

Blair Enns: I love Matilda. Another thing I can't believe I didn't think about. I have to hear this from you.

David C. Baker: This is Matilda, who looks like a sergeant, has a lower voice, puts up with no shit. We were in a conversation with the prospect, and the prospect they make all these promises-- You've taught me this. They make all these promises, and they say, "Okay, we're all set now as a last step." You think there's no last step, we've already done it. As a last step, we're going to formalize all this with RP, and then you say, "Okay, well, Matilda handles that for us. Are you sure you want to do this?"

People are different after they work with Matilda. [laughs] People have less confidence after they've worked with Matilda. She runs our value ops department, or our department of enterprise value engineering, or whatever you want to call it.

Blair Enns: Yes, love it.

David C. Baker: She has read all of your books. She's been through all the training. She's been to the RFP, the procurement conferences, she knows all the tricks of the trade, but she's friendly, she loves people, but she doesn't put up with any shit. It's sort of like that attorney on Landman. I don't know if you've watched that show, but it's like, "Oh God, I love her." Yes, that's what I mean by Matilda.

Blair Enns: A sale is proceeding nicely, and then you hear "RFP," and you go, "Okay." In this firm, I'm imagining it's a policy. If you can't get them to derail the RFP, if it's going to RFP, nobody's allowed to do anything with it other than Matilda. Matilda is allowed no resources.

David C. Baker: Yes, right.

Blair Enns: Matilda's job is to win this with very little cost or make it extremely painful for the person on the other end of the process. Bleed them dry.

David C. Baker: Bleed them dry or call back and say, "Let's skip the RP process. I think we're good."

[laughter]

Blair Enns: Oh, man, I love that idea. Team structure. When you said kind of hybrid or the intersection of marketing and consulting, actually, you had a better phrase for it. What was it? A consulting firm that knows marketing?

David C. Baker: Yes, exactly.

Blair Enns: I imagined a not very highly leveraged firm, meaning you think of the typical pyramid with the leader at the top, a small number of senior people below them, and then as you go down the rungs, you have a larger volume of lesser experienced and less expensive people, but that's not the firm that you would build and run.

David C. Baker: No.

Blair Enns: Talk to us about what the staffing structure looks like.

David C. Baker: There would be account people, for sure, but we wouldn't have a bunch of admins. We wouldn't have AEs. If somebody doesn't want to do it themselves, then let's make sure it needs to be done. Every person would be articulate, could have a conversation. The way I think of it is this, let's say that there's a client who's-- They're not pissed off. They're just a little bit frustrated. The client wants me in the call, and I can't be there, and I turn it over to anybody on the team. I have confidence that they would represent us well. They would think on their feet fast enough. They would know what to say and where to step back. They would not get emotional. Those are the kind of people that I would have on the team.

Even though we would have forward-facing account managers, I wouldn't be worried about anybody interacting with a client. At the end of a meeting, I wouldn't wipe my brow and say, "Thank God that's over. Now shove them back in the door and slide food under the door until the next meeting." I wouldn't have any people like that. All these people would be very articulate, and they could handle client interactions, both leading as well as pushing back on clients.

Blair Enns: These people of yours sound expensive, David. What are the implications on the pricing model?

David C. Baker: Oh, well, I've already told you we're going to be making so much money. This is not going to be an issue. Yes, we're going to have to pay people fairly. There will be some people making ton of money, but that is not why people want to come to this firm and work. They want to come to this firm because this is the place where they learn how to do it right. Some of them stay, and some of them leave.

After a decade, there are 20 firms that have started from alumni of this firm, and I am totally happy with that. Yes, they'll be making decent money, but there's not going to be a career ladder where you can be an owner here. That's not going to happen. There are other ways where you could be treated like an owner with certain distributions and maybe make something if the firm is ever sold one day, but we're going to attract people who want to learn how to do it.

It's like science class in high school. Okay, team, okay, class, we're going to spread up into breaks. Anybody they get paired with, they're going to be happy with. There aren't going to be any losers. It's going to be productive people who love working.

Blair Enns: On the topic of compensation, you said everybody's compensation would be comprised of some incentive developed with them in advance. That implies that the incentive would be different from person to person. Then the kicker, "And publicly known to the group." Everybody's salary is disclosed to everybody else on the team. Am I reading that correctly?

David C. Baker: You are. I would never have said this a few years ago, but I have come around to this position, because I think it's a forcing function. I do think that people are different, and what motivates them is different, and I think we ought to develop this incentive in partnership with each person. It can be different for every person. That's fine, but I want there to be incentives everywhere. I want to attract really driven people that love working and love making a difference.

Blair Enns: Okay.

David C. Baker: What do you think about the public salary thing?

Blair Enns: It scares me. I like it because it scares me. I imagine as you get to certain-- let's say there's 12 people, let's say there's 3 or 4 people in a couple of different roles. I can look to my left, I can look to my right. That person's in the same role as me. That person's in the same role as me. They're making more, their incentives are different, et cetera. I imagine that invites resentment and constant revisiting of the comp plan, although you could probably policy that and say we revisit it once a year. That's the downside as I see it, but as you pointed out, you've seen this before. You've seen this work, have you?

David C. Baker: I have. Not many times work well, but I have seen it work. Yes. We couldn't have votes on salary or anything because people are too good at building coalitions. The leaders would have the final say. If somebody who's paid really well and other people who are doing something similar but not paid as well, that should work itself out. I think part of being a high performer is being comfortable with demonstrating that to other people as well. This would be a case where, if it didn't work, then we would just stop it, and I would put that in the blog. It's like, "We tried this, it didn't work."

Blair Enns: I love the spirit of experimentation around that. I love that it makes me nervous. I wonder if it's trading one set of problems for another, but the trade-off might be worth it. I don't know if I've ever seen it. I don't have any experience with the model. It's one of the many interesting points in this post about things to consider, including the next one. Talk to me about your diversity policy.

David C. Baker: In this one, I really thought I would get a whole lot of feedback on, but I just said diversity is important, but diversity understood a little bit differently. I can't really speak to other industries, but in our industry, I don't think we have the right mix of rural versus urban. That's understandable because most firms are in cities, and so they would attract. Now, you'd think that would be a little bit different because of all the remote people, but it's not yet.

Male and female, I think it's within acceptable bounds right now. That's not a concern for me. Race is interesting. There are some underrepresented, but I wouldn't work super hard at the race thing except as a tiebreaker. I would work very hard at two things, and that would be rural, urban, and then political beliefs. Not so much what that person believed. I wouldn't care too much whether they were more on the right or the left. What I would care about is can this person demonstrate that they have friends from all different areas?

Blair Enns: Oh, that's good.

David C. Baker: That's important to me. I think it's really missing in our industry, and because of it, I think we understand half of the consumer world really well, and the other half of the consumer world, we struggle to understand how they think, how they buy things.

Blair Enns: Yes, that's a great litmus test. I think you and I are probably exceptions on this front in that I don't think, with some obvious exceptions, if you're doing, say, political work, I wouldn't want the firm to have a unified political point of view.

David C. Baker: Right. I wouldn't either.

Blair Enns: You would want people who disagree with each other politically and understand that it's just politics, that their worldview isn't right or wrong. It's just their view.

David C. Baker: I think the best way to assess that is, can you manage having friends? You could even just look at people's families. In your family, do you still get along and have great Thanksgiving dinners with people who have differing points of view? I think you should be able to do that.

Blair Enns: In addition to making the compensation of each individual team member public within the firm, you say you would publish the financials of the firm on the website for public viewing. What the hell, Baker?

David C. Baker: I know. That would be a new one. I've never seen anybody do that.

Blair Enns: The procurement people in your clients' businesses would absolutely love that.

David C. Baker: Oh, Matilda might veto this idea.

[laughter]

Blair Enns: She might.

David C. Baker: There's so many advisors and marketing people out there that are selling their clients a bill of goods about how successful they are, and it's like, "No." For one thing, that's a lie, and for another, should you really be listening to some of these people? Now, there's an argument against what I'm saying. You can be a fantastic referee in a soccer match or American football match and not have played the sport. It's quite possible that you learned everything you did from your own failures. That's okay. This is true for publicly traded companies. We know how successful they are, and it's not true for private. "This is another crazy idea. It may not work, but I think it's worth trying."

Blair Enns: I think Peter Kang at Barrel, they own other firms and other investments, and he routinely publishes the financials from all of his businesses, I think.

David C. Baker: He does. Yes, yes. It's on LinkedIn all the time. I admire that. I think it's fantastic. It takes so much courage, and your level of trust, confidence, just rises when you read something like that. Peter's a good example of that.

Blair Enns: Let's see. There's some things here I'd love to talk about, but we'll skip over. Academic theory of change. Oh, here we go.

David C. Baker: Uh-oh.

Blair Enns: No, no. [laughs]

David C. Baker: When you get excited, I know I'm screwed.

[laughter]

Blair Enns: It's a trap. I'm laying a trap. I'm not at all. I was interested to hear your point of view on customized versus productized services. You said you would have loosely productized services into roughly 16 modules. Talk to us about why and why 16 seems to be the right number for you in terms of things that people can buy from you. You said modules, not products. There's a lot there.

David C. Baker: Modules. I can't speak in anything that is not divisible by 2, so it can't be 15 or 17, so it has to be 16.

Blair Enns: It can't be a prime number.

David C. Baker: Many of these don't come from my own experience. This one does. If you go look at our website, you'll see, I think it's 12 modules or something. I think there probably needs to be more, but they're combined uniquely. This makes it so much easier for a client to buy. It makes it so much easier for you to train new people that come and work at your firm. Here you and I are probably going to differ, but I think there ought to be some performance element in the pricing, but the rest of it ought to be pretty tried and true.

No, this module, if we included in anything, it's 230,000, or maybe it's a range of 180,000 to 350,000. I'm fine with ranges, too. I think we're reinventing the wheel too many times with clients. If you are tightly positioned, it's easier to productize your services, and we're going to be tightly positioned. I don't believe in full productization ever, but I do believe in moving things in that direction. 16 is not scientific. That might not be the right number.

Blair Enns: You would price the modules rather than the hours of the inputs that went into the modules?

David C. Baker: I would look at hours just to get a sense of where it would be, but we would never charge hourly. We'd never have an hourly rate. None of that.

Blair Enns: I think you said there would be a variable component. Some element of performance pay to everything. In your post, you said at least 10 % of every engagement would be variable based on results. Why is that? What's your rationale?

David C. Baker: There's a couple reasons. One is I think it exudes confidence to the prospect. It's like, "We don't want to work for you unless we can really make a difference." The secret thing is something I learned from you, actually. This was years ago when we were talking about offering a money-back guarantee. I just thought that was such a silly idea. You explained at the time that one of the main benefits of a money-back guarantee is that you're a lot pickier with what client you work with.

That's why I've woven that in here. Let's say we're aiming for 25%, 30% profit. We're not going to probably make more than that because we're going to pay people really well. Then if we don't hit that 10%, that's, what, a third of our profits. It's pretty important. That means we're going to be looking very carefully at what clients we're going to work with. It acknowledges that sometimes we might get desperate, and this tamps down that childishly as you call it.

Blair Enns: That makes sense. It makes you more selective. You said there would be no pure projects or longer retainers, but instead a prepaid road mapping exercise to start, then auto-renewing quarterly engagements.

David C. Baker: Yes. I don't like having to revisit this every year. I don't like timeshare-like arrangements that are strong retainers because I think they're lightning rods for client relationships gone bad. I don't want to have to revisit things all the time. I want the client engagement to keep going, but I want the client to be able to engage it without a lot of hassle and without a lot of money on the line. That's why I'm trying to wed those two things.

Blair Enns: The prepaid road mapping engagement, that would be, in my language, selling a diagnostic. Upfront, the process where you do some discovery work and you map out with the client what the next year looks like, and you proceed in quarters, et cetera.

David C. Baker: Yes. Only after that was done could we even approach what the performance component of the engagement would look like after we'd done the diagnostic and figure out what's going on and how to fix it.

Blair Enns: You would limit the firm to about a dozen clients concurrently. You would focus on mid-level companies. You would always have direct access to the CEO, even though you wouldn't work directly with them. A team member, I imagine, would be a requirement. Would have a twice annual meeting with key client decision makers. Those things all wrap up together nicely. What do you want to say about them?

David C. Baker: Just one thing. I think we're taking our long-standing client relationships for granted. I think wonderful things happen when you're face-to-face with a client over dinner, a couple of drinks, walking the halls, meeting other people. I'm trying to fix that essentially. On the dozen clients concurrently, I want to create some sort of limit. It's like, "Okay, we have a thousand of these for sale, and after that, they're gone." It's that sort of interest I want to raise.

If somebody wants to work with us, they can start small. After we do a big project, they could still stay on small, but it needs to be a significant engagement. I don't want to have 30 clients. I think 12 clients is a beautiful number. It allows us to get into a client situation deeply enough to make a difference and to make money. Then if we have other interests, then we just say, "Listen, we don't have an opening right now. We might have one in May. Can we stay in touch?" That kind of thing. I just want there to be a little bit more limited access to what we do.

Blair Enns: We've talked about that before, having your opportunity increase your capacity, even if you are restraining your capacity for that purpose, gives you confidence that allows you to act with more backbone in the sale and in your client engagements.

David C. Baker: Yes.

Blair Enns: Last one. A team member would meet with a client key decision maker twice a year and direct access to the CEO. Our mutual friend, Mark O'Brien, has this great line that I really wish I had written, but I do cite him every time I say it, it's "The prospect's mind is malleable, the client's mind is fixed." If you're in an engagement with a client and you find you're not getting access, the client won't agree to regular meetings, their behavior is already fixed.

Explain in the sale that we have to have access to the CEO. We don't need to work with them on an ongoing basis, but on the rare occasion, when we have questions for them, need to spend time with them, you have to allow that, number one. Number two, you have to agree to these biannual meetings. Most clients in the moment that they're thinking of and are ready to hire you, will readily agree to principles, points of agreement like this, but it's really hard to get them to agree to it after you've started. I think understanding this upfront is really valuable.

David C. Baker: Yes, and I think it could be as simple as, like, "Hey, could you please send me an email and copy the president/CEO on it? I just want to thank him or her for the opportunity we have to work together." It could be something as simple as that. So that you have that person's email, and you can reference it back later. Ideally, this CEO or president wants to meet with you and talk about the shared vision of this thing. Yes, you're right. That's such a great quote.

If you try to make it happen later, it's going to come across as very adversarial. It comes across as you going over somebody's head. Do you want to work at this firm? I'll let you know in advance. You can't be an equal partner, but do you want to work here? I'll make you a minor partner. Are you interested? Is that a no?

Blair Enns: No, I'm at the point in my life, David, where the question, "Would you want to work here?" It doesn't matter where here is. The answer is no. Well, we've gone long on this one. We've talked about a lot, but certainly nowhere near close to everything. Was there anything that we didn't cover that you wanted to speak to?

David C. Baker: I was going to ask you about case studies. I don't believe in case studies much, except for in a few cases. I think you like case studies, don't you?

Blair Enns: I don't remember you speaking to case studies in this.

David C. Baker: I said we would not offer case studies. They're all pretty much made-up nonsense anyway, though, we would jump at any opportunity to walk through how we solve challenges, assuring them that we can likely find success for them, too, if we are allowed to work in a prescribed, not a proven way.

Blair Enns: I think case study is like a great sales tool. I don't know why you would pass on the opportunity to create them.

David C. Baker: Well, I just wouldn't create them and have them publicly available for anybody to download. Because has anybody ever written a case study that makes them look bad? Maybe that's what I should do. I like to do things differently.

Blair Enns: I think both of those things can be true at the same time. I'll think about that one a little bit more.

David C. Baker: You're not going to work for me, so we don't have to resolve this. I think we're okay.

Blair Enns: You and I, we both agree we spend enough time, just the perfect amount of time with each other. All right, David, this is a fantastic post. It's still getting a lot of traction, a lot of discussion out there in the world. If you haven't downloaded it, the title of the post is called If I Were Starting a New Firm by David C. Baker at Punctuation.com. Thanks, David.

David C. Baker: Thanks, Blair.

Decoy or Anchor?

2Bobs with David C. Baker and Blair Enns

Download

Blair differentiates between decoy pricing and price anchoring, which are two different techniques that are often confused for each other, and can increase your average proposal value in multi-option pricing when used appropriately.

Links

“Decoy or Anchor?” article by Blair Enns for winwithoutpitching.com

“The Perils of ‘Good/Better/Best’ Pricing” 2Bobs episode

Transcript

David C. Baker: Pricing decoy or anchor. Well, I have been familiar with a high anchor. You can't see my air quotes right now, but I have been familiar with a high anchor for many years. This is the first time I've ever heard of decoy pricing. Should I be embarrassed? That's the first question today.

Blair Enns: No, I was going to say it's a fad.

David: Not about that. Maybe other things.

[laughter]

Blair: Should you be embarrassed, yes, about not hearing about decoy pricing? I wrote this post that we're going to talk about decoy or anchor, comparing these two pricing techniques, because I had a bunch of clients, a bunch, maybe two, refer to all forms of three-option pricing as decoy pricing, the idea that there's a decoy. I was cringed at that word. We can talk about why that is. I wanted to make the distinction between adding a third option as an anchor and adding a third option as a decoy.

They both have this effect of moving the average selected price to something higher, either the middle option or the higher option. On average, when you use a decoy or a high anchor properly, your average proposal value, your average settled price goes up. The difference ends there, though. There's something about the decoy. When you're on the end of decoy pricing, it doesn't feel good. You sense you're being manipulated. That was the point of this post.

David: You're the duck flying down to meet other ducks.

[laughter]

David: Shit, I just got shot at. That wasn't fair. Maybe explain what decoy pricing is in terms of the three options where that fits and all that.

Blair: A decoy is a replica duck. It's painted. You put it out in the field. You sit there, and you're duck blind. [quacks] You call the ducks, and the ducks in the air see these ducks on the water. They come in on land, and then you fill them full of lead. [laughs] That's what a decoy is. You want to talk about decoy pricing?

David: Let's say that somebody gets three options, and one of them is a decoy. Where is the decoy in those three options, and what's its role?

Blair: The decoy is like this throwaway fake thing that is inserted in the middle. It's always inserted in the middle. The goal of the decoy is to move you from choosing the cheap option to the expensive option. A classic example is movie theater or popcorn. I don't have a movie theater anywhere near me. I don't know what movie theater popcorn goes for anymore. In the post, I wrote the example. Say small is $4, medium is $7, and large is $7.95. A few people emailed and said $4 for popcorn. You haven't been to theater lately?

David: Yes, right.

Blair: The point is if the small is $4, the medium is $7, and the large is $7.95, you're almost always going to choose the large, $7.95. The medium is the decoy because you're thinking, "Well, for an extra $0.95, I can get 25% or 50% more popcorn. Even though I'm not hungry, it's like the maximum value option. You will skew towards the large.

David: Yes, maybe I'll make a friend, and I can share my popcorn.

Blair: [laughs]

David: The $0.95 is worth the risk.

Blair: Yes, but the medium was never there to be purchased. If you're comparing small versus medium and you can't decide, "Oh, should I go smaller or the medium?" you're going to look at the large and go, "Well, large is the best value. Even though I'm not that hungry, I'm going to buy the large." That's decoy pricing. Now, the problem I have with decoy pricing is I am that person who goes into the theater. The decoy nudges me to buy the most expensive option, and I spend the next 15 or 20 minutes resenting that I've been manipulated by this pricing. Can you identify with that?

David: No, because I just gladly do the $7.95. [laughs]

Blair: Because you don't care about money. [laughs]

David: Let me summarize this in layman's terms and tell me if this is accurate. A decoy is in the middle. It nudges you to the high and makes that high one acceptable, but an anchor makes the middle acceptable because it seems so reasonable against the high. They're doing different things, and they're pushing you in different directions, right?

Blair: Yes, they are. We'll come back to the anchor and unpack that a little bit more. I want to talk about this pretty famous study that almost everybody quotes on the decoy effect. It's by Dan Ariely. I thought he had originally worked with The Economist magazine and changed their prices, but it turns out I reread that part of the book this morning. He was teaching at MIT Sloan School of Business.

He would put these options to subscribe to The Economist magazine in front of his students, and then he would measure what they selected. Without a decoy, he would put forward these options. Two options, no middle decoy. You could subscribe to the print-only version of The Economist magazine for $59, or you could subscribe to the print and online version for $125.

David: Just two options.

Blair: Two options. Without a decoy in the middle, 68% of the people took print-only, 32% took the print and online. Print and online was $125, but he then added a decoy in the middle, where it was online only for $125. It's so clearly a decoy because it's the same price as getting the print and online. You can have the print only for $59, you can have online only for $125, or you can have print and online for $125. What do you think happened?

David: Well, I presume more people picked the print and online.

Blair: Yes, 84%, where, previously, it was 32%. The decoy moved, I don't know, I'm not good at math, a whole lot of people, over 50% of the people, from choosing the cheapest option to choosing the most expensive option by putting this fake option in the middle.

David: Have you done much reading on whether this applies to professional services? This example and the one about popcorn are retail purchases. You're purchasing something. Does this work with the service side?

Blair: Well, I haven't done any reading on it, but I have a strong opinion on it. My strong opinion on it is the manipulative effect of this. My opinion is pricing like this on products or transactional services, there's a little bit of collateral damage, but people move on from it fairly quickly. Like I said, I'm a little bit resentful for about 15 minutes after I buy the large popcorn because I see what they're trying to do with that pricing. It's so fake, it's ridiculous. Why is it even there?

David: You don't feel that way about high anchor pricing?

Blair: No, we'll come back to that. Imagine I share a three-option proposal with a prospective client, and I say, "For your budget, $10,000, we can do this," or "For $15,000, we can do this, plus that," or "For $15,000, we can do this, plus that, plus the other thing." The client would look at me and go, "What the fuck is the point of the middle option? You're messing with me," and they would be absolutely right. I'm absolutely messing with them.

It's there as a form of manipulation. Whereas, yes, the high anchor is a nudge, but we'll unpack this. I don't see it's a manipulation at all. I see it as you, the professional, the expert, living up to your obligation to challenge the client to think bigger. Let them decide whether or not they want to think bigger about the project and invest more in the project. I see a high anchor almost as a professional responsibility and not as much as a nudge, and certainly not a tactic whose sole purpose is manipulation.

David: We were doing an episode a while ago, and it was called The Perils of 'Good/Better/Best' Pricing. There were lots of things that were interesting in that episode. The one thing that really struck me that I had never thought of is the fact that high anchor is just not more of the same. It should be a different approach to it. That's one difference with a high anchor because in this decoy pricing, it's just more or less or whatever, it's the same thing. With high anchor pricing, it's not more of the same. It's a different approach, typically, right?

Blair: Well, not always. It can be more of the same. As I'm fond of saying, the lowest expression of this three-option pricing is three different buckets of different sizes or different amounts of inputs or outputs. It's still valid. It's just the lowest expression of this idea. The highest expression of it would be three entirely different ways of doing business together.

David: Okay, got it. When I see people talk about a high anchor, I don't hardly ever see anybody express that high anchor as an entirely different way of doing business. It's just a bigger bucket.

Blair: Yes, I think that's the norm. I would like people to move beyond that if they're able. If we go a little bit deeper into the high anchor, the key difference between a decoy and an anchor is the anchor is the additional third option. Let's say you're already working with options, and you're scoping out an engagement for a client. You think, "Oh, there's legitimately two different ways we could do this. There's the quick and dirty, less expensive one, and there's the more elaborate one." You're considering putting two options in front of the client. Then you read Blair's book, Pricing Creativity: A Guide to Profit Beyond the Billable Hour. Ding, ding, add, add, add, insert.

David: [laughs]

Blair: This is my ad read voice. You think, "Oh, I see the power of a high anchor." If I can add an anchor at a third more elaborate, more expensive option, and it's only the anchor if I start with that, if it's the first one that I talk about. If I can add that, then I can push the client to maybe spend more. A key point I would add about this is you're not just pushing the client or nudging the client to spend more. You're nudging the client to think bigger about the opportunity in front of them because, very often, our listeners will be scoping out a project for a client, or they might meet with an existing client.

The client is explaining the project to them. They're positioning the project as something that's tactical, that should get done quickly, and with limited budget. As the client is describing the project, the expert doing the intake is thinking, "I can't believe you're thinking about it this way. There's a massive opportunity. We could think bigger. You could invest more. We could take some more time. You could actually really create a meaningful amount of value here if you thought about the project differently."

In those scenarios, I think you have a responsibility to push your client to think bigger, not to make them think bigger. In a three-option proposal with a high anchor, you're not trying to talk the client into any one of the options. The anchor is there to do its job. You start with the anchor with language like, "I first brief my team to think creatively and expansively about what's the most that we could do or deliver the highest degree of certainty that we can help you create this value. We've come up with a novel solution. It's fairly elaborate and expensive. It's priced at really big number."

Then, if the client came to you with the stated budget and they had a stated deliverable they were looking for, you would go to that option next, and then you would go to something in the middle. Now, what you're doing with the high anchor is you're challenging the client to think bigger about the situation. You're not trying to convince them that this is the one that they should take. You should never be in that position.

When you're putting forward a three-option pricing, you're just expressing a range of how they could do this, how they could think about this at different price points, and then you facilitate a discussion about the pros and cons of each. You're not trying to convince them to take the anchor. In fact, the job of the anchor is actually to make the middle one look more palatable, although some people will choose the anchor from time to time. I just don't see it as manipulative, the way decoy pricing strikes me as manipulative.

David: Yes, I think there are some of us who have manipulative buttons that are popped up everywhere that see manipulation. We're more sensitive to manipulation than other people. There might be a little bit of collateral damage for those people. I think I'm one of those people where I automatically distrust this sort of thing. I was trying to put myself in the shoes of the person you were just talking to in that simulation a minute ago.

I wouldn't react negatively to that, especially if right after that, you graciously went on to talk about the budget that I had expressed to you, what that would get me, right? Then you would let me bring the conversation back to that out of curiosity and says, "Oh, that's really interesting. Hey, before we go on, can I ask you a question about the big thing?" If I bring us back to that, then I wouldn't feel sold to, right?

Hopefully, there's enough of an intriguing set of possibilities in what you bring to me that I would want to bring it back. I'd never want somebody to be pressing me to take that bigger one. It's not just about the options. It's about how you present them and whether you're a confident salesperson, and you're listening carefully and paying attention to the signals that the person you're selling to is sending to. I think that'd be critical.

Blair: Conversely, if there was an option that I was presenting to you that was just clearly bullshit, was fake, I knew you were never going to take it, that's manipulation?

David: Yes, for sure. To put a proposal like this together takes a lot more work on your part, because you do have to understand my situation well enough to come up with something that is not manipulative, that does follow the contours of what I'm facing, matched with the contours of what I'm willing to accept, my risk aversion, all that kind of thing. There's a note in your article about people retreating from the dangers of the edges to the safety of the middle. Can you apply that to these discussions, too?

Blair: Yes, so the principle is called extremeness aversion. I feel like I talk about it in every second or third option. That's this idea that when we're presented with options, we retreat to the safety of the middle. As you pointed out, what you're doing with the high anchor is you're moving the client's safe zone from their budget. Client comes to you. They've got a budget. You come back with a proposal, and you say, "Okay. Well, here's what we can do for your budget, but I have this other option that's more expensive than your budget." If it's just two options, here's one at your budget, here's one higher than your budget.

Where's the client's safe zone? It's their budget. If you add a third one, even higher, now, you're invoking this principle of extremeness aversion. In my eyes, you're effectively moving the client's safe zone from their budget to the middle option, because the danger of the budget option now becomes the danger of under-buying. There is always the danger of over-buying in the most expensive option. Faced with three options, you're leaning towards the least expensive one. The danger is that you will under-buy. Therefore, the safe zone moves to the middle, and that's extremeness aversion at work.

David: Yes. You can flip that around, too. There's quite a sinking feeling when you realize a client would have bought a lot more from you than they did. [laughs] Like when they misunderstand something, they just misheard something. Whatever they thought they heard was much higher than what you said, and it didn't faze them. It's like, "Oh, goodness, I just undersold this." I've had that happen before in an earlier life.

Blair: I remember the year. It was 2012. I was pricing a speaking engagement overseas. They asked me for the price, and I said $2,500. They talked for a minute, and then they said, "Sorry, did you say $25,000 or $2,500?" I was like, "Oh, I said 'thousand.'"

[laughter]

Blair: I left a digit on the table. We've all been there. We've all been there. There's something you said earlier that caused me to want to bring this up. There is a caveat to this idea that decoy pricing is manipulative and that you should opt for high anchors instead of decoys. The caveat is, and it's more relevant as more time goes by, because as more time goes by, more agencies are productizing their services and effectively becoming product companies.

They've got this suite of services. AI is forcing that because it's killing the labor-based pricing model. There's this natural transition to everybody productizing their services. If you're productized services sold at scale, and that doesn't include most agencies, but it can include a lot of them. If you have a more affordable product that is sold at scale that people can buy on your website, I think decoy pricing is perfectly acceptable.

I think there's no lasting damage. I think the negative effect of a decoy effect when you're experiencing it on a website in a purchase situation, as opposed to in a sales conversation where you're being sold to, I think it's not that meaningful. It's like my popcorn experience. It's not that meaningful, and it doesn't last that long. I think if you are selling products and people can buy those products on your website, then go ahead and use decoy pricing if you think it's more effective than a high anchor.

David: In general, decoy pricing would maybe apply to that small exception you just mentioned. Don't confuse that with high anchor or anchor pricing. Anchor pricing in your methodology has quite a valuable role to it. What am I missing? Are there other times when decoy pricing would make sense, or probably not? You don't want people to confuse the two either.

Blair: Well, sold at scale products that are purchases rather than sold. When you really only have two clear options, and you can't think of a high anchor, then you could consider putting a decoy in the middle to nudge people from the cheapest option that you have to the more expensive one.

David: You talked a lot, not just today but in other episodes and in your writing, and the stuff that you talk about in front of groups, that you want to present yourself as the expert that you would want to hire. The sale is the sample, right? As we apply that to this, would it be fair to say that if you're hiring an expert, you don't want the expert just to let you self-diagnose? You want them to think bigger. Maybe not force that option on you, but to at least help you think bigger about what could be, and that's what the high anchor could be. Is that what you mean by acting like the expert you want to hire?

Blair: Well, that's part of it, so I think any expert has-- Obligation might be a little strong, but I don't know. I'm quite comfortable with the idea that you have an obligation to challenge your client to think bigger, to expand their range of options. I don't think there's anything manipulative about it. It starts to become manipulative when you start building a case and trying to convince them to buy the most expensive one.

Because if they're going to buy the most expensive option or anything over their budget, they're taking on risk. You need to acknowledge the risk they're taking. You shouldn't be in a position to force them to take that risk on. Also, this idea that because I think decoy pricing in the sale of professional services is a little bit manipulative, in that you're putting something forward that, by definition, is fake.

David: That's what decoy means.

Blair: It's a decoy. You're putting forward an option that you have no intent on them buying, and you know it does not make sense for them to buy. What does that say about you, the advisor, that would be working with this person?

David: Right, okay. Now, I see what you're saying, yes.

Blair: If the sale is the sample of the engagement, and you're putting forward these disingenuous options, what does that say about your character and what you're going to be like to work with?

David: Yes, okay. Anything else we should add here?

Blair: I have this urge to go duck hunting, but I've never hunted ducks in my life.

David: You're just going to shoot my decoys.

[laughter]

David: Thank you, Blair.

Blair: Thanks, David.

We Are All Closet Socialists

2Bobs with David C. Baker and Blair Enns

Download

Despite the fact that many entrepreneurs hate people telling them what to do, they end up running their own agencies using a “central planning” model. Instead, David encourages entrepreneurial leaders to set clear standards, give staff more freedom, and institute kind accountability, for them and ourselves.

Links

“Countering Your ‘Central Planning’ Tendencies” by David C. Baker for punctuation.com

Transcript

Blair Enns: David, our topic today is You Might Be a Closet Socialist.

David C. Baker: [laughs] Wait.

Blair: Not you. That's the worst insult anybody could hurl at you, isn't it?

David: Kind of, yes. I think there's a little bit of socialism on around the edges as I get older and softer and kinder and-- Wait, is that true of me?

Blair: That's interesting. You wrote a post recently. We're calling this title, You Might Be a Closet Socialist, but that wasn't the title of the post you wrote, was it?

David: No, it was a little less evocative, I think. This just hit me in a passing way and I wrote the topic idea down, just a sentence, and then I thought about it for months. It's like I kept seeing things that I wanted to throw in that basket because I've always been struck by the fact that there's this internal conflict. The people that you and I work with, they're all pretty heavy entrepreneurial minds, and some of them more on the progressive side in terms of their politics and so on.

They have an aptitude for risk. They make money. They're capitalists. They may not like that term, but they're really capitalists or entrepreneur is a softer term for that. Then I look back, and I think how they are running their firms, and I notice that they're running their firms like socialists, but they're entrepreneurs. That led me down this path, and I just thought, "Oh, I need to write something about this." I got some really interesting feedback about it. When I hit send, I just never-- "Oh, do I really want to hit send on this thing?"

Blair: Those are the best posts.

David: Yes. I did get some really good feedback on it. The whole notion of central planning is what got me thinking about this, right? Because that's the central feature of socialism, is that we're going to control everything from one place. Then what really sent me down this path was this notion that pricing is a signal, and you don't have pricing the signal in socialism, and you try to control everything; the means of production, the distribution, the pricing, all of that stuff, and so you're missing all of these signals.

That got me immediately, like right adjacent to that is this notion that entrepreneurs are control freaks. But the best entrepreneurs recognize their tendency to be control freaks, and they tamp that down a little bit, and they move away from central planning. An entrepreneur at heart wants to do central planning, they're a control freak, but the firms that are run the best aren't central planning. That's not central to them. This internal conflict just really got me thinking. I feel like I want to rewrite this article five years from now and all kinds of things are going to occur to me between now and then.

Blair: There's a lot to unpack here. I look at the topic and I think, "Okay, I get what he's going to do here. This will probably be pretty good." Then I get into it, and it's like, "Oh, this is so good." One of the things, you appeal to my vanity by quoting me in the second paragraph.

David: I have to throw that in, yes, every time I write something.

Blair: I appreciate that. It was you feeding me my own words and then going through your thinking on this, and then reconciling them once again with my own words led me to a realization. The quote you said, "My podcast co-host pictures effective economic progress like this; Capitalism is the fire, and the box that keeps the fire from destroying everything it encounters is the sum of thoughtful laws that contain it."

That's the metaphor I brought up on an episode a while ago. I said, "That's how I think about capitalism." The trade is the fire, and then the laws, social and judicial, are the box. We're in this constant battle or tension about how big the box should be.

David: Yes.

Blair: I appreciate that you brought that up. Then as you get to your recommendations for how you should think, how you, the business owner, should operate more as a capitalist, it occurred to me that what you're describing is that the owner's role is effectively to be the box, and your team are the kinetic thing that you just let happen. Instead of you trying to be the person that makes everything happen in the middle, you're the person sitting back thinking, "The box needs to be stronger. We need some reinforcement over here, or the box is too air tight, or it's too thick. There's not enough heat getting out." How does that sit with you?

David: I did not extend that picture to what you just did, but it makes perfect sense. I think where that truth surfaces is if you think back, when you as listeners, think back to any time you've tried to motivate people, it usually doesn't work. [chuckles] People are self-motivated, or they aren't. What you do is steer, comment, shape, twist, turn. I did not extend that metaphor to think about the principle "creating the box to control the fire." But what I really like about that is that there has to be fire, and that fire has to be other people at your firm, and you're simply just shaping it. I really like that. That had not occurred to me before.

Blair: It didn't occur to me either too. I'm looking at my highlights and my notes I made on what you sent me, and I resolved. I thought, "Man, this guy knows what he's doing. I should read more of his posts."

[laughter]

David: Speaking of me? That's what you're talking about?

Blair: Yes. We'll jump ahead a little bit. You talk about the right way. Then I'll back up and we'll talk about the advantages of socialism. You're saying there's a better way to run your firm, and then you list three things. I highlighted some of the key elements of the three things and I wrote "the box, not the fire". That's where it came true for me. What are the three things under the banner of the right way? You say there's a better way to run your firm. What are those three things that the principal should be thinking about and focusing on?

David: As you're building this box, now that we have this, we've agreed on this picture, and the employees are the fire, the first thing you do is to set the culture or how we think about things. I guess you could state it another way, it's like the rules of engagement. Immediately when I say that, people in their minds are going to jump right to that section of their website that says, "These are the six things that set us apart."

I don't think that's the answer because those all strike me as interesting. They made sense at that moment in your employee retreat, but they need to be deeper than that. How do we think about performance? How do we think about transparency? When would we turn work down? Those kinds of things, so that's the first. Set the culture, how we think about things, the rules of engagement.

The second is letting the troops make decisions on the ground. This needs to be unpacked a lot because people experiment with this. It comes as a surprise to the people that are being asked to make the decisions. These people are not used to making decisions. You haven't set the rules of engagement, so they don't know the framework to make those decisions.

You sometimes hire the wrong people, so you have this epiphany like, "We can't have a command-and-control thing. We can't have central planning here. I really need to be less of a control freak, so I'm going to let go of the baton." But other people don't take the baton well in the relay race and it falls to the ground and then we've lost the race. Then that just reconfirms some of your very deeply held beliefs about you really need to be doing things or things aren't going to be done right. It's self-confirming because you haven't hired the right people.

Anyway, the first is set the rules of engagement, second is make sure that the decisions are being made as low down the totem pole or the ladder as possible, and then third, spend your best efforts on the things that they can't or won't do. I've talked a lot about this. We've talked about this in previous episodes. Unless you get these things off your plate, namely all the little silly decisions that you shouldn't be making that are not close enough to the events, then you can't be doing the things that only you can do for the firm.

Those three things all circulate, and they self-confirm each other. I'm sure there's a lot more we could talk about there, but that's how I think about the right way to do this. It's the right mix of making sure you understand what your role is, and it's still really, really important, but all the authority doesn't need to be vested in you. You're setting this box, to use your image, and the fire is the employees that you've hired, and you've given them the right instructions, and you've hired the right people, and you're coaching them and having the difficult discussions that you need to have with them and so on. Anyway, that's how I think about it.

Blair: When I read these three things you should be focusing on; set the culture, let the troops make decisions on the ground, spend your best efforts on things they can't or won't do. It triggered back that fire-in-the-box metaphor. I was overcome with a wave of regret. In a moment, I saw all of my management mistakes. I am not a good manager. I might be a decent leader, but I'm not a good manager. I just saw it all in this description.

Even the box metaphor, it's like, I'm in the studio, we're recording in December. Last thing I did before I left home is I stoked the fire, and both of the cats were lying in front of the fire. I put the wood in the fire, I damp it down so when I get back to the house, the house is going to be nice and warm because of the fire. What's the fire in the box? It's people. We're not burning people, but it's people.

[laughter]

First of all, you want to have good quality people. I want to just keep pushing this metaphor. It's got to be high quality. You have to have the right number, and then you've got to figure out a way to spark them and get them going. Then after that, it's all about the box.

David: Yes, exactly. They need to work together. Just to be clear, for people that don't know, you live in northern clime that's very cold and that's how you heat your house with a fire, so this is not just an academic exercise. It's like you really do need to make this work if you're not going to freeze.

Blair: Yes. On your middle point about let the troops make decisions on the ground, I thought of two things. I had a boss once for about 10 or 11 months, who by the end of it was so central command. By the end of it I had questioned my ability to write a simple letter, and I would have to get her to check it before. I was in a senior position, I had 11 people reporting to me and I had to get her to check the simplest of my work. That's what command and control did to my confidence. After that command and control environment for less than a year, could I have been turned loose in a box and been marshaled to go like, "Okay, do your thing, we trust you"? Because working under that regime had robbed me of the ability to be my best self.

Then a little bit before that role, I was working in advertising on dealer group accounts. There was a book that came out in the '80s called You Will Be Satisfied, and the guy's name was Bob Tasca, I think. This guy ran a Ford dealership in Rhode Island or somewhere, and he was the top performing store in the country. Ford would bring him in to talk to other dealers to share his story on how he did it. He basically said, "It's simple. I really have one rule. I push decision making to the lowest level of the organization. Everybody in the organization has the authority to make the customer happy." To prove this was the philosophy that took him to number one, he sold his store, bought one that was in the toilet, that was a poorly performing one, implemented the same management style and rules, drove that store to number one and bankrupted his old store in the process.

David: Oh.

Blair: That idea of just letting people make decisions, giving them authority, pushing authority to the lowest level in the organization, and he did this without firing a single person.

David: That's quite a leader who could do that.

Blair: He turned around a poor performing organization by pushing authority to the lowest level of the organization.

David: What's the allure? When you're a command and control or central planning freak, it's exhausting. In your story, you have this person who needs to read everything that you're writing before it ever gets sent out. It's exhausting, but what's the allure? What's the big temptation that even drives us down this path? Well, we just don't like obstacles and that's something that's true of all entrepreneurs. We hate obstacles. We hate being told, "This can't be done or this takes longer," and so you just step in and you say, "No, this is going to happen." So people just follow you and then you set up this recurring theme that you can never get out of until you have some big light from the sky that says, "This is not the only way to do things."

What's interesting to me about that story you just told, is that the guy was able to turn this around without hiring different people, so he must have been very self-aware at that point. He didn't have to swap them out and say, "Oh, well these people, they can only just take my orders. They can't think for themselves." Apparently he figured out a way to turn his current staff into more of a fire, and he stepped back and he was the box around the fire.

Blair: Yes. Wow. It's really got my wheels turning. You mentioned that there is an advantage to socialism and there's an advantage to central planning. As you were describing the benefits of it, I thought, "Oh yes, that's China." Then your last sentence was, it's basically China. Do you want to talk about that a minute?

David: Yes. It's like, we need more housing, we need more electricity production. That means we need to build big dams. That means that a lot of people are going to lose their homes. Sorry, that's just what has to happen here. We need to connect these big cities, so we're just going to build this high-speed railway between them. There's massive advantages in socialism because you can get things done, but then you have either a populace, if it's in a country, or you have a bunch of employees who are just simply sitting there waiting to be told. You're also going to capture all the blame when things don't go right. I don't want to pretend that central planning doesn't have a lot of mystique and advantages to it. It really does, but it's like it puts you in this situation where you are just trapped for life and the people who work for you don't really enjoy it. That's the big theme here. As an entrepreneur, you have this innate drive to get things done. You don't want to let that slip over to how you manage things and just simply tell everybody what to do. As an entrepreneur, you don't like being told what to do, but you don't think about that when you start telling everybody else what to do all the time. We just need a moment of self-reflection here about what really works and what doesn't.

Blair: That's the challenge in a nutshell, isn't it? You became an entrepreneur because you didn't want to answer to anybody, and now everybody answers to you. You're putting them in the same situation you were in.

David: Yes, exactly.

Blair: That's ironic. We talked about the right way in these three points of set the culture, let the troops make decisions on the ground, and spend your best efforts on the things they can or won't do. You also have an alternative path for people who just can't let go of their central planning tendencies. Do you want to speak to that?

David: Yes, that would be the change is not going to happen overnight. It's probably going to be slow in coming. It will be painful. Honestly, it's more about you or me. It's not so much about the people. It's about coming to some realization. This is very personal for me. I ran a firm, it wasn't massive. I had 16 people at its height. Then I worked for myself for many, many years, and then hired Jonathan because the M&A practice was too big for me. There were a few things that I had not really figured out really well, especially on the buy and the sell side search portion of what we do.

I brought Jonathan on four or five years ago. I've seen this personal struggle. It's like, "No, this is the way we do things." It's like, "No, this is the way we did things when things weren't as good as they should have been. Jonathan, whenever you need or want my feedback, I'm very happy to give it to you. There's a long leash." His side of things is growing so much faster than my side of things. It's in part because I have stepped away from trying to, like, I was the problem. I need somebody who has a bigger vision, who's more competent about this stuff, and I still am fighting two or three times every week.

I'm slapping myself back. It's like, "Oh, that's not the way I would want to do it, but that's the way it's working." The two of us just got off a call with a client, and after every one of these, he'll say, "What would you have done differently?" Then I ask the question, "What do you think I should have done differently?" It's such a painful process to be open to that feedback instead of the central planning way of doing things. It's so freeing too, where I know the best use of David's time, and I also see like, "Wow, this is so much more healthy and profitable and growing," because I'm not doing all of that little stuff.

I'm sure this is a little silly for people to hear, but that's the path that every manager goes on, especially every entrepreneurial manager. Can you just let go? It's not like the suggestions that you would make in a central planning role are wrong, which often they are just honestly, but that's not the main issue. When you're doing that, you're not forming the box around it. You're not creating this environment that can grow safely and provide all kinds of warmth for all kinds of people. How many of us have any leadership or management training? Hardly anybody. We're just picking up things, good things or bad things.

I've had both kinds of managers. There's three people that I worked for that have been very influential in my life. All three of them had minor weaknesses, but largely, they were really great examples of how to do things. I just find myself so fortunate. I don't think I've ever read a book about leadership or management.

Blair: I wrote one.

David: [laughs] I don't think I've ever read one.

Blair: I've read one. The one you wrote.

David: I actually, I asked Jonathan to rewrite that. I said, "Man, this needs a younger perspective," but anyway. Yes, it's just interesting to me to step back and say, "Let's not talk about positioning today. Let's not talk about financial performance. Let's talk about what your role is and how your tendencies to control everything are like that's what entrepreneurs do, but it's not in your long-term best interest."

Blair: That's a great point on which to end. I will leave it there. Thank you, David. I've really enjoyed this article, and I enjoyed the conversation. I feel like I've grown because I can feel the pain in my gut.

David: [laughs] Thanks, Blair.