2Bobs

The more unexpected the metaphor, the more information it carries. Blair has four less-obvious metaphors to give you access to entire playbooks in just four words when selling your expertise.

"The Power of a Metaphor" written by Blair Enns for winwithoutpitching.com

David C. Baker: Today, Blair, I'm going to interview you and the topic is-- Have you heard what the topic is?

Blair Enns: I just gave you the title. You just asked me before we started recording, "What's the topic?"

David: The power of a metaphor. You really are not going to need much today because I've got a lot to say.

Blair: Oh, great. I'll just mail this one in again.

David: The whole audience is like, "Oh, this is great. We're going to hang around." Here's what I like about this topic is back to my sixth book, the one on secret trade craft, the whole point of that book was that if you are a tightly positioned expert, then it doesn't stop there. You have to be working in an expert way too, which I learned a lot from you, not just because that's what people expect of experts, but because once you're tightly positioned, there are still a whole bunch of people you could work with. You need a unique point of view to distinguish you from the other people that are in this smaller consideration set, which is one of the things that you're going to talk about today.

Before I turn you loose, I just want to bless you with some of my favorite metaphors. This is one of my favorite ones.

Blair: Do you hear this, audience? This is what I put up with.

[laughter]

David: The little boat gently drifted across the pond exactly the way a bowling ball wouldn't. Isn't that beautiful?

Blair: Where did you get that?

David: Here's another one. He was unpredictable and mysterious, like a jigsaw puzzle at the base of a volcano.

Blair: What?

David: Look at that moment of silence right there. That was so stunningly good.

Blair: Are these Yogi Berra-isms?

David: He was as tall as a 6'3 tree. That is gold right there. [chuckles]

Blair: Where are you getting these?

David: I don't want to blame this on AI, but it's possible I looked them up, examples of really bad metaphors. This is back to the point, the power of a metaphor. I love this topic. Talk to us about why and give us a brief-- what's the right word? Introduction. Thank you.

Blair: [laughs] We are on our A-games here so far. A metaphor. These four words, "This is like that," technically that's a simile, but for all the English majors out there, we're going to group metaphors and similes together. Four words, "This is like that," delivers so much information. Metaphors just contain volumes of information.

I wrote a post on this recently, and the example I gave in the post is I was on this whitewater kayaking course. It's the only time, I think, that I've sat in a whitewater kayak. It's not like I know how to whitewater kayak, but I own the flat-- what are known as ocean kayaks, even though we kayak on a lake. I've paddled canoes my whole life and I've kayaked for many years.

A friend of mine said to my wife and me, "Hey, I have to get certified in whitewater kayaking. Why don't you guys come with me?" I thought, "Yes, this will be easy. I know how to paddle. This will be no problem." We go out, we're on the water. It's fine on flat water. Then we get onto the moving water and I'm completely lost. I am constantly upside down in this boat. You love this.

At some point the instructor comes over to me and says, "Here, maybe this will help. Kayaking is like skiing." With those four words, I was like, "I got it." I understood it. Not only am I not a great whitewater kayaker, I'm not a great skier, but I've done it enough, I understand it. As soon as she said, "Kayaking is like skiing," she didn't need to say anything else. I instantly got it in a flash. I understood that current is slope and I understood I got to quit leaning into the hill and I need to fall forward down the hill. I instantly understood that I was carving with my wrong edge.

Kayaking is like skiing. Four words in this metaphor. In my mind, I have the playbook of the mental understanding of this other sport. Again, I'm not great at it, but I've done it enough that I understand it mentally. I had muscle memory that I could apply. Four words, there's no other short phrase she could have done for me. It was like the playbook was downloaded into my brain. In truth, it was already there and she just pointed out, "Use this playbook that you have."

David: Just connect it.

Blair: That's the power of a metaphor.

David: Here we are, or here you are, talking about selling, which is something that people think of as being upside down in a kayak. [laughs] Like, "I'm not good at this. I don't enjoy it. I hope nobody has a camera." Selling expertise is not something that feels natural to them. Because it doesn't feel natural, it's not something they enjoy. Extending this, that's really what we're talking about here, the power of a metaphor in selling expertise, which is such a beautiful concept.

Blair: Because I teach selling, as the years go by, I become aware of more and more things that selling is like, so more metaphors for selling. The idea is I have four different metaphors- and maybe we'll even get into five or six, but I have four different metaphors that I can share with you, the listener. When I say these words, "Selling is like," or, "Selling is," then if you understand the topic that I'm relating selling to, then you will instantly have this playbook that you can use to become a better salesperson.

David: I read these four that you have that we'll start out with, but I was struck by one that was missing based on the most recent book you wrote on the four conversations. Selling is like a conversation in a way. It's not on your list here, but I love every one of these. Let's start with the first one. Selling is like leading.

Blair: Selling is leading. Until recently, I didn't know who the originator of this saying was, I do now. I'm fond of saying, "In any sale of expertise, the sale is the sample of the engagement to follow." It turns out it was Mahan Khalsa. I don't even think it's in his book. I think it's him talking about how he sells. He says, "My sale is the sample of how I deliver."

I think those are profound words. I talk about this in the book, The Four Conversations. It's not true in the sale of goods or in the sale of transactional services, but in any sale of expertise, the sale is the sample of the engagement to follow. The roles are assigned, the client tries on what it would be like to work with you. If you don't lead in the sale, you won't be allowed to lead in the engagement.

I talk about leading a lot. At some point it occurred to me many years ago now that selling really is leading. I was reading-- I forget what book. I haven't read a lot of books on leadership as most of the people who have worked for me over the years will tell you. I was reading something on leadership and I thought, "I talk about leadership in selling all the time," but it was just obvious to me that you could take this book and you could just substitute out the word "leading" for "selling" and "leader" for "salesperson", and you would have a handbook for how to be a better salesperson.

The person listening to this, if you are a good leader and if you have studied it and if you do have a playbook for leadership, I'm telling you, it translates almost exactly to the sale of expertise. Now I'll just make a generalization about one of the reasons why these four metaphors are powerful is they're unexpected because we think of selling-- now the generalization, we tend to think of selling as convincing, as persuasion, as the act of talking people into things.

If I come along and say, "No, selling expertise is like leading," or, "Selling is leading," that allows you in an instant, should you choose to see the power in this metaphor, you jettison an old playbook and maybe a playbook that made you a little bit uncomfortable and drop in a brand new playbook, a playbook that you already have, you're just not using it for this use.

David: I don't want to spring a very difficult question on you without any preparation opportunity on your part, but why is it that people don't think of selling as leading? What is the big roadblock that keeps them from thinking that way? Because when I heard that the first time, I liked how it sounded. It resonated with me, but it was such a different thought. It was such a new thought. It was so odd to think of because, you typically think of it the other way. It's like, "Well, all the power is with the buyer. How am I going to be leading? I'm trying to impress them." Anyway, why is that such a non-standard thought?

Blair: I think one reason is when we're selling expertise, we don't really think of it as expertise so much as we do think of it as a service. There is the old service sector mantra that the customer is always right. That's one thing. We tend to acquiesce to the customer. I think there's something different about sales. We've talked about this before where, the listener, you're a very good communicator and conversationalist, but there's something that happens when the context of the conversation is around selling something. Everything seems to change. You get stiff. You get awkward. You forget some of your most basic skills. There are probably other reasons in there too.

I think we tend to think of it more as responding or convincing. I don't think it's natural for most people to think of selling as leading. I think, again, the more unexpected the metaphor, the more information it transmits. Selling is leading is one of the better ones, certainly not the best one on this list of four. I think a lot of people would listen to that and go, "Yes, I can see that. That makes sense to me," with very few people challenging it.

I love to be sold to when somebody is leading, even when they're not necessarily selling me exclusively expertise. Last week, we needed new siding-- We have a separate building that houses my office upstairs and my workshop downstairs. I asked around and I got the same firm recommended to me by multiple people. They came out. Julie was with me when they were selling and, in a moment when they couldn't hear me, I said, "This is going to be $40,000, I know it." She like, "What?" I said, "I'll bet it is and I'll bet we pay it too."

Even though they were selling a product and some expertise, not quite the same stuff that most of the people are listening here sell, but I was so impressed with how-- it made me feel taken care of, it made me feel like, "Oh, they have done this before and there's the right mix of listening to me carefully, noticing me, seeing me, but also not letting me inject my bad ideas, which they have heard a million times when they sell to somebody."

It's not just selling is leading from the person who's selling, but if the person who's being led feels good too in this process. I hope that makes sense anyway.

David: You think of the definition of leading or leadership, word for word, it escapes me, but the idea is, the leader says, "People, we're going in this direction." There's no mandate, there's not, "You're going to follow me or else." It's, "We're going in this direction," and you are inspired to want to follow. "Okay, I guess we're going in that direction, I'm all in." That's what leading is and that's what just happened to you in the sale.

Blair: Yes.

David: All right. That's the first one, selling is leading. The second one is change management. This one's not as obvious, but really fascinating. Change management is a metaphor for selling.

Blair: I think this might be the most powerful one. This was taught to me about 25 years ago. Someone said to me, her name was Pauline O'Malley Blair, "Buying is changing, selling is change management." Those two sentences together just basically changed my world. I think of all of the different metaphors here, the best playbooks for selling are probably the playbooks on change management.

There are different change management models that you can use and borrow from, you can mix and match and you can mix and match change management and leading and these others that we'll talk about and others that we won't talk about. That's what we do. We mix a bunch of metaphors, a bunch of models, and then you come up with your own unique blend of what the topic is, in my case, selling.

Back to selling is change management. If you study any model for how people change, you will see it as a series of steps that everybody goes through when buying. Now, the steps need maybe slightly different names, maybe there's some adaptation of the model, but the metaphor stands. If you look at the person you're selling to and you see them as somebody who is contemplating or planning change, then whatever methods you would use to help somebody change are effectively the same methods that you would use to help this person buy.

David: One of the things that I love about this particular one of the four metaphors is that if you recognize that selling is change management, you also recognize innately that the person that you're talking with has to sell to other people. You can give them the tools they'll need for the change management that they need to manage back at the firm because they're going to have some people to convince as well. You're not just talking to them, you're also giving them the tools to manage that change management internally.

Blair: That's a great insight, one of many, many insights that will dawn on you when you start to think of selling as something other than convincing. You see it as leading, you will have a significant number of profound insights around the implication of that. The same with change management and the same with the next one which might be my favorite one.

David: Listeners, if you've never done this, just for fun, I still like doing it, I don't know why, it's just interesting to me, but when you have a minute, go to a browser and just type, "Theory of change," and then click the image tab so that you're not getting text answers, get images, and you'll see hundreds, thousands of these things laid out. You will immediately be drawn to one or another of them, and just start thinking about that. Think about overlaying this little metaphor on what you do in terms of selling. The first is leading, the second is change management, and the third is parenting, but with a question mark. Why the question mark?

Blair: [laughs]

David: Are you nervous about something?

Blair: No, I just think it's so non-obvious. The reason why parenting came up is the most common metaphor that I hear in Win Without Pitching training, if I'm in a workshop, at some point somebody will say, "This is a lot like dating. Selling is a lot like dating." Usually what they mean is playing hard to get. I think dating is a valid metaphor for selling, but I don't think it's a particularly valuable one because there isn't a lot of surprise in it.

To me, parenting is a surprising metaphor for selling. Why would selling be like parenting? Because, and I talk about this in the post, sometimes the other party doesn't know what they want, isn't well-behaved, or they make unreasonable demands.

David: This is theoretical. You're not talking about your kids. This is other people's kids.

Blair: You think about a five-year-old throwing a tantrum, "I want this," or saying, "You're stupid," or whatever, they're having a fit, and the next line, it's also in the post, "Someone needs to be the adult in the relationship. That someone is you." That comes from my brother-in-law. My sister is constantly quoting her husband about this great line of parenting.

This realization that somebody has to act like the adult, and oh yes, that's you, that's helpful to me because I feel like a child who's never actually grown up, a child who's faking his way through adulthood. It's like, "Oh yes, I'm supposed to be the adult here."

I think selling expertise is more like that. It's like, "Okay, these are unreasonable demands. You're not behaving properly." Whatever it is, I think too often in any sale, particularly an expensive sale of expertise, we, the salespeople, defer to the client. If selling is leading, then we should be driving the next steps. We should be showing up with a framework. We should know what to say after hello. We should know all of these things. We should have a sense of objective of where we're going in this conversation. A child doesn't really have any of that. A parent should bring that to a parent-child relationship. You should bring that to a client-expert relationship in a sale.

I think it was a year ago or so, I checked in with you for some reason, just to see how you were doing, and you relayed to me that you were in a sales conversation with a client or a potential client about a year ago. Something wasn't going the way you would have wanted, and you said, "I need to be the adult in this relationship." I thought, "Oh, that's interesting." It's like a reference to this. This probably explains why you're better at sales than I am, because you have four kids and we have two, maybe.

David: [laughs] I'm twice as good?

Blair: Yes, you're twice as good at selling. I think parenting is a good metaphor for managing as well. The thing that stands out to me about parenting well is that you have to be courageous enough to make the important choices that have the long-term view in mind. I could say, "Yes, you can have this candy right now," but if I keep saying yes, what's your life going to be like? It's like somebody's got to have the big long-term perspective and view.

David: I love this one, the third one. The first was selling is like leading. Second, selling is like change management. Third, selling is like parenting. The fourth one is selling is like facilitating.

Blair: Selling is facilitating. Selling is helping. There's very little surprise in those two. The reason why this one really struck me recently, a couple of weeks ago, I was talking to a room full of-- a specific advisor type. Yes, it was financial advisors. We were talking about, "As an expert, you are a facilitator." I was telling them the story of, "I had bought a vehicle and I didn't tell my financial advisor." Then when I finally confessed--

David: Who's your financial advisor? Your spouse or somebody else? [chuckles]

Blair: Somebody we pay. He said, "Why didn't you tell me? Why didn't you tell me you were going to buy a truck?" I said, "Well, I was afraid you wouldn't let me," or something like that. He said, "Blair, it's your money. I'm never going to tell you what to do, I would just lay out the options, different ways that you could have done this." I said, "Well, it's pretty straightforward. I don't see any way I could have done this." Then he told me what one of my options was and I went, "Damn, I should have called him."

[laughter]

David: You're paying him and you keep using him because you've come to believe that he has your best interest at heart. That doesn't mean he's always right. It doesn't mean he's going to be rude to you, but it is a valued opinion. In that context, it's like selling because it's facilitating what's best for you.

Blair: My point in bringing up the story originally to this group of other financial planners, I said, "At your best, you don't tell your clients what to do. You lay out your options and you talk about the pros and cons of each option and the trade-offs, and then you let them make a choice." That's exactly how you should think about selling, particularly the closing conversation. I'm now speaking to the power of options.

There are some types of experts where maybe in certain situations, you have to tell your client, "You need to do this." For the most part, most advisors, whether you're marketing financial services, whatever it is, your job as the outside expert or advisor is to lay out the options to the client, talk to them about the pros and cons. What we often say in training is, I'm fond of saying, "It doesn't matter how well you have conducted these conversations, you will never know all of the trade-offs that your clients have to make in making the choice that they make. Therefore, you should have no judgment in the options that you put forward in your proposal."

There is no right or wrong options. There's only trade-offs. Your job is not to convince them to select one over the other. Your job is to be the helpful expert advisor, lay out the options, talk about the pros and cons, facilitate a discussion, and respect the client's choice, whatever it is. No convincing, no coercion. Selling is facilitating.

David: I love the fact that you use the word "trade-offs" because that's the word I wanted to talk about a little bit. It's one of the things that's missing in our modern conversations, as a whole, in society. In a sales conversation, there are trade-offs. One of the ways that you can gain near instant credibility is to almost unsell by saying, "Now, here's the downside of what I'm recommending. Let's just make sure that we have all this laid out so that the decision that you make, it's still your decision, is as informed as possible."

These four, selling is like leading, selling is like change management, selling is like parenting, selling is like facilitating, how does this fit in the context of a metaphor, a perspective, a model? How does all that tie up together?

Blair: It starts with a metaphor, "This is like that." You start looking for metaphors. Take your domain expertise. What is it like? See if you can't come up with a bunch of different metaphors, see if you can't come up with some unexpected metaphors that therefore carry more information. Your metaphor can then be turned into a perspective, an overarching belief on how this should be done.

If I take selling is leading as a metaphor, my overarching perspective in my business-- and I have lots of perspectives, but the overarching perspective through which I create content, the lens through which I create content for my content marketing, is the idea that you can win without pitching. I'm fortunate my perspective is right there in the name of the business.

A perspective might be, selling is leading. I can take this metaphor and I could blow this up and I could make this the cornerstone of my business. My manifesto, instead of it being called the Win Without Pitching Manifesto, it might be called the Selling is Leading Manifesto, or if I was going to write a book on it, it would be called Selling is Leading. I'd be putting this belief, this ideology out into the world that selling is like leading. It's a powerful metaphor. I choose to make it a cornerstone of my business. I create content through this lens. I publish my manifesto on it.

Then out of our perspective almost always falls a way of working. I've already said a metaphor downloads the playbook. I could take a book on leadership, probably more correctly, I would ingest a bunch of different books on leadership and I would cobble together the best of them all, and I would create a model for how to sell. It would be called the Leadership Sales Model or something like that.

These three things we've talked before about the power of perspectives and the power of models, I simply want to make the point that not all perspectives and models are metaphors, but this is a logical starting point. Start looking for metaphors of the thing that you do. Your domain expertise is a lot like what? I would challenge the listener to come up with four, five, six, eight different metaphors and then start to play with them. How much information is contained in this metaphor? Does this imply a playbook?

I'll make the point that not all metaphors yield helpful models. If I said, "Selling is like quantum electrodynamics," it might be true to me, but a model reduces complexity. This is adding complexity. Unless you're a physicist, there's no immediate playbook that's already downloaded in your brain that you could reference. Not all metaphors are powerful enough to be perspectives or yield a model. Does that make sense?

David: Yes, this is such a great episode, but the flip side of that coin is, in my mind, I'm flipping through dozens and dozens of agency websites right now, and I'm not seeing these metaphors or these perspectives or these models.

There's so much room to do things that would really help us in this space. I'm not sure where it comes from. Where do we not have this freedom to just put our feet up and forget about client work for a minute and just think about what we do, how interesting it is, how unique it could be and how we could give people, just in a couple of sentences, a new way to think about how we-- We're not a design firm, we're not a coding firm. You fill in the blank and, all of a sudden, a light would come on. It just feels like there's so much room for improvement around this in our space, and I wish it would happen.

Blair: I know you're asking why. It's because we're still chasing utilization, probably. There isn't free time. Got to go bill those hours.

David: When there's free time, that's a bad sign. This has been great. Thank you, Blair.

Blair: Thanks, David.

Ignoring any unexpected offers to buy your business that might come your way is not in your best interest. But neither is dating all opportunities in desperation. David has four things principals should consider, whether or not you are actively looking to sell your firm.

“Should You Entertain That Offer?” by David C. Baker for punctuation.com

2Bobs London Meetup on Thursday 8 May, 2025 at 2pm

Blair Enns: All right, David, the topic today is should I entertain that acquisition offer? Should I, Blair Enns, entertain this acquisition offer?

David C. Baker: Somebody offered to buy you? Is that what you're saying?

Blair: No.

David: You're asking for advice?

Blair: [laughs] Is this a post? Have you written on this yet, or are these notes for my edification?

David: It's a post. Yes. I write a lot of really good things, which I'm surprised you don't.

Blair: People keep saying this.

[laughter]

Blair: I look forward to reading them one day.

David: One day.

Blair: One day.

David: Yes.

Blair: Should you entertain that acquisition offer? Why this post? Why now?

David: There's more M&A activity now than there ever has been. That's part of the reason for it. You're sitting here running a firm and somebody sends you a fax. No, it's probably not a fax.

Blair: A telex.

David: Every once in a while. Somebody sends you a note. It's usually an email. Nowadays, it could be a phone call. They are representing such and such a buyer and they want to know if you're interested in selling. The typical principal probably gets two of these a week, I would guess. The question is, what should I do with these, right? You're trying to avoid either extreme. On the one extreme, you never entertain any of them, which is like my dating experience in high school where I dated two people.

I'd rather not get into why it was only two people. Then the other extreme would be, I don't know, maybe it was you, Blair. How many people did you date in high school?

Blair: Not many.

David: Not many. Okay. You don't want to entertain none of them. You don't want to entertain too many of them, too. Should you entertain that offer? The argument is yes, but with an asterisk, like there's certain things that you want to think about before you do. You should. It's a good thing to do as long as you are careful about how you do it.

Blair: Okay. This is a topic for the business owner who is not actively looking to sell their firm but does occasionally get these inbound inquiries, "Hey, would you be interested in selling?" Is that about it?

David: Yes. Exactly right.

Blair: I delete all those things. I just assume there's nothing to them. After I read through your notes here and highlighted some things, I thought, "Oh, maybe I should pay attention." Maybe I should use this framework that you've laid out here to just not dismiss them completely out of hand.

David: Yes, because it would be really interesting to know what the exact mix is. There are really two ways essentially to sell your firm. One is to conduct a search. There you hire a firm. We do that sort of thing. There's about a dozen firms that do that. You hire a firm to conduct a sell-side search for you. The other way to do it, and my just rough guess is it's probably half and half, is that some opportunity comes to you organically apart from a search and you don't know what to do with it.

When you think about just philosophically the difference between those two, it's very different. Because when you are looking for a buyer, you don't have quite as much leverage sometimes. If you're not looking for a buyer and somebody comes up to you and says, "Hey, would you be interested?" It feels a little bit better, right? Because you weren't necessarily looking for it. In that case, when you're not hiring somebody to conduct a search for you, then you should entertain certain offers if you do it the right way. You should do that on your own.

You should not hire an M&A firm like ours to help you with that in the early stages. Now, if it gets to a certain point, then it's a good idea to bring somebody else in. You should respond to these offers that come to you organically every once in a while as long as you stay out of trouble doing it.

Blair: Okay, that makes sense. You have a four-point framework here. I'll list the four points, and then we'll go into each of them in detail. Four-point framework on how to think about these things that do come in via email or fax from time to time. The first one is be open to opportunities. Don't be completely closed to it the way I am. Second, make quick judgment calls about which ones to pursue. Some sort of heuristic about how you decide whether or not to take one seriously or not. Third is approach the first one as a student. I really like that. I have some questions on that. The fourth is to limit your investment in the sale.

David: That's a concept you're familiar with, I presume, right?

Blair: Yes. Yes. Do not overinvest. No sunk costs. I think we talked about this in other episodes. When I try on the idea of maybe selling the business at some point in the future or when I try on the idea, typically through my clients of them engaging in selling their firm, I think of the emotional sunk costs of getting tied up into it. It just feels to me like you're in a really vulnerable position. We'll come back to that. I'm getting ahead of myself here. Step one or the first point is simply to be open to opportunities. This point you make here about if you're not completely closed, maybe part of your brain is scanning for these signals that you might otherwise miss if you were completely closed.

Am I characterizing that correctly?

David: This might be fun to do. It's never really occurred to me before. You know what episode we did quite a while ago where you said, just live within this artificial constraint that you can never sell your firm. That was a new thought to me and it spurred all kinds of interesting conversations and I've thought about that quite a bit. What if you flipped that around though and said, "Pretend that you had to sell your firm? How would you listen to conversations differently?"

You would pick up a few things and sometimes you'd pick them up from a client who represents a client concentration challenge where you've just had this big win together and you go out to celebrate at dinner and after a drink, the client says, "Ah, we should just buy you all. We keep doing such great work together." In the pre-signal days, that wouldn't even register on your consciousness. With a different station tuned in, you think, "Oh, I'd never really thought about that possibility. I wonder if he's really thinking about that. I should joke back like, "Yes, you can't afford us," but it probably does make sense."

It's just recognizing that many of these opportunities just happen organically or maybe it's you working with another agency, you share a great client together and you realize how similar your cultures are and how there's very little overlap between your service offerings and how the client is so much better off because of this. Neither one of you is white-labeled. It all works together. Maybe there's a principle that it's sort of like an informal advisory board where you have this transparent relationship with this other principle and you've learned how ethical they are, how well they think, how transparent they are about their struggles, and so on.

All of a sudden you start to see how a hand fits inside of a glove. Being open to opportunities, it's really important for this not to be construed as some sense of desperation. It's more like, "Hey, I'm really good at what I do. This firm is really strong, but the future could look very different." It's just interesting to think about those things, just dream about those things. It's not out of desperation, it's just out of, wow, there are so many ways we could take this. I just want to listen. I'm very confident in what we do. We have a strong marketing plan. We run this thing like a tight ship, but why not? Let's just listen to things. That's the whole point.

Blair: As you're talking, I am really processing this in a way that I haven't previously. It just makes me realize, I could think of other domains, but this idea of open to selling the business versus not, I wrote something almost 10 years ago, maybe it was over 10 years ago now, about how I plan to die with my boots on in this business. I have said before that I have had moments of weakness where I have considered it, but it's still largely in my plan moving forward. As you're talking, I'm thinking, and I could think of lots of our clients, my clients, your clients that we share, where they really are buy and build people.

They're more proper entrepreneurs than you or I. You and I are entrepreneurial, but we've really built these individual businesses that are largely lifestyle businesses. We're not entrepreneurs the way serial entrepreneurs buy, sell, build, merge businesses. Now, you with your M&A hat on, you probably regularly look through this lens of what could be different or better if you tacked another firm onto this, if you sold to so-and-so, et cetera. I'm using myself as a surrogate here for what I assume is a large part of the listener group, which is, I just don't think that way.

There are probably all kinds of doors that are closed to me because I am not open to those opportunities. I'm not listening. I imagine the typical owner of a typical creative firm, whatever that means, probably is wired similarly, where they don't have a part of their brain, maybe a more entrepreneurial part of their brain, working on, well, what if we added this? What if we merge with these people, et cetera? There's a whole other avenue or set of avenues available to growing the business, taking it to the next level.

David: Yes. If you think through Darwin's contributions to how we evolve and so on, I think that society has evolved around us in a way that our psyches have not caught up at all, and it might be another 100 years before we do. I still think internally, subconsciously, we're still operating like we're going to have one career all our lives, like two generations ago did, like our grandparents did. That just isn't the case anymore.

In fact, you can have three, four, five really great, satisfying careers that have very little to do with one another, where you've used one as a stepping stone to the next. M&A could be a part of that. I just don't think subconsciously we've gotten to the point where we accept that idea. We're just thinking, "Ah, I'm going to do this until I'm however old." I think we just need to be open to all kinds of other things that could happen.

You and I both know thousands of firms between us, and there have been some remarkable stories of transitions where somebody has gone on to do something else that has nothing to do with this marketing or digital field, and they have been wildly successful. That's because they've listened to those opportunities differently.

Blair: Hey, everyone. It's Blair. David and I will be in London together in May, and we've decided to host a 2Bobs meetup on Thursday, May 8th from 2:00 to 4:00 PM somewhere near London Bridge Station. If you're in London and would like to attend, you can grab yourself a ticket at 2bobs.com/events for a nominal fee. We're just going to hang out for a couple of hours, maybe have a couple of pints, nothing really on the agenda other than a meet and greet. That's 2Bobs in London, Thursday, May 8th from 2:00 PM to 4:00 PM. Go to 2bobs.com/events.

Blair: Okay, I'm sold on your first point. Be open to opportunities.

David: There's three more.

[laughter]

Blair: There we go. There's three. Baker, you still have a hill to climb. All right. The second one is make quick judgment calls.

David: Oh, you'll be with me on this one. This is your whole life. Quick judgment calls.

[laughter]

David: Oh, goodness.

Blair: All right, listener. No reason for you guys to keep listening. David and I are just going to work this out amongst ourselves.

[laughter]

David: Make quick judgment calls. The idea here is that you don't want to waste time. I think of this as driving through a small town at a reasonable rate where the lights seem to be timed. You're just assuming a green light, but you're watching the lights, and as soon as one turns red, then you stop and like, okay, this is the end of that train. That's how you're approaching this thing. You're looking for lots of yeses until a big no. The no might be some cultural thing, or it might be the fact that they have no money, or that what they want you to do in this next life is not something you want to do, or they don't like your team, or whatever it is.

There's a hundred things it could be. You're just looking for really quick judgment calls, and in two categories, really. One is, if I wanted to sell, is this the person I'd want to be with for the next two or three years? That's the way you can maximize your earn-out. Then the second part of that is, do I really even want to sell? If you absolutely do not, well, then don't entertain the opportunity. If there's even the smallest part of you that says, "Oh, I should be open to this. I still have a lot more questions than I have answers, but I should be open to this." Then you keep going until a red light.

Blair: How's that? What happens when you hit the red light? Red light is not an amber light. It's like, no, stop. This doesn't work for me. I'm out.

David: Yes.

Blair: I'm in, in, in, out.

David: Then you slam the brakes and everybody crashes behind you. This is why you don't tell people you're pursuing this opportunity until later so there's no crash.

Blair: Got you.

David: Yes. You just stop.

Blair: I was waiting for you to mix the dating metaphor into the driving through red light metaphor, but I don't think we're going to get there.

David: My metaphors have been a failure today. I haven't mixed and matched them.

Blair: Make quick judgment calls. It's basically yes. Until you hit a red light. This will tie into the fourth point. First, the third point, I really like this idea of approaching early opportunities as a student. It just reminds me, I can think of so many conversations I've had with clients. The first time you try to raise money, the first time you try to do anything, it's like the first pancake, you're going to throw it away. You're not going to eat it. You're saying the first few times you do end up saying an early yes, and keep going further and further into the conversation, you would just understand that you're probably going to blow this anyway. Don't be too attached to the first one. Is that correct?

David: Right. Exactly. Your pancake metaphor, that's like the seventh time you mentioned that in the last year, I think. It's really a good one. I appreciate you throwing that in. You just always throw away the first pancake. That's just so true. The point of this third one, approaching early opportunities as a student, or maybe I should say approaching an early opportunity as a student, because you may only need to do one of these before you've learned enough where you're going to be pickier before you pursue any subsequent opportunities.

The point is that there is a lot you can learn about M&A by reading or talking with friends that have done it or whatever, but there are some things you simply cannot learn unless you're in it yourself. I mean yourself, not through some advisor that you might hire. You'll learn about how you're going to react to the idea of having a boss again, because you will have a boss again, about your real motivations, about how close you are to really giving up some of that control that you crave so much.

Even if what you do with your control isn't all that great, the fact that you have it is just, that's precious to all of us as entrepreneurs. What you want for your team. Because it's pretty easy to say all the right things about what you would do to do the right thing for your team. Then when it comes right down to it, when you have to make some of those choices, sometimes that's a different story.

Blair: Team, what team?

[laughter]

David: Hopefully your team is not listening at the moment. A few other dozen things that you just wouldn't learn. Mainly I'm thinking here of how the way you phrase things will land. They're going to ask you questions in this pursuit, and you're going to say something that sounds right, and you're going to see their reaction. You're going to realize, oh, maybe that wasn't the right way to do it. This is a learning process. You view it as going to school in a low-stakes environment as long as you make quick decisions and you abandon the pursuit once a red light. Learning opportunity, there's so many things you can learn.

Blair: Okay, so it's the first pancake metaphor applies yet again. Some of these things are really interesting. That joke I made about your team, when I read your note there, I had the same idea. It's like, yes, a lot of people say the right thing about how important culture is and who will be inheriting this team and this culture. Then somebody drops a bag of gold on your desk, and you realize that maybe you're not as attached to that as you claim to have been. Maybe the opposite is true. Maybe you haven't said a whole lot about how important your team is or the culture is, and you realize this would represent a dramatic shift in the culture, and you don't like the idea of handing your people over to this new organization, new culture.

David: Yes, or even you come to realize that all this culture stuff is real, but it has more to do with the person you want to be and how much you love working at this place. You're surprised at how little the possible acquirer cares about your culture too. That's another possible realization you're going to have.

Blair: You make the point under this banner of approach early opportunities, and I'll just read the line here. "At this stage be super careful about latching on to person who did one deal somehow making their experience normative." I feel like you've seen this before.

David: Yes, I'm talking about your neighbor who sold his car wash or your father-in-law who has lots to say about how you should do this, and he was in PE or something. Or an attorney in the family, right, who does family law and has nothing to do with this field. It's good to talk with other people. You really should talk with other people, but be really careful about latching on to one unpaid advisor who thinks they know everything but have only done one deal. Believe me, every deal is different. There are so many possibilities on the table, particularly if this is across state borders, across international borders, if it's a different kind of an acquisition, if the funding is different.

Just be careful about who you listen to. Talk to these people, but weigh it carefully. There's a lot of experts who sold one firm for a lot less than they want you to think who can steer you wrong, too?

[laughter]

Blair: That was a dig, wasn't it?

David: Yes.

Blair: All right. Our topic is should you entertain that acquisition offer? You have a four-point framework for thinking through these opportunities that seem to come in over the transom when you're not actively in the market. The first one is be open to opportunities. The second one is make quick judgment calls about which ones to pursue. The third is approach the first one as a student, the first pancake that you'll throw away. You'll get it wrong. The fourth is limit your investment in the sale, or another way to think about this is keep your business strong while you are entertaining the idea of that acquisition offer.

David: Yes, because it's so easy. Once you allow yourself to get excited about this and pursue it, even just mildly excited, then two things are going to happen. One is you're going to start dreaming about the possibility of a different set of expectations, being less in the people business, maybe the pot of cash that you got at closing, and so on. That's one thing that happened, you start to dream about that. It's harder to walk away from something after you've started dreaming about it. That's what you were talking about when we first started this episode.

This next part is more insidious, really, and it's scarier to me. That's that you will put off some big decisions that won't have much short-term impact but will have long-term impact. Maybe it's your rebranding or starting a new business plan that will take five months to see results or hiring that one person or building out that service offering design or whatever it is that you would have done to fix some defect in your business. You think, "Well, should I really do that? It looks like this might happen. It may not happen, but it doesn't make sense to spend money or energy on this while I'm pursuing this opportunity."

I'm here to say it does make sense to pursue whatever you need to do to close those gaps in your business, whether it's time or money, because you want your business to be very strong so that you can walk away from anything that you should walk away from. Even if you don't walk away from an opportunity, your firm will be stronger, which means you'll probably-- not always, but you'll probably earn more money during the earn-out because your firm is stronger. Run your firm as if it's not going to sell. Be open to sell so that when you do see these opportunities and decide to learn from them, especially that first one, you'll still be able to walk away from it pretty easily.

To tie all this together, the third and the fourth point, the real deal that you accept, you don't want it to be the first one you've talked about. You want to have learned about how this works by learning with an environment before and then always being willing to walk away from something. Now some people are just stubborn and courageous, but you really want to have all the cards so that you can negotiate strongly, still ethically, while this unfolds too. Anyway, that's the big point here.

Blair: Walk down two roads at the same time. Keep your sunk costs, especially your emotional sunk costs, under control so that if it falls apart, your plan B is a pretty strong one and you're not sacrificing the future of the firm. I've said this before. I cannot stand the idea of negotiating from a position of weakness. When you are all in emotionally on this deal going through, you are negotiating from a position of weakness. Disappointment is nothing but a function of expectation. If you're expecting it to happen and it doesn't happen, you're going to be deeply disappointed. If the buyer comes back with another condition, another concession that they need from you, you are going to be in no position to be able to push back.

David: Yes, this actually highlights something that happened just accidentally, honestly. Our business Punctuation is really two prongs. It's how to build a really strong firm and then how to sell it if you want to someday. I love the fact that we're appending this first part on here to make the firms that are actually selling a lot stronger. The mission feels really good to me. Help you be a really strong firm and oh, if you get a chance to sell, we'll help you with that too. Not just being here to help you sell. It makes a better story in my mind anyway.

Blair: Now, David, if there were a book that somebody wanted to read more about selling their firm, what book would you recommend?

David: It would not be Win Without Pitching, I'll say that.

[laughter]

Blair: It would be Selling Your Professional Service Firm, a Primer by David C. Baker. We've done an episode on that. We'll post a link in the show notes. Even if you're not actively selling, and that's really what this talk is about. It's for those who aren't actively looking to sell, your point is, well, part of your brain should be open to the idea and use this simple four-point framework. If that is you, then this is a pretty good book to read on that front. It's also a pretty good book to read, even though it's not the objective of the book. It's a pretty good primer on how to run your firm generally, even if you're not going to sell it. I'll do the plugging for you.

David: Thank you. I appreciate it. Also, here, open to sell, we maybe ought to flip this around too for people. Maybe you ought to be open to buy too. Think about that.

Blair: I'm thinking about it.

David: You weren't as excited about that idea.

Blair: [laughs] Thanks for this, David.

David: Thanks, Blair.

Your clients are far more likely to talk to each other when you have vertical positioning. Blair has observed both good and bad things arising from this.

“How to Ask for Referrals” 2Bobs episode

David C. Baker: All right, Blair. We have talked quite a bit over the years about pricing the client. We're going to talk about that, but dive deep in one particular element of that, and that's, okay, if you do this, what happens when clients talk? If you're going to price the client, what if they're talking? We're just going to deal with one particular thing. This might be more relevant if your positioning is vertical, and one of the things you say in here is your clients are more likely to talk. This will be interesting. I'm going to dive really deep on something we've talked about generally, too.

Blair Enns: Yes. I don't want to just talk about pricing, too, because if I say to the listener, "Hey, I hear your clients were talking to each other," you would probably have some visceral response. Some of it would be good, and some of it would be bad, and there is the good and the bad of your clients speaking to each other. I have a few points I want to hit on this. The first one is pricing because the reaction, if you are following this rule that I laid out in Pricing Creativity, that probably shouldn't be a rule, it should be a strong recommendation of price the client, not the service.

If you're following that rule and you're vertically specialized, so you work in a vertical market segment, then you're probably going to run into this issue of your clients talking to each other, and then they could compare prices. That seems horrible to people. I'm sure there are many listeners who deal with that fear and have actually dealt with the reality, not just the fear of having a client call up and say, "Hey, I just talked to so-and-so and they said you're paying a different price."

David: That's the visceral reaction you were talking about. I always feel so weird interviewing you about this topic. Why? Because I don't price the client. I'm at the opposite extreme of that. Not only are my prices the same for everybody, but I tell everybody what my prices are. I always feel like, "Oh, man. Am I really missing the boat here? Should I listen to this episode differently than normal?" Because I'm like, it's hard for me even to ask you some of these questions because I don't do any of this. I have my own very specific reasons for it, which probably make sense for me not to, but it always feels weird to interview you about pricing the client because I don't do any of it.

Blair: I've actually written on this recently. I don't think there's enough material to cover it in a podcast, but it's basically the case for selling cost plus or the case for pricing the service instead of the client. We did do an episode on this recently to standardize or customize. We talked about standardizing or customizing along the delivery domain and along the pricing domain. Standardizing along the pricing domain often means that you put prices on the services themselves, not on the clients. This principle of price the client, I think it's a really valuable principle.

Now it's downgraded in my mind from a rule to a principle. You think about it, there are obvious and non-obvious reasons to price the client. The obvious reason to price the client is if the service that you're offering, whatever it is you're doing for the client, if it's more valuable to some clients than others, then it makes sense that you should be able to capture more of that value, therefore, the prices should be different. Now, the flip side of that is with your smaller clients, it's less valuable. Does that mean you should be charging less? Yes, if you're following that rule.

David: I don't like that half of your rule. I'm just going to go with the first half where you charge more. [laughs]

Blair: You wouldn't be alone on that. Here's why people would not be happy with the idea of charging less to clients for whom you're creating less value. It's because they're thinking of a discreetly packaged service that does not change depending on the client. If you take those three words, price the client, the focus for most people is on price. The point I'm trying to make here is you should have as much focus on the client. What I mean by that is not all of your clients value the same things. You should be more creative and customized. Now again, let's back up. There's a caveat here.

I'm not talking about fully productized services business, but in a traditional creative firm, and we covered this in that episode on standardize or customize, in a historical business model of a creative firm, it would be a largely customized delivery model. What that means is that what you're doing for client A is often quite different from what you're doing for client B. I've written a post on this. In the post, I'm imagining I'm getting on a plane.

I've paid whatever I paid for my airfare. There are 150 other people on that plane. What I'm not going to do and what almost nobody on that plane is going to do is to turn to their seatmate and say, "What did you pay for your ticket?" Everybody understands that the prices paid are all different. In fact, quite different in some examples, right?

David: Yes.

Blair: We intuitively understand, even though most of us haven't thought deeply about this, that the reason the prices are different is that in addition to the core value driver of getting from, in my case, Phoenix to Vancouver, there are all of these other things that I might value and be willing to pay for and some that I might not value and I don't want to pay for. Each of us has bought a bundle of services or a bundle of value drivers. The bundle is different for most of us, not all of us, but it's different for most of us, and we paid a price we were willing to pay for that bundle of services.

David: I bought a first-class ticket because I didn't want to sit with people like you. It's different things. [laughs]

Blair: I bought an economy ticket, but a high fare level. I paid more for the fare level so I could change my flight if I wanted to change it, and I could use my upgrade credits. I did change my flight the day before. I flew home two days earlier than I had planned to. I've changed the flight at the last minute and I got upgraded at the last minute. Yes, we pay different prices for a different bundle of services. Now, when people bring up this issue of, "Oh, my clients are going to talk to each other and they're going to find out that what I charge them is higher than what I've charged somebody else," I want you to think about that as the airline example.

I've completely stolen this airline example from one of Ron Baker's books, who elucidates this beautifully. It really was the example for me that drove home that it's not just the core service. We all get trapped into thinking it's the core service. When I say there's too much emphasis on price and not enough on the client, what I mean by that is the different bundles of ancillary services that you bundle and unbundle into the package to make, at the very core of what they're purchasing, the entire experience is different from what the entire experience of another client is purchasing. Does that make sense?

David: It does, but it also brings up a point that I've been thinking about in a different context. I'm going to insert it here. You made a statement a few minutes ago about how, in that statement, we concentrate more on the price than on the client. In other words, the price that clients pay should be different because what the clients want should be very different. What strikes me sometimes about some of the margins in our industry is that, yes, the client relationships look very different. I want those client relationships to look different because you are leading the client based on what the client really needs.

What I fear is that those client relationships look really different, not because of your leadership, but because you are getting ordered around by the client. There are some other ways to solve this, but that's one thing I don't want to let go. If you are really leading your client relationships, by God, they better look very different. When they look very different, that doesn't mean you're leading the client. It could mean that you're just simply taking orders, and the diner wants something different in this case. We want your relationships to look different. We want them to look different because you're leading the client in different places.

Blair: Now, the exception to that, again, it's worth restating, is when you've completely bundled up your services and you've chosen to price those productized services. There's some nuance here, and we have to hold multiple ideas in our mind at the same time. I'll also point out, sometimes just the fact that the value is greater is enough. You don't have to go out of your way to find ways to make the experience different for the client, just because you are imagining justifying the price difference when your two clients speak to each other. That's not the reason you would do this.

I would encourage you, if you're not fully productized or standardized or productized on the service domain, then you really should be packaging together solutions for clients that are different based on the value drivers that are important to them. The only way you do that is you have a meaningful value conversation, which we've talked about many times before. That is the outcome of the value conversation. You uncover all of the raw materials from which you will put together a proposal. Typically, in this example, it's a fairly bespoke solution. When your clients do talk and the numbers are different and you get that phone call, as I did one day, then you have some leverage to push back on.

David: Wait, the clients told you that they had compared prices and they had a question for you or prospects?

Blair: Back in the day, I happened to have three clients who were all in the same peer group that you put together.

David: Oh, a roundtable. Okay, got it.

Blair: Yes, a roundtable.

David: Oh, I want to talk about that in a minute, too. I want to talk about how roundtables terrify me, but go ahead and finish your story, yes.

Blair: These guys get together. I forget how often they met. They had a meeting. I got an email from all three of them.

David: Collusion too.

Blair: Then a fourth person who was not a client, but I was friendly with, who said-- The fourth person emailed first, they weren't a client, "Heads up. I shouldn't be letting you know this, but in our latest meeting, three of your clients talked about hiring you, and they compared the prices, and they all paid different prices, and there was an interesting discussion, so you might be hearing from people." Then over the period of a couple of days, all three of those clients emailed me with the same thing. Now they all said, "I'm okay with this, but you should know-- Don't tell anybody I emailed you, but you should know this conversation came up."

David: Wow.

Blair: What did I do? I checked the invoices, looked it up, and then I sent all three of them an email at the same time, everybody in the same thread. I said, "Each of you has sent me an email saying that you were talking about the prices you paid me and that those prices were differently." I have two points to make. Point number one, I set the price. It's my prerogative to charge whatever I want to charge. Your decision is to pay it or not pay it, period. That's how this works. Point number two--

David: [laughs] I love pissed off Blair.

Blair: [laughs] I ended it with a note of graciousness and appreciation for everybody. Point number two, I just checked the invoices, you all have horrible memories. You paid the same price. Now one person paid slightly more because they bought something else in addition. They bought an audit in addition to the training service. I ended it on that note, and I thanked them for their business. Everybody was okay. It was a fun moment. It wasn't me going ballistic, but I was taking a bit of a firm hand. I really wanted to make that first point. It's like, "Hey, it's my prerogative to charge you. I get to put the price on it. You get to decide to pay or not pay it." I guess you could negotiate it. Look, here's what I'll do for you.

David: I'm Blair, so don't bother negotiating. I know all the tricks. [laughs]

Blair: Anyway, so it has happened to me, and it was an interesting-- I wish they had paid different prices. Then I wouldn't have been able to fall back on that second point. I would have just had to double down on the first point. I suppose I would have said, "If any of you feel like you didn't get a decent return on your investment, I'm happy to give you your money back." I would go that far on a point of principle. If somebody had asked for their money back, I probably would have had a voodoo doll made of them and stuck it to death with pins for the rest of my life. Not that I'm vindictive.

David: I saw this great joke. I think I might've sent it to you last week. The spouse is upstairs yelling down to her husband, says, "Hey, have you ever heard about those voodoo dolls where somebody puts a pin in them and it hurts really bad? Have you ever felt that?" He yells back up the stairs, "No, I've never felt that." She said, "Okay, how about now?" [laughter]

Blair: Oh, that is good. You did not send me that. That's fantastic.

David: Clients will talk. One of the points you make is that clients are a little more likely to talk with a particular positioning that you have. You want to talk about that for a minute?

Blair: Yes. We did an episode on referrals. I forget what it was called. Referrals, maybe. Marcus will find it and put a link in the show note. Thank you, Marcus. In it, we talked about the different business types that are really open to referrals, where referrals are really powerful. It tends to be industries where there are some boundaries, where your clients know each other but don't compete with each other. It's funny. I had a call two and a half hours ago with a client of mine who brought up an example. He owns four businesses, and one of them is focused on Higher Ed. He said, "This business is 100% referrals." I said, "Oh, I'm not going to name any details, but I have to bring this up."

He said, "It's 100% referrals. They all know each other. They all go to the same conferences, but they don't compete against each other." That's what you want. If you have that scenario, then you want your clients talking to each other, assuming you do good work, because they refer constantly. He made the point, and he said, "That's where the term collegial comes from, from these colleges and the relationship that they have with each other." Now, I didn't look that up. I don't know if it's true. Seems somewhat suspicious to me, but I like the idea.

These people are collegial. They're friendly. They're in the same business. They don't see themselves as competing against each other. If that's the case, then you want your clients talking. You want them talking as often as possible. Now, the dark side is what we've already talked about. They're going to talk, they're going to refer, they're going to compare prices. You need to be prepared. How are you going to handle that phone call or that email when you get the email?

David: Yes. The way I would describe what you've just depicted is industries where, by definition, the work is delivered geographically. It's like healthcare or internet service or something like that. The other place that it comes up is anybody whose positioning is tied to a vertical in a ICS code. Not just because they talk to each other, but because most of the time when you follow one of your clients to their next job, it's because you are vertically positioned. In other words, they're not comparing with somebody else, they're comparing with themselves. They've already used you before.

It's sometimes harder for you to climb that ladder of sophistication because they've already seen what you did for them in the past and roughly what you charged, and they're assuming that's what it's going to be without recognizing that you have gotten smarter, you've hired more expensive people, you've got more IP that you've invested in all of this stuff. That can hurt you too, not just because of clients talking to each other, but clients talking to themselves because they're using you from one job to the next.

Blair: Yes, that's a great point. This idea that they refer, that's one of the good reasons, good things that happen when your clients talk. They compare prices. Let's call it bad for now. I'll come back to that at the end. It's one of the bad things that happen when clients talk.

David: What do you mean when you say that they compare for validation? What is validation? How does that relate to pricing?

Blair: It doesn't relate to pricing. It's just more under the banner of what happens when your clients talk to each other. You might think of this as a good thing, or if it's at the beginning of the life of your business, you might think of it as a bad thing. Now, the first example I ever heard of this, like clients looking around at others in the category-- Their competitors for validation of your services was the first firm I ever worked with that specialized in selling legal services. It comes up with almost everybody who sells into that space. It's a very conservative industry.

When you're trying to sell something relatively new in that industry, the first question is, who else are you working with? If you have not been validated by first working for another firm, and a firm bigger and more famous than the one you're selling to, then many of these firms will not consider you. It's not the same as a referral, but it is some recommendation, or implied recommendation, or validation. They want to know, "Hey, have you ever worked with so-and-so before?" If you're not working with their competitors, they get worried and think, "There's got to be a reason why you're not working for my competitors."

David: Right. I probably didn't introduce this really well at the very beginning, because really what we're talking about is this big umbrella of when your clients talk, and there's good and bad. Some of the bad might be they're comparing prices. Other is like, you want them to talk because they want to have heard that you worked with somebody else. It's a good and a bad thing. It's not all bad when clients talk. What about this idea of sometimes this creates new opportunities for you? This would be another of the upsides of clients talking.

Blair: Yes, this is a really interesting one. I feel like I almost shouldn't say this, because when Rory Sutherland shared it with Leah and me when we were doing the 20% of the marketing procurement podcast for a year, he was hesitant to even bring it up. Then when he brought it up, I thought, "Oh, I've seen this in action." There is an agency principal who coaches for us who pulled this off beautifully. Rory's point was, and I'm putting words in his mouth here, paraphrasing, but basically says, "We can actually reverse these power dynamics of multiple agencies pitching to one client. Why isn't it one agency pitching to multiple clients at the same time?"

I asked him for an example of that. I think maybe he was already working on this. This is the one he didn't want to talk about. It's a couple of years ago now. He said, "Think of automotive manufacturers that are producing electric vehicles. They all have the same problem in the market, and that is the range anxiety of a first-time electric vehicle buyer. Imagine that every one of these manufacturers is looking for a better marketing campaign to combat range anxiety. Imagine that they all are casting about looking for new agencies. They're inviting a bunch of different agencies to come in and pitch them on it.

If it's a category problem, why wouldn't you take the initiative and go to the category, try to roll up the category yourself, go to all of the OEMs, and try to make a case together?" I don't know if there's a universal-- There's probably a lobbyist group of all the large automotive manufacturers. This would be like herding cats. There are better categories. In his example, it would be, "Why not pitch the campaign to the entire industry? Get the industry together, and it's just you." Then I'll take that one step further because the example that came to mind was somebody I know, whom I just mentioned, created a certification product for the industry that they were serving.

There are two large players in the industry. They got them on board. With those two endorsements, this thing became real and valid. They became a third partner in owning this thing. They pitched it effectively to the industry by corralling the two largest players, and they became an owner in the product that they were now marketing.

David: Wow. I couldn't help but think of one of the most effective and efficient, inexpensive ways to market your firm is through what I call a private round table. The entire concept is built on this idea that you should get clients talking to each other.

Blair: Yes. I know exactly what you mean, to unpack it.

David: You should also invite prospects to it too. Just imagine you invite about 10 people, it's invitation only. Maybe three of them are your clients, and they're going to talk you up to the other seven people who are prospective clients. You pay some author that they've heard of that is famous in their world, pay them 5,000, or sometimes you get it for free and make a half-hour presentation. Then one of your team says, "Hey, these are the things we're noticing in the marketplace. We just want to give you an update on that."

Then you, as the principal, would navigate a discussion among each of them that says, "Okay, let's go around the table. What are you facing and how are you solving that?" It's not like you're shining a spotlight on these individual people. The fact that you have the spotlight is what's amazing because you have the power to bring these people together, and you're not afraid of when they talk together. That's a really powerful message to send to a marketplace.

Blair: I would go a little bit further and say, even that ratio of three clients to seven prospects, I think it should be reversed. I think you should have more clients in the room than prospects because the dominant conversation involves you. It just happens. They talk about the things they're doing with you. The first client I ever had that did this that I was aware of, she was talking about how powerful this is because she says at the break, she overheard a client talking to a prospect saying, "What do you mean you're not working with these guys?"

David: Yes. Selling for you.

Blair: That's a really powerful idea. Yes, I'm glad you brought that up. That's a great one.

David: Yes. The theme of all of this is you can assume clients are going to talk. That's probably more likely when your clients don't compete against each other geographically or when you're in a vertical focus, and you just need to be prepared for it. There are things that you need to understand about pricing, but a lot of good things can come from it too. Clients talking, anything else I've missed here?

Blair: Yes, I would say it's mostly good, and the one bad thing that people get worried about is them talking about the prices they paid. I would just have you do a little bit of homework to just think about, are you making enough individual changes to what you do on a client by client basis so that you can fall back on that, or do you only have one thing to fall back on which is, "Hey, we charge based on the value that we're creating. You can pay it or you can not pay it." It's not about others paid more others paid less.

David: There's reasons for it.

Blair: That's the reality.

David: Right. Great. Thank you, Blair.

Blair: Thanks, David.

As we are hearing about more firms that are closing during these challenging times, David offers some guidance to help cut through the confusion when our worst fears in our business become reality.

"Facing an Existential Crisis" article by David for punctuation.com

Rory Sutherland's LinkedIn post

David's LinkedIn post

Blair Enns: David, our topic today is a post you wrote about recently. You also posted on LinkedIn. There were a lot of comments about it, a lot of likes. The topic is "Facing an Existential Crisis?" As I do with most of the topics you choose, I ask you, what was the impetus for this one?

David C. Baker: Wow. Just this sense that I get from a lot of firms that they wish things were a little better. Again, it's still a mix. There are a lot of firms that are doing really well. Actually, I think there are probably more firms doing really well than we know because they feel cheap talking about it because it just feels like they're boasting. There are a lot of firms that are doing well. Then I'd say most firms are just there. It's not existential crisis. It's just not the best time they've ever had in their business. Then there's a bunch of them that are really facing an existential crisis.

I actually had written an article that was almost done. Then Sunday morning, I thought, you know what? I need to write about this. I need to write about the existential crisis. I just sat down and just let it flow. It's not fun. I started out the article telling people, "This is not fun to read, and it's not fun to write either." I feel like there's 20 of us doctors that are practicing at this hospital, and my only job is to tell people they have stage 3 or stage 4 cancer, and all the rest of them get to do normal doctor practice stuff. It's like, "This isn't fun at all."

I just felt duty-bound to speak into this. Assuring people, if this doesn't apply to you, then don't read it. It's like, this is disgusting, discouraging stuff. The same is true for listening to this episode. It's like, if this doesn't apply to you, if you don't think you're facing an existential crisis, then you need to go take a walk and have fun and don't let me drag you down with all this stuff.

Blair: I read it fairly quickly because I largely ignore your content. Then a friend said, "Oh, my God, this article that David just wrote." He said, "I haven't even read it yet, but it's already very good." I clicked through and I read it, and I texted you, and I said, "I think this is one of the best things you have ever written." You have written a shitload of content in the last 30 years, books, posts, whatever. I'm just imagining the people who are benefiting from this. Anybody listening, if you feel like you are facing an existential crisis in your business, please do search for this post and find it. It's posted on David's website, punctuation.com. There will be a link in the show notes. You want to talk about who you wrote this for?

David: Yes. Before, when you heard me talking about how firms are doing, did that strike you as matching your experience, or am I too negative or too positive there?

Blair: No, I think it really seems to be this clearly bifurcated market where-- We had a training workshop a couple of weeks ago, and afterwards, it occurred to me, "Oh, nobody in the workshop was in rescue mode." All the firms in that virtual room were doing well. You and I are so used to hearing communication every day from others like us who also serve the space of a piece of bad news pretty much every day, another firm going down, another firm going down, or another firm reaching out because they're really struggling, where these pipelines have just turned to concrete.

There's just a whole bunch of no decision. There's a whole bunch of reason for it. In the midst of all of this, I've had many conversations with firms who are doing really well right now. It is a strange time.

David: It is strange. We don't know what to do with it. It also feels fragile. If you're doing well, you don't feel like it's any semi-permanent status. It feels like that could change pretty quickly, and the opposite could be true as well. All of a sudden, a big client could come along and rescue what otherwise looks like a bad year. It's just a weird time to be running and owning a firm.

Blair: Rory Sutherland had this great post in LinkedIn that I found this morning, read, and commented on it. He's just so brilliant at mining models and metaphors from other parts of the world and bringing them into marketing. He was talking about in biology, there's this idea of high-K creatures and low-K creatures. K is a function of how many offspring you produce. I have a friend who's a grizzly bear biologist, as you know, so this stuff isn't new to me. Those who are higher up the food chain are higher K creatures, meaning they have fewer children, they have fewer offspring. Those who are lower down the food chain have numerous offspring on the hope that some will survive.

Rory says, "At times of uncertainty like now, it's better to behave like a low-K creature where you're spreading seeds all over the place." He's talking about lead generation. He says, basically, high-K creatures, they pick something, one or two things, and they just repeatedly do these one or two things. His point is sometimes, in times like now, it makes sense to drop down and just do a whole bunch of different things from a lead generation point. I made the comment that in times of business uncertainty, it's almost like the predator-prey relationship gets scrambled or even inverted, and the tadpoles start eating the bears. Does that make sense?

David: I would just sit with that image for a second.

Blair: It's just weird times. The tadpoles are eating the bears in some places.

David: Where I thought you were going to go with that was all the people who were laid off, like those are the new offspring, and they're all fighting to survive as well, fighting against us.

Blair: That happens. This sector gets cleaned out a bit. A bunch of businesses go out of business, so you think, "Okay, there's fewer firms, so there's more work to spread around." No, because so many people who are working in these firms start their own firms. Not because the market needs it but because they don't know what else to do.

David: Yes. It's every three or four year cycle it seems to happen. I think psychologically, there's also something that's happening too in that things aren't going well. We're not exactly sure what to do. Psychologically, we do a lot of things so that if we go down, it's like, "I did everything I could. Maybe some of it wasn't effective, but I did everything I could." I think that's actually a pretty good instinct. You don't want to get frozen and say, "I'm not sure if that will work. What should I do?" It's like, "No, do lots of things." Then, once you start to see the turnaround happen, what got you there isn't going to take you to the next place. You need to focus again. That's another mistake that people don't do.

Blair: Yes, I agree with that completely. Hey, you tell us a great story about going to Harvard Business School and being impressed with the professors in theory and disappointed in practice. You wrote about this in this post. You want to just tell that story?

David: Yes. First, everybody who's groaning is like, "He went to Harvard? I've heard him talk. I don't think he went to Harvard." I went for a two-week study course. Somebody gave it to me, and I thought, "Oh, that'll be fun."

Blair: Maybe this will help.

David: Yes. It was free, so everything was paid. You're staying in the dorm. In fact, one of my suitemates was Karen McGrane. That's where I got to know her. I really love Karen and the work she does. She's one of the smartest people I know. Anyway, we're there for two weeks. This is with the graduate school profs. You have your assignments, and you're up late at night studying as a group in your suite. Then you make presentations the next day. They critique your logic and your presentation. Then, there's a break for lunch every day, and you're just in the cafeteria with the same Harvard graduate professors.

I was so looking forward to talking to them. The whole purpose of the two weeks was using the typical Harvard case study approach, where you say, "Okay, here's what happened in 1994, this was a situation, these were their options, this is what they chose, this is why it was a good choice, this is why it wasn't, what would you have done, and so on." It's the case study method that Harvard is so famous for. At lunch, though, instead of talking more about that, I wanted to ask them, "Okay, what would you do with this real-life situation right now? What would you do if you were in charge of Apple and you were unduly dependent on China?" On and on, I just make up these things.

What struck me immediately was how they had no answers for those things. This sounds really arrogant. I don't mean it arrogant. I just mean it's true. It's like I was thinking circles around these people. Now, I didn't go to Harvard. It's not like I'm smarter than they were. I realize there's such a big difference between facing a real-life situation with your business right now versus studying a case study for the decisions that somebody else made in a very specific situation in the past. Nobody has written our case study yet. We're living the case study that hasn't been written.

Harvard's not going to save us. There's tradeoffs in these decisions, and they are not clear. That's what turns an existential crisis to an even worse existential crisis because you feel frozen, you're not sure what to do. I didn't even have that story in this article. Afterwards, I thought, "Oh, I need to put this in here because people need to understand that this is not as easy as it sounds. It's not as easy as the advice I'm giving people." I'm just saying, "Okay, here's some guidelines. You still have to make a tough decision, but Harvard's not going to save you in this case."

Blair: On that note, you've got some guidance on what to do. First, talk to us a little bit about the timing. You made some really interesting points about the value of knowing when to do, not just what to do. I said to you before we started recording, I said offhandedly, you've given me a lot of advice over the years, most of which I've dismissed only to later look back and think, "I should have done that."

David: Yes. Can you record that statement?

Blair: I'm just giving you credit everywhere, man. This better come back to me.

David: Yes. Think about the three main financial statements that we use to manage our businesses. You've got cash flow statements, you've got profit and loss statements, or P&Ls income statements, also known as that, and you have balance sheet. When things get tough, you typically will revert to studying your cash flow. Nobody looks at cash flow when things are going great. There's just no point. Really, what you should be looking at is your balance sheet because what you want to be doing is making sufficiently tough decisions so that you're not losing ground.

Maybe you're not gaining ground, but you need to be at least 200 feet above the ground if you're an airplane or something like that, if you want to use that image, or climbing. You don't want to be losing altitude. Your balance sheet is the best way to look at that. If you are staying in business and you're not losing ground, consider that progress. Who cares if you're making money? Profit, to me, it's optional. It should happen most of the time, but there's no reason it has to happen all of the time. Just like with clients, every client should be profitable, but every project doesn't have to be. You want to look at whether you're losing ground or not.

If you're holding steady or climbing, you're probably going to be okay, but make sure you're not losing that little bit of altitude you have. In an airplane, when something goes bad, altitude is your friend because if something happens when you're just a little bit above the ground, there's no time to think, no time to recover. When you lose altitude in your business, by that, I mean cash cushion on your balance sheet, then somebody else is going to start making decisions for you. That is a really bad place to be. You've still got to retain the ability to make decisions. That means you have to watch your balance sheet.

Blair: When you say somebody else, you mean suppliers?

David: Suppliers, the court-

Blair: Creditors.

David: -your clients, your employees, everybody but you.

Blair: Yes. The obvious thing to cut in an existential crisis is to look at your staff overhead and think about reductions. You've got some suggestions here.

David: Yes. The first one is to be active and not passive. The reason is because if you let the team make that choice, the most employable ones will leave first, and you'll be left with the least employable ones. I heard somebody critique what's happening at the federal government this way. It's like, offering everybody eight months of severance means that the people who are most likely to be employable by somebody else will gladly take that. It's like, "I can find another job." The ones you're left with are the ones who are not as employable, not as confident that they can find work. It almost has the opposite effect.

Be active and not passive so that you can choose what's happening. Your best people want to know that you're being active and not passive. They do not want to work for a firm where decisions are being made about big things by somebody else. That's the first. The second one is to cut entire positions. It's pretty easy for us to transpose our own experience and say, "Okay, I need to miss a paycheck. I can do that. We've got savings." Most of your people are living closer to the edge than you are. They're making less money. They're maybe at a different stage in their life where they're trying to buy a home and so on. Maybe yours is paid off.

Saying, "Okay, everybody's going to take a 20% cut," that squeezes a lot of people in a way that they can't. It seems nicer to not have anybody lose their job, but it's actually not something that's all that sustainable. I don't think this is always universally true. Sometimes it's okay, including your middle management people who have a little bit more cushion probably. Generally, you want to cut entire positions and not just say, "Okay, everybody's going to take a pay cut across the top for eight weeks or something like that."

Blair: Yes, I'm sure that this is going to divide the audience, but your point is pretty clear, and it's hard to push back against this. I've seen this before. Some owners think the egalitarian thing to do is to spread the pain. "All right, everybody. We're all in this together, 20% off the top for everybody." Most people can't take a 20% pay cut. Some can, some can't. You don't know what their personal situation is.

To your point about the best employees, the ones who are looking in the mirror thinking, "Listen, I'm creating value here. I understand that these other people maybe they should get a pay cut or they should go, but you should even give me a raise in the face of this." The high-value creators, these are the ones you're going to push out that way.

David: Yes, I always think of science class, where you get paired up with three other people and the four of you do a science experiment, it's like, "Oh, shit. I'm stuck with these people. I'm going to be the one doing all the work." [chuckles] A little arrogance in there, obviously, but the difference in people's performance is highlighted during tougher times. You don't want to do that. You also want to take one decisive action because when the really bad news, and it's really bad news, this hurts people's lives, when this comes down, you don't want people wondering, "Okay, what's going to happen next week?"

There's no promise because the business isn't stable, and it could get worse before it gets better. They need to have some rough assurance that, "Okay, we measured twice, and we cut once. We're not going to just chop a leg off one inch at a time." It's like, "No, it's going to be right here. We think this is the right place. We may make a little bit of a mistake here, but no, we think it's the right place. Communicate that without a promise, but one decisive action without a promise.

Blair: Fairly common advice, never do it late in the day or late in the week.

David: Yes, because you want to be around to answer questions. You don't want people going into a weekend and all kinds of chatter between them in a way that you can't correct any misunderstanding. You always want to do this early in the day, early in the week. It's just a minor thing. It's not nearly as important as some of these other things, but it's just a point that a lot of HR people will tell you.

Blair: You make a point that when you're cutting, do not forget the management team. Talk us through that.

David: Oh, yes. This one's really hard because it's the management team that you spend time with. There's a natural, tighter bonding with these people. You know more about their lives personally and their kids and so on. You work with them, and they're the ones who have enabled you to have the sort of life that you have right now. They took something over from you after you tried to delegate it to lots of people and it didn't work, and finally, you found a really strong management team, and they keep you from having to be involved in the day-to-day stuff.

It's pretty easy to unfairly cut people that are not as close to you, that weren't as hard to find, that don't take over things for you. What you end up with, and this happens everywhere. I'll bet everybody who's had to do this sort of thing has seen their own mistakes. I certainly have when I went through a tough time in an earlier business, where you end up with this top-heavy team, and they may not even be the people who bill as much to the client.

You don't overcorrect and cut just from the management team. You have to cut from the management team, too, because if you're a 20-person firm and you have, like, I don't know, four people on your management team, you wouldn't have four people on your management team if it was an 8-person firm or something. You just have to think through that, too.

Blair: Yes. There are more points here under the banner of staff reductions, but I'll get you to speak to one then we'll move on. Talk us through the idea of using severance as a mental trick.

David: There's not as much confusion about what we need to do. I think there's more confusion about when we should do it. The trick that can make it easier for you, and it's using your own empathy as a way to prod yourself into making a better decision, is to say, "Okay, if I let these seven people go now, I could probably give them-- I don't know, let's just say two months severance. Maybe I should do that. I don't know. I'm not absolutely certain I should do it yet. Maybe I should wait a month. Okay. If I wait a month and I can only give them one month severance, what's the better thing? Now with two months or in a month with one month?"

It's just a mental trick to use your own empathy to lead you to a better decision because the better decision is usually sooner. It's like at the end of this, when you're doing a debrief-- I've never heard anybody say, "I wish I'd waited longer." Never once have I ever heard anybody say, "I wish I'd have waited longer." Sometimes, that was the right timing. Most of the time, "I should have done that a little bit earlier."

Blair: Yes. I often hear, "I should have done it the first time I asked you about it or the first time I thought about it." Do you want to get into the worst-case scenarios here if the firm does fail? You make the point that your clients are going to find new sources of whatever you do, and your team members, they're going to find new places to work. All that's going to work out, but you're going to have to clean up a mess.

David: Yes. This is where your job as a leader becomes way more complicated than anybody else's because you can talk the right game about, "Okay, team, we're doing what we need to do to recover. This is the good news. Here's the timing. Here's why we're doing it, and so on." In a corner of your mind, you have to be preparing for the possibility that this doesn't turn around. You don't want to talk about that. This is just your own private planning. You have to be schizophrenic, so to speak, intentionally so that you have most of your efforts focused on the turnaround.

There's one eye over here on the corner that says, "Okay, but if this doesn't happen, then this is what needs to happen." I've got three different suggestions here about how to limit the damage if this existential crisis actually turns out to be existential and the firm closes. The first one is to just distinguish between any of the obligations that your firm has that are just guaranteed by the company, the corporation, and those that are personally guaranteed. All credit cards are pretty much tied to a person, unfortunately, even company credit cards. Then, of course, a line of credit, or it could be an EIDL loan. For our US listeners, they'll know what that means. It won't make sense to anybody else.

If that EIDL loan-- Those were offered during the pandemic. The payback is 30 years, so a lot of people took them, and almost everybody who took them, it was a mistake. If it's $200,000 or more, then that's personally guaranteed. The business might fail. If the EIDL loan was $30,000, then the business can't pay it, and bam, so what? The government doesn't get their money, you're scot-free. Anything that's personally guaranteed like that, or line of credit, or credit cards, you're going to be on the hook for that. You want to start favoring what things you pay back so that the debts that you leave unresolved are the ones that don't have a personal guarantee. That's the first step.

Blair: I'm just imagining people taking the $200,000 in EIDL loans and having that on their personal books. That's a big load.

David: Yes. It's like there's student loans, taxes, and EIDL loans are not commuted in a bankruptcy. Even if there was a bankruptcy, and there seldom ever would be, honestly, because there's no point in your corporation filing bankruptcy. This leaves these obligations unpaid, even if there's a lawsuit, and very seldom would it ever spill over to you personally, too. Anyway, so distinguish between those and pay off as much as you can of those loans that are personally guaranteed. The second is don't screw with taxes or unremitted retirement funds.

If you've got a 401(k), or a SEP, or something like that, and employees have deferred their own money to go into this, but you haven't yet sent it in to whatever the company is that you're using, Schwab or something, don't mess with that because you'll be on the hook for that stuff personally. Then the third is-- This one, obviously, you're going to need to talk to attorneys here, but if things get ugly, a judge can reverse transfers. Now, they can reverse transfers that are personal all the way up to a year.

Blair: Property transfers?

David: Yes, exactly. If you're worried about a personal bankruptcy, and so you transfer a piece of property you own to a cousin, or a spouse, or something like that, that can be reversed up to a year. If it isn't to a related party, it can be reversed up to three months. Just be really careful with that stuff, and of course, talk with an attorney first. If you're going to do something like that, make sure it's not illegal. Make sure that the clock runs out on it. I hate talking about this stuff, but it's just I want to save some people some heartache here. Distinguish between personally guaranteed ones and ones that aren't, don't screw with taxes or unremitted retirement funds, and property transfers need to be done very carefully.

Blair: That's under the banner of the worst-case scenario things that you should be thinking about and doing, not doing, in the final stages, or if things are getting very, very tight, you're going to have to deal with these things. There's some serious don'ts in there. You don't want the government coming after you. You don't want to take on the personal obligations more than you have to. Then let's close by talking about what happens if your worst fears are realized, the firm does go under.

David: Yes. Don't walk away from it. I can't imagine any scenario where you would walk away from it. You might merge with another firm, where they might even take over your obligations. You don't get any money for your firm, but at least they cover the debt, or maybe you get acquihired. In the email that went out yesterday, my weekly email that goes out to tens of thousands of people, there was a blurb at the top that said, "Here, there's this 11-person firm, they're not in good shape, they're not making a profit, but they're in a place where they could be absorbed if you're in health tech or finance tech."

That was a client that I worked with, I think, four years ago, something like that. Things have turned in a negative way for them. We worked out an arrangement where we just ran that ad for them, and we just transfer any interest to them. The goal is, okay, let's not lose several hundred thousand dollars, let's at least find a home for our clients, let's find a home for our team, and let's limit disruption and limit any cleanup that we have to do personally.

You would never just walk away from your firm. You would always do something with it, even if it means transferring the client relationships to your team, and maybe they get it for free or maybe they pay you some override based on how much business they get over the next couple of years, or maybe they take over some debt or something like that, or take over the lease. In worst-case scenario, you're still going to limit the damage by at least thinking creatively.

Blair: All right. We're talking about "Facing an Existential Crisis?" That's the name of the post that you wrote. It's on punctuation.com. We'll post a link in the show notes. You also posted it on LinkedIn. There's some interesting discussion there. Again, I think this is just such a valuable piece to people who are in crisis. One person's crisis, somebody else can sleep at night.

We've all got this different level of dealing with anxiety and crisis. Even if you've got some worries and you need to think through the opportunities that you have in front of you-- One of the things I skipped over, I didn't get you to speak to, I'll just list them here. You talk about four critical keys in basically thinking about all of these things collectively. First is, don't lie to yourself. Come on, be honest.

David: Yes. Calibrate how you react. Do you typically overreact? Take that into account. Do you typically underreact? Maybe you should react a little bit smarter this time. Just calibrate how you normally act.

Blair: Yes. Second, ignore what other people are going to think. That's got to be a big one for some people. Pride gets in the way of doing what needs to be done. Third, which we've gone into in detail, is cut staff and cut deep. Basically, get ahead of this on the staff overhead front. Fourth, simultaneously prepare for success and failure. We were talking about that in the limiting damage and if your worst fears happen. Is there anything else you want to add before we close on this?

David: Just an apology for having to talk about this, but it feels like, man, somebody needs to, and I like to take care of healthy patients and sick patients. This is like I'm speaking to the sick patients here, hoping that the damage is okay. Really, if your firm goes through an existential crisis, your clients are not going to have any trouble finding another firm. That's sad in itself, honestly. Your team, the competent ones, are going to find. There may be some temporal sort of pain, but they'll find. You'll be fine, too.

Anybody that started and runs a firm like this is a very capable individual. Going through some of this stuff, it's not what you would wish on anybody, but you're more resilient than you think. People love you more than you think. It'll be fine. Don't refuse to look at the truth of a situation because of shame or embarrassment, because anybody who hasn't been through something like this is lying to you. [laughter] They're just young. Give them some time. Yes, just face it. It's okay.

Blair: David, on behalf of creative entrepreneurs everywhere, thank you for the work that you do, including this excellent article.

David: Thanks, Blair.

As Blair continues to encourage expert practice owners to price the client and not the service, he and David discuss the pros and cons of four levels of pricing authority they should be thinking about within their firm, instead of just assuming pricing responsibility automatically defaults to a specific role or job title.

“Who Should Set Prices In Your Firm?” written by Blair Enns for WinWithoutPitching.com

David C. Baker: I'm David, just to make that clear.

Blair Enns: Today you be David. I like where this is going.

David: I'm on my medication, so I'm still David. I'm interviewing you, Blair, on who should set prices. One little asterisk here is we are giving advice to not the people who sell their services to us, and we're both a little tired of people taking the advice.

Blair: This is a good point.

David: We would like you to set prices very poorly when you are selling something to us, but in general, you know what's so odd? I'm going to let you talk in a minute. Just relax. I got a note from somebody on LinkedIn thanking us both for the work on 2Bobs, and he advises funeral home owners, and I'm thinking-

Blair: Wow.

David: -we have so many people listening that are not in the direct target that you and I specify, which leads me to my question. Then we'll get to your note. You're going to be talking in a minute. Is this pricing thing a problem across all professional services, or is there something unique about the area that you and I serve that makes it more of an issue?

Blair: Do you mean just the general issue of pricing in general, or the specific topic of today, this question of who should set price in the firm?

David: Not so much who should, but like setting low prices and leaving money on the table. Is that unique to the industries that you and I serve, or is it pretty much across professional services? I've just been curious about that.

Blair: I think it's not unique. I think it's common across all services, not just professional services. I often say to our clients, pricing is the lowest hanging fruit on the profit tree, and it's the first place you should look. It's the place where you can do two or three things and start to improve profits more. Certainly, revenue, the top line, and usually profit comes with it.

Although, as we have talked about it before, trying to remember the name of the episode, there are some complexities that get in the way, but bump to the top line just by doing a few things differently on the pricing front should accrue to the bottom line.

David: Everywhere.

Blair: Yes. I don't think enough firms look at pricing.

David: Funerals should be more expensive. No, but there's lots of different elements of the whole pricing discussion, but today we're going to talk more about the who should set prices. This is interesting to me. I've got actually more questions than normal about how this goes. Who should set prices, right?

Blair: Yes.

David: Anything else you want to say about that? That was your cue to speak.

Blair: Are you loving my energy and enthusiasm today? Why, yes, David, I'm glad you brought this up. I think most firm owners don't actually think about this. When I think of the firms that I worked in as a young man and then the firms that I have advised for years, I would say this generally holds true across most of these firms, that the pricing role was never seen as a distinct role unto itself.

It was just assumed that whoever was doing a certain function, pricing tagged along with that function. In the first full-service marketing communication firm I ever worked in, those prices were set by the production manager. In each subsequent agency I worked in, I as the account manager or new business person had the authority to set price, and I probably should not have.

David: Right. I wonder if maybe we started paying attention to price as a reaction to clients pushing prices in the opposite direction with procurement. That's when we started to think more about it. I don't know. That's a new thought to me. We don't think about what we should charge clients very scientifically. We don't think too much about what we should pay our suppliers very scientifically either. Anyway, you're just saying that we don't take this very seriously. Part of the evidence for that is that there isn't a professional pricing person or function.

Blair: Yes. There are businesses that have people whose sole function is pricing, but those tend to be large businesses. There are large professional services firms, design firms, consulting firms that I have worked with that had people dedicated to the function of pricing. One in particular whose job was just a pricer, I think they had worked with Tim Williams and he had put that person in place. Then I've worked with a handful of organizations that had created a pricing council.

Given certain people pricing responsibility in addition to their other responsibilities. Then we've advised a bunch of firms on structuring pricing roles and creating pricing councils as well. I think the default assumption is, oh no, whoever is in this role, whether that role is account manager, consultant, production manager, traffic manager, whatever you call them, what you would call a resourcer. I think that's what you call them.

David: Yes. Right.

Blair: Client-facing personnel, what do you call them?

David: An engaging person, engagement.

Blair: An engagement person?

David: Yes.

Blair: It's one of those two roles that the assumption is that with the role comes the requirement to set price. Usually, it's my team and I bring it up to our clients, ask the question, "Who sets price?" They look at us quizzically like, "Well, it's a person in this role." The times when a client says to us, points out on their own that they have a pricing problem is usually when they're comparing the performance of their engagement people. Their client-facing people, the consultants or the account managers.

They look at what these different people bill or what the gross margin, if they're tracking gross margin. Some might try to track, assign a net profit to not exactly fully net, but some form of net profit to accounts and individuals. Certainly on a gross margin basis in a typical firm with multiple client-facing people, you will see a huge disparity in performance. Skipping ahead a little bit, there are signs in that performance disparity about who should be allowed to set price and who should not.

David: Yes, I know. I'm going to bring up a study I did in a few minutes about that. When you think across sort of adjacent industries, you can see how there's either a function person who does it, a department who does it like at printing firms, or there's an algorithm that does it. If you're buying digital ads, there's no question about the pricing. It's a system, it's algorithm-driven. One of the points you're making about our topic today is that these comments don't apply to those kinds of settings. You're talking about pricing in a customized setting where the difference is very stark.

Blair: Yes. Not every business represented by the audience here would have customized pricing. We talked about this in a recent episode on standardizing versus customizing, where I made the point that you can standardize or customize both your delivery and your pricing. In businesses that customize pricing, that price the client rather than the service, there's the freedom of the consultant or the frontline person. Or anybody in the organization, whoever's setting price, quite frankly, there's the freedom of that person to set price based on whatever variables.

In some businesses, they'll set it based on cost. In more ideal scenarios, they're setting price based on the value to be created. Now we're in the domain of value pricing, but whether it's value pricing or there's some mathematical method and some more rigor to the basis of the price, the individual has some leeway and you just see huge disparities in performance.

David: Which is often why the leeway is taken away.

Blair: Yes. If the listener has productized their services and they are pricing the services, then obviously this doesn't apply. I said in that recent episode on standardizing versus customizing that I believe the most lucrative combination of models is to standardize your delivery into productized services, but continue to customize the price, continue to price the client.

In a business like that, where you're customizing the price, you're pricing the client, not the service. Pricing is an almost invaluable skill. It is so valuable. It is so important to the top and bottom line performance of the firm that's got to be taken seriously. Part of taking the pricing role seriously is getting serious about answering the question, who should set price?

David: Yes. I'm going to ask you in a second to sort of list the four levels of pricing authority, and then we'll dive into the pros and cons of each one. As I was reading through that, I was thinking, "Wow, I'm not sure how I would assign one of these four to specific clients I raised in my head, just privately, because it seems like they bounce around all the time." It's like, if things are going great, price it right, and we don't care if we get it or not. We're feeling our oats about this thing.

It's like we're really good and don't fight with us about this. If you want to go somewhere else to get the work done, fine. Then that very same firm when things are not going great, it's like whatever it takes to get the work because I know this is less than what we should get paid to do it, but it's better than just sitting around. These are four levels. Are you implying that people stick with one generally or do they bounce around like I was wondering?

Blair: No, they really should arrive at the model. It's a model with four levels to be specific, four levels of pricing authority going from the spectrum of fully centralized to fully decentralized. I think as we go through the four levels and then we'll talk about the pros and cons of each after we summarize them, I'd like the listener just to try this on. Find out where you are now and then ask yourself the question, is the way that you are assigning pricing authority, is it the right one for your firm or should you consider a progression to maybe the next level?

David: These four, which I'll ask you to share in just a minute, are in a particular order. As your firm gets more mature, you might be able to climb to the next one. List these four for us. The first is fully centralized. Summarize that one for us.

Blair: Yes. Before I do, I need to talk about attribution. I didn't come up with this model. I read it in one of the many pricing books I own. I flipped through all the pricing books. I couldn't find it anywhere. I just asked ChatGPT who came up with this model. It told me Toby Brown, co-author of the book Law Firm Pricing. I didn't think it was him because I'd never read that book. I emailed Ron Baker. He and I spent hours trying to figure out who originated this model. The LLMs don't seem to know. Toby Brown wouldn't reply to me. For now, we're giving Toby credit, but I'm not sure the true origin.

David: You reserve the right to withdraw it.

Blair: [chuckles] I'm not sure the true origin of this model.

David: You're not giving me a lot of confidence in LLMs at the moment, by the way.

Blair: Yes. It's another story. All right. Four levels of pricing authority. The first one is fully centralized. It is what it sounds. The pricing authority is centralized in a small center, and that center can be as small as one individual, like the production manager in the first agency I ever worked with. She set price. You might consider that person a chief pricing officer, or more likely, there will be some form of small committee, usually known as the pricing council. I think Ron Baker may have invented that term. Maybe not, but let's give Ron credit. He doesn't get enough credit for the pricing influence he's had on me.

David: If it's fully centralized, that shines a spotlight on, it better be the right person.

Blair: Yes.

David: Fully centralized is the first one. Second one is center-led.

Blair: Yes. You still have a center. You have a chief pricing officer or some form of pricing or value council. The center really just sets the guidelines and the strategy, and the individuals or the teams they have discretion in applying the guidelines and the strategy. This centralized pricing authority. Back in my first job, it was Heather Coleman, shout out Heather. I would go to her with the job and she would say, "This number of hours for this person, this number of hours for this person, and then everybody had a rate, and then here's the price, put the price on the estimate, et cetera."

Maybe I had some ability to offer some input, but it was a fully centralized pricing authority. One step down from that is you start to give some discretion to the people on the frontlines like a young, stupid 22-year-old Blair Enns. Where in this case, the production manager, she's setting out guidance for how I am to set price. It's my job to basically follow the guidelines, follow the strategy, follow the guidance, but I did have some discretion. That's center-led.

David: Then center-supported, there's more discretion even than the one you just described.

Blair: Yes. It's just more discretion. As we move away from centralization to the people on the front lines and we give them more discretion, the idea is we have a higher confidence in their ability, probably because they've had some training. There's still information coming from the center, but the chief pricing officer or the pricing or value council, now they're just more like a resource to the individuals on the front line.

It's like, all right, you know what the frameworks are, you know what we're trying to achieve, you know what the benchmarks are that you need to stay above or below. You've had a little bit of training on this, go do it. We're here to answer any questions that you might have.

David: I want to jump in and say, if other people's minds, as they hear this, are sort of going where mine are, they're thinking, okay, a compromise from whatever that center support, that chief pricing officer or the committee or whatever, that the deviation is going to be lower. That's not necessarily the case. The deviation might be higher, right?

Blair: The deviation might be higher as we get further away from centralization? Is that what you're saying?

David: I mean, there's a recommendation, this is what we think it ought to be. If the person on the front lines changes it, it's not always lower. It may be higher.

Blair: Yes. That's a great point.

David: Anyway, I just wanted to correct people's minds about that. It's not always lower when somebody changes it. It could very well be higher. The first fully centralized, center-led, center-supported, and the last one is fully decentralized. That looks like chaos.

Blair: Yes, it does on the surface, doesn't it? When you think about it right, and I think the school of thought here, and again, I don't know if this originates from Toby Brown. I think at least he has put this forward in his work, is this idea that you should actually move from fully centralized to fully decentralized. We'll come back to that. I'm not sure-- I can see the case for it, but I think that you can make the case for it as you're sure the skills are there.

Fully decentralized, each client-facing team member, including a young 22-year-old Blair Enns, sets price independently with minimum guidance or oversight. It would have been ridiculous, when I think of my 23-year-old self, for me to have the authority to set price back then because I didn't have the training, I didn't have the skills, I didn't have the frameworks.

David: These four, again, is your assumption that we're moving up or down in terms of sophistication? Fully centralized, center-led, center-supported, fully decentralized. Is that last stage, if it's implemented well, the most mature or the least mature?

Blair: It's a good question. Here's how I think about it. I start working with the firm, it is pricing chaos, and the first thing I want to do is to find the one or two or three people in the firm who are good at setting price. I want to take pricing responsibility back from everybody. Now this is what I want, it's not necessarily what happens or even what's ideal, but in my mind, I think, okay, as the advisor, clean slate. Let's centralize the authority to a small number of people.

Let's get their skills up. They already have the aptitude for it, they've demonstrated it. Let's work on them. Let's enforce the frameworks and the standards, what always needs to happen, what you never do, et cetera, or what the proposals look like, et cetera. You centralize that, you create the standard, and then now you start to work out, you start to work towards decentralization. I don't know that full decentralization is ever the goal.

I think if you get to full decentralization, I think there are implications on compensation models for those individuals, which have implications on the business model and the culture of the organization. I think fully decentralized pricing is when you basically have an army of independent advisors building their own book of business under your banner. I don't think it's ideal in the typical firm listening to this.

David: It starts out fully decentralized where everybody's doing everything, it's not much of a system. What you want to do is at least centralize it so that we can learn from the people who are better at pricing. Those are two given sort of steps. Then the third step, whether we decentralize it using everything we've learned, that's sort of optional, but you want to centralize it to focus on the people that are better at pricing.

Blair: Yes. Then as you start to decentralize, you move from fully centralized to center-led, where you're starting to give the people in the front line some discretion. You're going to run into the reality that some of these people can't do this and shouldn't do this. It's going to lead you back to maybe going no further than center-led, like you need to sign off on everything they do. They have some discretion, but the centralized pricing authority needs to sign off on everything they do. If it is your ambition to push pricing back to everybody in the front lines, you're going to have to replace some people who can't do this.

David: I was curious about this years ago, and I haven't updated this, but every firm I worked with, which is usually a different firm every week, I described a project sufficiently specific so that somebody could put a price on it. Without seeing each other's work I asked an account manager who was good, at least on the surface, a project manager, somebody internally who didn't interface with clients but was driven by objectivity, and a principal. Those three places, what do you think we should charge for this?

This is across 20 firms, and with very few exceptions, the highest price was the project manager, production manager, who really cared more about profitability and having enough time for the work to be done than they cared about anything else. The middle were the account people, and the principals were the worst, because when they stepped in to sort of kill whatever the system was, it was, we need to get this job.

Blair: Yes, I would have guessed that order. The project manager is easy. They're very pragmatic. They know what it's going to take to get it done.

David: Yes.

Blair: They're not having the conversation where they're delivering the price to the client. That's the account manager, or maybe it's the principal. They're being really pragmatic. They're not being swayed by imagining how that conversation's going. Then the founder or the principal is last, because they're prey to white knight syndrome. I'm going to be the person riding in on the white horse to save the deal, and often that means cutting price.

David: To make payroll next week, too.

Blair: Yes. Right. Okay.

David: The four, fully centralized, center-led, center-supported, and then the fourth is fully decentralized. Give us the pros and cons of these.

Blair: All right, fully centralized. Obviously, the benefit is you have this uniform pricing and control. I said, I like this as the beginning, because I just I'm raising my hand in the air and clenching my fist. It feels like me taking control of pricing. We're going to get it down to the smallest core unit. We're going to implement some systems and some training. We're going to get these people good at it. That's the benefit. It's a uniformity control, and you can get everybody aligned on this. Now, the cons or the costs should jump out too.

The biggest one is bottleneck. Your centralized pricing function, you look at it as a pricing council. Everybody else looks at it like the pricing bottleneck. If you have high deal flow in your firm, you have to make sure that the pricing people have enough capacity to vet the proposals, vet the jobs that are coming through, and also do whatever else it is that they're supposed to be doing. That is a real issue. It does create-- doesn't have to, but it often creates bottlenecks that can do a lot of damage in terms of people's willingness to buy in.

David: I think one of the most insurmountable obstacles to this is the fact that a lot of people on the front lines with clients do not sufficiently record the requirements, the mandates, everything the client is telling them to give somebody, some central pricing authority, the information they need to do a good job. Sometimes when there's AM resistance, which is another con that you've listed here, it's because this forces them to work differently. They now have to pass along more information to somebody else to do the job.

Blair: Yes, which is increasing their workload a little bit. You're giving them more work to do, plus you're adding a bottleneck. It's nice and easy to say, "Hey, let's centralize pricing," but it does come with some drawbacks. Another one that we didn't talk about yet is it's limiting their autonomy, the account manager or the people on the front line, and that leads to resistance. I will point out that some of these people have pricing authority or autonomy and they never should have to begin with. In some cases, you're taking back from people something they shouldn't be doing.

David: Not that makes it any more welcome to somebody that's losing that authority, but there's resistance.

Blair: No, it doesn't matter at all to them.

David: The pros, mainly it's uniform. The cons, there's some resistance and possible bottlenecks for fully centralized. The second is center-led. What are the pros and cons of that?

Blair: Yes, center-led and center-supported, I think these are the ones in the middle. There's just more balance here. A balance is a firm-wide pricing strategy with some local discretion. You achieve some level of consistency, not through enforcement, but through guidelines. Just being clear about guidelines and maybe what things cost and therefore what the minimum price needs to be.

Then the discretion for the person on the front lines is to increase price. It leverages the centralized expertise without being restrictive. The cons, there's still some bureaucracy. Then the biggest one is just confusion over, if I'm the person on the front lines, how much freedom do I have? Really the way I think about it is, you on the front line, you would have freedom to add margin, to increase prices.

David: We're never going to slap your hand for raising it.

Blair: Yes. The centralized authority is essentially setting the bottom line. You have to get at least this. Now go get what you can.

David: Those people on the front line that are interfacing with clients, even if their compensation isn't variable, they love winning. They don't love ripping off clients, but they love charging what the market will bear because they are proud of the work that the firm does. They don't want to be selling stuff too cheap either. There's some weird little reputational thing that happens inside the heads of the people that are on the front line. Even though their compensation isn't tied to it, they really like seeing holes in pricing. At least the ones that are good at it like seeing holes. That's part of your point, I guess.

Blair: Plus they often find themselves in stressful situations where jobs were underpriced and they're under pressure. They're over on the job. I remember this feeling. You feel pretty good about yourself when you put a big price on something and your people actually have the time and resources to do the job and you're not writing off time if you are in fact billing time, which I was early in my career.

David: That's such a great point. I hadn't thought about that. This person that we're describing, their role is to straddle the fence with one foot firmly planted on each side more than any other role at the place. You have to keep the client happy, but they want to give the team the amount of time, just restating what you just said, the amount of time to do good work too. Yes, it's a great point. Any other pros and cons for this middle stuff, the center-led and center-supported?

Blair: Center-supported pros, high AM autonomy, but with experts. I really like center-supported, but I think it's a place that you have to get to by going through center-led and maybe even fully centralized when you're trying to renovate your pricing structure. I like it. High account manager or frontline personnel autonomy, and then they're backed up by people with some expert resources that they don't have. They're able to make quick decisions. You remove the bottlenecks and it encourages voluntary use of training resources and tools. I like that. As somebody who's in the training business, you can't force this stuff on people, right?

David: Yes.

Blair: I like that in center-supported, you provide people with the tools and the training, and then you see who steps up. You get this self-sorting mechanism that's fair. It's one thing to make an assessment of people's performance when nobody's been trained and nobody has the resources. Some people are just better at winging it than others. Some people really benefit from the strict frameworks and structures that don't have to be overly strict. I think there's a lot of pros here.

The cons are, we're still open to inconsistency depending on individual application of the tools and limited oversight of discounts. When you start to get closer to decentralized as we are now, the big thing that you don't want your people doing is cutting price. We're not fully decentralized. We're one step away here at center-supported. I would just have the owner think twice about ability to discount or to price below certain thresholds.

David: Right. These people like autonomy. One thing you can do is set, hey, for this year, every time you sell it higher, we're going to give you that as a credit. You could eat away at that if you enter a situation where you need to give a discount or something, or you could just gamify it a little bit. That's not your advice. That's mine.

Blair: Yes. We haven't talked about incentives because that's not part of this. I really wanted to talk about roles. You want certain behavior, just look at your incentives and craft the incentives to support that behavior. We can talk about that maybe a little bit more in a minute. If we move to fully decentralized, just finishing the pros and the cons, the pro is maximum autonomy and speed. Things get done quickly.

In this environment, you actually have a strong entrepreneurial culture. You're more likely to have people on leveraged compensation plans where there's a variable component to their compensation. Some of that is tied to top-line price or gross margin. You get this more entrepreneurial place and you get tailored solutions for each client, tailored prices for each client. Some people, it's just part of their makeup.

The idea of charging different clients, different prices seems unfair to them. In terms of personality makeup, I'm at the opposite end of the spectrum. It seems grossly unfair to me to charge the same price for a service to different organizations where the value of that service is significantly different across the organizations. That's just a personality thing.

David: You could sort of hang a banner across this one and say this works best when the people doing it are thinking like owners and some element of their pay is sort of like how an owner would be paid. In other words, it's variable. They have more skin in the game and they're more skilled. They might not have entered this phase more skilled, but through the modeling and training and the tools that you gave them, now they're equipped to better. They had the right personality from the beginning. They just didn't understand exactly how it all worked.

Blair: Let's just finish on the cons of decentralized. It's easy to imagine what they are, right, chaos.

David: Yes.

Blair: Every person for themselves. There's little knowledge sharing between individuals or little strategic alignment. Then obviously you can't control or it's very hard to control the discounting or other forms of risk like somebody deciding to put compensation at risk in some sort of performance pay. If you're fully decentralized, you're exposing yourself to that level of risk unless you've got some hard policy lines around that. When you get to the extremes of fully centralized and fully decentralized, there are strong benefits and there are strong trade-offs that you make. I tend to like the two levels in the middle.

David: Right. Summarize this, we've talked about the four layers, the levels, the pros and cons. Where's your thinking on this? How would you summarize it?

Blair: I think for firms that systematically enterprise or over-serve, which is the other side of that, or just struggle with profit generally, I think you should think about doing a roles reset and follow largely what I said, which is have a look at centralizing the function for a little bit. If your firm is smaller, maybe this isn't necessary to go fully centralized, but have a look at centralizing. If you really have a big problem and you have somebody on the team who is great at setting price, you just say for the foreseeable future, you can write up the proposals, you can scope it all out.

This person is going to put the price on it. Then we're going to move away from this as we set some standards and elevate everybody else's skills. That's how I would think about it. I would look at centralizing in the beginning. This is me again, thinking of, I've got a problem firm. We have a pricing slash profit problem and we're going in to solve it. We're going to centralize first and we're going to centralize based on aptitude, not based on title, not based on seniority.

Then we're going to move to center supported when certain targets or thresholds are met, like price, margin, or profit. Then we're going to train everybody on the front lines and we're going to let the top performers rise to the top. Then at some point when the bottom people can't keep up, they may have to be marshaled onto other roles or other organizations. That's how I would think about it.

David: What about involving some pricing screening during the employee hiring process? I've never heard of anybody doing that, but you described the client and given the project and say, "How would you price this? How would you think about pricing this?"

Blair: That's really interesting. Even I hadn't thought about that. Where do what you did in that study where you'd say, "Here's a scenario, here's the client. What price would you put on that?" The approach I'm describing is really renovating the pricing structure of an existing firm with existing personnel. You need to optimize or solve for the current problem with the resources that you have.

Then moving forward, if you're going to have somebody on the front lines, who's got some pricing authority, something short of fully centralized pricing authority. They have at least some input, maybe even fully decentralized. You want to make that part of the hiring criteria. You want them to understand in the application and interview process, what their role and responsibility is in pricing. Then as best you can try to figure out how good they are at it.

As I'm saying that, beyond your example of posing a question, I'm not sure how I would test for this. I think that's exactly what I do. Here's a proposal. There's no price on it. Let me explain the client. Here's a proposal. Maybe it's a three-option proposal, three different ways we can help this client. The prices are missing at the bottom. What do you think they should be? You have to deliver this proposal. What prices do you want to put on it?

David: Even just how they react to the question, I think would be interesting.

Blair: Yes. Do they smile or lean back in horror.

David: Or walk out, yes. You're saying we shouldn't assign pricing to a role. We should assign pricing in the second step of centralizing it. We should assign pricing to people who are good at it. Let's say that you have an account person who's really good at it naturally. Fine. All right. Then you have another account person who's not very good at it, and you give them the framework and the support tools and so on, and they still don't learn it.

My philosophy is, okay, if somebody, even after that help, is not good at pricing and handling objections and growing an account, if that person is in an account management role, then they're probably not good at that role. They shouldn't be in that role. Even if they require training in an account-facing role, do they need to be good at this?

Blair: Yes. This is two parts. There's the act of setting price. Just take 22-year-old Blair. My project manager, Heather, let's say she was value pricing instead of pricing based on cost, which is how we were working, and she's working out. I'm downloading to her the value conversation that I never had. She does her cost. She figures out what it's going to cost, and then she listens to my assessment of the situation.

Then she takes the cost-based price and she triples it. She says, "This is really valuable to this client. This should be a worthwhile investment for them to make." Now she still has to hand that back to me, and I have to go sell it. There's the act of setting the price, and there's the act of communicating the price. If you are poor at the latter, it doesn't matter how good you are at the former.

David: Yes, but see, half of the account managers just lost their jobs. I don't know. I'm just guessing. It's not probably half, but half of them are order-takers who basically let the client dictate the price. You said to start this podcast episode that this is the low-hanging fruit, pricing. If you have an issue at your firm with profitability, this is the easy one to fix.

Now I'm seeing that because I think a lot of people who are setting prices are bad at it, and I don't think even with training they would be good at it. Some of them would be good at it. This is not just a passing thing. This is very fundamental to how your firm operates, how you think about this, hearing this episode.

Blair: I think you might be surprised how little training is required to turn somebody from a bad pricer into an actually okay average pricer.

David: Where can they get that training, by the way?

Blair: [laughter] Well, I'm glad you asked. If the listeners goes back, and I don't remember the episode titles, but when Pricing Creativity came out many years ago, we did at least a couple episodes on various pricing topics, and they could just look through the back catalog and listen. The idea of three-option proposals, it solves so many problems. One simple technique, just putting forward three different options. Let's say you've got a client, let's say you're uncomfortable. You're the junior account person. You're uncomfortable putting this proposal in front of somebody.

You should take solace and comfort in knowing that big expensive price is really just one of three different options that you're putting in front of the client. It's not your job to talk the client into selecting that price. It's your job to present three different ways to do business together or three different engagements at three different price points. It's your job to walk the client through the pros and cons of each and then let the client choose.

When you start structuring your proposals correctly, because you start thinking about the engagement a little bit differently, and you allow yourself to be more creative and expansive in thinking about how you might create value for the client. It aligns in a three-option proposal where you're actually all of a sudden quite comfortable putting this in front of the client, because it's not a take-it-or-leave-it situation, as I've talked about before, where it's your job to talk them into yes.

Your role now changes. You're simply facilitating a discussion and a choice between three legitimate options at different, sometimes dramatically different price points, and you let the client choose. When the proposal is structured and priced properly, you remove the stress of what I alluded to earlier, of the function of communicating the price. You let the framework, the structure, the proposal do the heavy lifting on that front.

David: That's very good. We've gone long, but this is one of those episodes where we just need to let it go long because it was a great discussion. Any last words for us, Blair?

Blair: Just the one point I probably didn't hammer enough that I would double down on is pricing responsibility should not be tied to title or seniority. It really should be tied to aptitude. Some people have an aptitude for this and some don't. Again, those missing the aptitude, I think a little bit of training goes a long way on this front.

I don't want the owner of a firm who's listening to this to think that so-and-so who's been with you for 15 years should keep setting price if they have demonstrated that they're not good at it. Give them the training, give them the resources to get better at it, but everybody, yourself included, should not see pricing as tied to a specific function, or role, or level of seniority necessarily.

David: All right. We'll end on that. Thank you, Blair.

Blair: Thanks, David.

David thinks principals should build their firms as if they were going to sell it while Blair’s advice is to run it as if you’ll never sell it. Being aware of options as your firm matures can give you the leverage you might need in negotiations.

“Ten Reasons Firms Are Bought” by David C. Baker for punctuation.com

Blair Enns: David, today we're doing another topic on the subject of selling your firm. This one is called Understanding The Reasons Why Someone Might Buy Your Firm. You have buying and selling of firms on the brain, don't you?

David C. Baker: Yes.

Blair: I wonder if there's some hidden motive.

David: Could there be?

Blair: No.

David: Could I really want to make sure people know that we do this stuff?

Blair: It's pretty busy part of your practice these days, isn't it?

David: Yes. That's why I brought Jonathan on full-time several years ago. It was just overwhelming for me. I just couldn't do both. I thought I was better suited for the advisory side and turns out I was correct. Jonathan's just been doing amazing work there and we love it. Plus, I just wrote this book about selling your professional service firm. I want people to read it. I think it's actually my best book. Unfortunately, it's written for a pretty small niche audience so not many people will experience my best book but I want people to buy it.

Blair: All right. Fair enough. I think we've done at least one episode on it and another on some subject matter in it and I think I made the point of saying it's a pretty good manual for the things to think about in order to run your firm well and properly.

David: Yes. That's the beauty of the overlap. I don't think I really thought much about that overlap until I read John Warlow's book on Built to Sell and the concept is right in the title. It hit me like it never had before when I read that book. Then, I don't know, five, six years ago, you wrote a post. You try this constraint on, "You can never sell your firm." The idea being that you're stuck with it forever and if you're stuck with it forever, what would you do differently? I thought, "Oh, wow, that's a typical overreaction from Blair," and then about five seconds later, "But dang, that's really true like so many of his others."

Blair: I didn't write that as a constraint of an exercise. I publicly said I had decided I am never going to sell this business and I'm never going to retire.

David: You want to take any of it back?

Blair: I have thoughts of both, but so far, I'm living that promise. Let's start here. As you point out, you've heard me say run your firm as though you're never going to sell it because that will force you to turn around and face the issues that you are running from and also correct the things you don't like about the business. That is a powerful idea. Run the business as though you will never sell it, but the inverse and I'll quote our friend Rory Sutherland here who's--

In his book, Alchemy, he says, "The opposite of a good idea can also be a good idea, a poorly understood idea." The opposite of that is what you say is run it as if you're going to sell it. That's also the point of view of Michael Gerber, author of The E-Myth Revisited. His advice is run your business like you're going to franchise it. My advice is run your business like you're never going to sell it. Your advice is run your business as if you're going to sell it. They're all good ideas. Would you agree? Do you think they're all good ideas?

David: I think they're all good ideas. I think probably that one of those three that's most difficult to accept is run it as if you're going to franchise it. I have actually evidence of the fact that that was the most difficult to expect or to hear because I had Michael Gerber keynote a conference I was doing and half the audience walked out because the idea of these owners of creative firms wanting to franchise their businesses has just struck at the very root of how they thought of themselves. They're in the anti-franchise business. I do agree with it.

Blair: I wasn't at that conference. I think that was 2000 or 2001. That was the early NYOB days and he was your first keynote speaker, was he?

David: Yes, exactly.

Blair: The story was he stands up and says to a room full of design firm owners, "You guys should be more like McDonald's."

David: Exactly.

Blair: Then the room emptied out.

David: Yes, because these people, not only would they not want to run their business as a franchise, if they ate at a franchise, it wouldn't be McDonald's. It was a double whammy. I think he's correct. I think the systems and how, to whatever degree you can, productize your offerings and we have an episode that's come out about that and so on. I think all three are correct. I think the last one though is the tough one to swallow.

Blair: We've talked about selling your firm on at least one other episode. When I saw you come up with this topic, I thought, "It feels like we've been over this ground." I think the reasons why somebody might buy your firm are pretty obvious. Then I read your outline here and I thought, maybe once again, I underestimated you. There is some depth here." Why do you want to talk about this now?

David: Because people are sometimes surprised when someone reaches out to them and wants to buy their firm, and then they start to get full of themselves, and they're shocked at how little somebody wants to pay, but more, it's that I think they just don't really understand why buyers might want to buy their firm. It's not about your staff. It's not about the actual work, the quality of the work that you do. It's about other things. If you know that, then you can prepare for it.

I was reading something today, it was a survey that I got from one of my clients. They said that we've tried to run this firm with a focus on employees. I thought to myself, I wonder if the firms that fall in that category, that want to run their firms with a focus on employees, are actually less profitable as a result of that. I don't know that they are. It was just a question that I had. I was thinking, "Okay, there has to be a balance between running your firm as a place where people want to work and running your firm that generates good profit consistently because only one of those things falls in the bucket of what a buyer cares about."

Anyway, it's a tough balance. There aren't black-and-white answers here. I just want people to understand that there are lots of reasons why people want to buy a firm. In any given firm, there's probably three or four of these 10 that might apply to them.

Blair: You get some initial expression of interest from a potential buyer. You go home and you say to your spouse, "Hey, somebody wants to buy my firm." Your spouse says, "Why?" Your answer is like, "What do you mean why? Because it's an awesome firm. Who wouldn't want to own this awesome firm?" That's not the reason why somebody wants to buy your firm. I like to ask the question of acquirers, "What is it that you were buying? When you bought that business, what were you buying?"

You think there's one or two answers. There's a lot more. You've got 10 answers here. Do you want to kick us off and run through the list here?

David: Sure. They're not in any particular order. I'll just run through these. Jump in when I'm not making sense, or there's something that needs to be tied together, or whatever.

Blair: When the audience needs to hear from me.

David: That's right. Your lovely voice. What did you call it before our call started?

Blair: The dulcet tones of my voice.

David: The first, and by the way, these are not in any order, they're just as they occurred to me, vertical integration. The buyer focuses on a vertical industry and they want to start offering something else to that same audience. Maybe they do SEO and they've discovered that it's really not all that practical to not also do SE, so they buy an SEM firm. Vertical integration.

Blair: That's a new service line to append to their current service offering.

David: Yes, exactly, because vertical integration and vertical positioning are actually a little bit confusing together, but right.

Blair: Go ahead. The second one is horizontal integration. What is that?

David: Here, you're buying a firm that focuses in a different industry typically. You might be buying a competitor or you could be actually not caring too much about what they do, but you feel like the service that you've perfected and offered to your vertical is really well suited to another vertical. You buy this firm to get access to their clients. You're just selling into them and using their sales force and so on. Sometimes you are buying a competitor to take them off the market, but usually, it's more just for access to that marketplace.

Blair: I'm a firm owner and I do X for Y, discipline for market. The acquirer comes along and says, "We also do X, but we do it for Z, not Y. We're interested in acquiring you because there are some synergies between X for Y and X for Z. We want to expand the market without necessarily changing the discipline. Buying you allows us to do what we're already doing into a broader market." Is that the way to think about it?

David: Yes. It could just be driven by a desire for growth, but sometimes it's like, "We don't want to be as exposed as we are to this vertical market, so let's broaden this out."

Blair: Oh, yes. Risk reduction. It's like, "We're too exposed to a vertical that might be undergoing transformation or susceptible to an economic downturn." That makes sense.

David: Yes. Vertical and horizontal integration. The other one is to solve a client concentration issue. This is the third one. You don't see this too often, but we do hear about it and it's never verbalized publicly. It's always underneath the surface. "We've done great work because of that. We have grown, in fact, most rapid growth comes on the back of a client concentration issue. Our relationship with this client is fantastic. We have tried to do new business and we keep getting sucked back into client stuff and so on, so it's just never been all that successful. Maybe what we should do is buy another firm."

All that does is it just changes the relative percentage of this client that we have against a bigger hole that's changing one side of that equation. Sometimes, actually, you're killing two birds with one stone in that the firm that you're buying also has a client concentration problem. You're putting these two firms together. This actually happens quite a bit.

Blair: You're pooling the risk.

David: Yes. The client concentration challenge is what's made new business difficult. It shouldn't, but it does. We can't take our best people and focus them over here. We have this work, let's just maximize it. I've said two things, that it happens a lot or it doesn't happen a lot. By that, to reconcile those two things, what I mean is that not a lot of acquisitions happen to solve this, but a lot of people think about solving it this way.

Blair: Got you. One of my first clients over 20 years ago, they had a large client they were very successful with and they grew so rapidly, they desperately wanted to mitigate the risk that that one client represented because first they were 20% of their business, then they're 50, 60, they were 80% of the business. What you just outlined happened, which is they could not concentrate on new business for long because their gorilla client was growing so rapidly and was so demanding.

Finally, I just said, "You know what? Let's quit trying to push this boulder up the hill. Just forget about new business altogether. Focus on growing the client. Know that at some point, the client goes away, you're going to shut it down." They ended up buying another firm that was better diversified as a way to mitigate that risk.

David: Yes, exactly. It just makes sense on the face of it.

Blair: Number four is a profit grab.

David Here the acquirer is under some pressure. It's usually outside pressure, not inside pressure. By outside pressure, I mean a lender or an investor or the people who are going to get rich when the next thing happens, some exit or whatever it is. They have a lot of business, tons of pass-through stuff, but they're just not successfully able to generate much profit from it. They buy another firm that's boring, smaller, but they have pretty nice numbers. They're 40% EBITDA instead of 5% or 10%.

The buyer just needs-- This is the quickest way to add that profitability because everything else is requiring deep change and time to happen. This is a quick fix to something like that. Now, I'm assuming that obviously people can listen to this thinking, "This is why we could buy a firm," but mainly I'm addressing people who want to sell. If you're in a selling situation and this is true of your firm, this gives you lots of leverage. Of all of these scenarios that we're talking about here, this one gives you the most, profit, EBITDA.

Then they'll poke around the edges to make sure that this profit is predictable, but this gives you tons of leverage in the relationship. Of course, this goes back to what you and I were talking about at the beginning. This is pretty good for you too.

Blair: It's pretty good for you too, especially if you can recognize that this is what they're buying. That's when you have the leverage. I can imagine that some deals were made where firms were sold for this reason and the seller didn't realize what the buyer was buying and perhaps left some money on the table.

David: Yes, because it was unlikely that they got financials from the acquiring firm, especially if there was a big size differential.

Blair: We've got 10 different reasons why someone might buy your firm. The first two are integration issues, vertical integration, horizontal integration. The third one is to solve a client concentration issue. The fourth one is a profit grab. The fifth one, smooth out a growth curve. What do you mean by that?

David: The firm that's going to buy you has an exit plan of some kind. Part of the equation in a successful exit for that firm is telling a great financial story. Maybe what happened to them last year is not a great chapter in that story. There was a big dip or maybe they see one coming or they lost a significant client or there was something in the regulatory environment that changed or whatever. What this does is it allows them to fix that top line.

The one we just talked about is about fixing the bottom-line profit. This is about fixing the top line. In this case, you have more leverage than you might expect because the profit contribution that your firm is going to make is just not that important. They're more interested in the top line here. If you're not aware of this, then you'll be unduly worried about how you'll come out in the transaction. This is a part of things, and it usually happens after there's some larger disruption in the marketplace.

You saw that after COVID, you'd see it after the 2008, 2009 thing where bigger firms need to smooth out that growth curve to tell a better financial story later when they exit.

Blair: This is quite a bit like the earlier one of a profit grab. Both of these are acquisitions designed to tell a better story for when they turn around and sell the business.

David: Yes.

Blair: The acquirer sells the whole thing, right?

David: Right. In some cases, the buyer of your firm isn't even going to need profitability. It's a market share buy for somebody else or they're buying the promise of the growth curve and so on. In many cases where this applies, your profit doesn't matter as much to them. It's more the top-line volume.

Blair: Let's say you're the advisor to the seller. Are you able to determine for your client's benefit what the reason is that the acquirer wants to buy?

David: Oh, yes.

Blair: Are they straightforward in giving that information?

David: They're not straightforward, but there's no hiding of it because of the questions they ask, the reason why they need "something", what they push back on from a negotiation standpoint. There's always ways to throw things at the discussions and see how they respond to it. It's very obvious why they're buying something.

Blair: Have you ever been involved in an acquisition, again, representing the seller where you were unable to discern the true motivation of the buyer?

David: No.

Blair: Do you think somebody who's not using-- I'm not trying to set you up for people to hire you. You facilitate transactions, you do it all the time, you see the patterns. How many times are you going to sell your own firm, the listener? You might think, "I'll do it myself." I just can imagine that somebody who hasn't sold a business before might not even consider the question of what is the acquirer really buying, let alone, do the work to determine what that answer is.

David: I think that's possible, but unlikely. I think most people, assuming that they're of average or above intelligence, and maybe they've read a book or two or they've talked with somebody that's gone through this, I don't think they'll have problem identifying why. I just think they don't know what to do with it.

Blair: It becomes pretty clear, doesn't it?

David: Yes, it's pretty clear. They just don't know how to use that. It's like a sports agent. A great sports agent should more than pay for themselves. I would think the same thing is true of an M&A advisor, too.

Blair: The sixth reason why somebody might buy your firm is buying your intellectual property. How common is this?

David: I hear you laughing.

Blair: No, I'm not.

David: It's not very common.

Blair: It could and should be more common, maybe?

David: Oh, absolutely. Yes.

Blair: As an advisor to these sellers, you would like it if they built more IP and appropriately protected it, and then monetized it on exit.

David: Yes. Our problem is usually the opposite, where if we happen to be representing the seller, the seller thinks that there's a lot of value in their IP, and we're having to deliver the bad news that there's not too much. The truth on the flip side of that is that the more IP you have, oh, my God, how it's just an amazing thing, especially if that's why they're buying it. If they aren't buying your firm for the IP and you have a lot of IP, you should have it in a separate corporation, and you should license the use of that IP to the buyer, but not exclusively.

You could have a non-commercial. Probably not. That probably wouldn't fly. If they're not willing to pay for what you think is really great IP, and you're right in this case, then you shouldn't sell it to them. You should keep it and just give them a license to use it in perpetuity.

Blair: Keep it in a different legal entity, license that IP to the acquiring organization in perpetuity, and then you're free to license it to somebody else or sell it outright.

David: Yes, do whatever you want with it. The thing about IP, if somebody's going to buy you for the IP that you have-- let me illustrate what I mean by that. It could be a tight research methodology and I probably have 10 clients where that would apply. Maybe it's a SaaS-like performance dashboard, or maybe it's some algorithm about how to interpret in a social listening environment, or consumer feedback, or testing a packaging, or whatever it is. If you have some IP, ideally, even if it's not a separate corporation, you have separate financials for that, so you know what income and what expenses to attribute to it.

This is a factor, and you should be honest with yourself about what you have. If it really is IP-able, then you should treat it that way, and if it isn't IP-able, then you probably ought to quit fooling yourself about how much value it has.

Blair: I want to bring up something that maybe doesn't fall under IP, but it's the only place where I can see on your list where I think it would make sense to put this. I've had some clients who became pricing stars, who took their profit margin from 10%, 20%, to 30%, 40%, and beyond. Some of these firms have been sold, and some have been in M&A conversations that didn't end up getting sold.

I remember talking to the CFO of a very large firm that was considering acquiring one of my clients, and the client referred us for pricing training to the large organization. They both were open with me with the fact that there's a potential acquisition. They were in discussions. I said to my client, the smaller firm that was looking to be acquired. It didn't go through. They ended up being bought by somebody else.

I said, "If you look at your new ability to drive a higher margin, you were a X, now you're consistently a Y, solely through your improved pricing. When they buy that, they're not going to value your ability to go into the larger organization, because if they buy you, you could go into that organization, and you could drive the same increase in profitability across an organization that is 20 times your size. What is the value of that?" Can they put a price on that in the acquisition?

David: Absolutely. You'd build it into the terms of the sale, so the earn-out would be dependent not 100% on what happens within the firm that was sold, but partly tied to the larger results of the large company that bought you. Now, if they ignore the-- they're not interested in that, then you just move on and say, "Fine, no problem," but then when you start to see things that could be fixed after the acquisition, then you go back to them and say, "Hey, I'm struggling here because my earn-out is not going to reward me to help you fix these things, but I really want to help you fix these things. Could we change the arrangements here?"

That happens. Yes, it can absolutely be built in, and it should be.

Blair: Fascinating. Seventh on your list of reasons why someone might buy your firm, geographic expansion. Seems straightforward.

David: Yes. Increased geographic footprint. This was more trendy in the past. You don't see it happen quite as much now. It started with PR firms. It's like, "We need a presence in New York City, so let's buy a firm there." Then the second phase was, "We're having trouble recruiting to Broken Bow, Nebraska." I have a client who lives there. [chuckles] "Let's see if we can make it easier to pick up really great developers in Austin." Then, of course, it's driven a little bit by what cities are known for.

Energy, "Oh, you got to have a presence in Houston." Silicon Valley for startups, biotech in the Northeast, Northern Indiana orthopedics. If I could throw in an ad for where I live, did you know Nashville has more healthcare corporations than any city in the world? People think of music, but no, Nashville is about healthcare, on the service side.

Blair: Bible publishers.

David: Let's leave that out of this.

[laughter]

David: Printing, transportation. If you serve the healthcare service side, you've got to have a presence in Nashville. That kind of thing drives this geographic footprint. You have to be serving the same industry that they want to serve, but this could absolutely drive it.

Blair: Got you. Eighth is subsequent succession. I'm not sure I know what you mean by that.

David: For whatever reason, you don't want to sell your firm to somebody else. You'd like to see your legacy continue. That means that when you're ready to step down, it's going to be an internal sale. There's nobody on your staff at the moment that is entrepreneurial enough or has the experience to do it, so you buy another firm that's being well run by a younger person. It's sometimes not billed as an acquisition, it's billed as more of a merger, but really it's a succession plan. It's a penultimate way to make this happen.

Between the two of you and anybody who knows what's happening, it's like, "Now four years from now, I'll be able to leave and this firm will continue." Subsequent succession.

Blair: You're buying a successor.

David: Yes.

Blair: "I'll buy you now, then you buy it back from me."

David: "You buy me, but I'm going to charge you more than I'm going to pay you."

Blair: I can see some form of merger where the bulk of the cash goes in one direction initially and then starts going the other way as the acquirer wants to phase themselves out.

David: The firm that's being bought is not as successful. They're earlier on that trajectory and they have always admired this bigger firm and they feel like, "Wow, this is a much quicker, safer way to grow quickly. It makes sense."

Blair: It's a mentorship and a succession plan.

David: Yes.

Blair: Number nine, cross-selling.

David: This one is just a little bit different from horizontal integration, but the purpose is very obviously, "We need access to your clients because what we sell, which isn't what you sell, can be directed to exactly that target." Now usually the firm that's being acquired has either really great account people and/or great salespeople that are willing to help sell this stuff to make this transition easier. Cross-selling. "We're really good at what we do. We want to move into your industry. We don't really care as much about what you do. We care about your contacts."

That's the difference between horizontal integration and cross-selling is, "We don't even really care about your revenue. We just want to use the relationships that you already have with your clients." It's really highly connected C-level people. This drives acquisition sometimes too.

Blair: "We're buying your relationships with your senior people at enviable companies because we want to sell other things to them."

David: Yes. Then the last one is just an acqui-hire. This is the reason people buy you. Now, you have to be honest with yourself here. I'm going to be honest with you to help you with that. When somebody is looking for an acqui-hire, they're looking to purchase a firm in a non-traditional setting, it's a little bit more than a hiring, but it's less than an acquisition. They don't want to spend any money. This is the least amount of leverage you have probably, but it's much better than actually walking away.

You would never walk away from your firm. You would let somebody else acqui-hire it. There's advantages there. It's like immediately you get this additional capacity, which otherwise you'd have to take lots of risks to hire people individually. They've worked together, so there's that culture that comes with it. Plus, even though there may not be a lot of profitable business, there's probably enough business to cover the cost of the people. There's very little risk here. This is more common now than ever.

I'm not really sure what's driving it. We do some of this, but it's actually harder for professional M&A advisors to do this because there's not much money in it. Usually, you get paid as a percentage of the transaction value, and there's very little transaction value here. It's a little bit tough. We just do a flat fee thing. There's more of this stuff happening than ever, coupled with the fact that there are more firms wanting to walk away who don't have an asset that is as sellable as they would otherwise like.

Those two sides of the equation are coming together for more acqui-hires than ever.

Blair: I didn't know the trend was increasing. I know of a handful of firms, maybe a couple of handfuls of firms, who've done this and sold to some very large corporations. It all ended up being win-win for everybody. I guess there is a trend in the larger market that there are probably a lot of people who would like to just shut the firm down and go work for somebody. Had enough entrepreneurship headaches for a little while, want to ride out the tumultuous times.

David: Yes. I think the primary thing driving that is just struggles in managing people and the expectations that employees bring to the table these days. It used to be clients. Now it's more weary of that. The thing is that there are way more acqui-hires than we know of simply because nobody ever calls it that. It's called an acquisition because it's embarrassing to call it an acqui-hire. Nobody really knows what the seller got, but if you saw the paperwork, you'd realize it was an acqui-hire.

Blair: Got you. Understanding The Reasons Why Someone Might Buy Your Firm, there are 10 reasons. I'm not going to list them all. We're already running a little bit late. Do you want to talk a little bit about flipping this around?

David: Yes. You could build your firm so that you could aim for one of these nine, you'd leave Aquahire off the list, one of these nine reasons, or more likely is you just stumbled onto a really good reason why somebody might want to buy your firm. What's not on this list, if you were going to flip this around and say reasons to sell your firm is, "I'm just tired of it." That's a really terrible reason to go to market, even though that's what drives much of the activity.

You can't talk about that. You should tell your advisor that obviously, because it's like your lawyer, don't hide anything from them unless you actually killed a person and then do. Do hide that from your advisor as well, would be my advice. If you're just tired and need to move on, then how are you going to explain this to the seller, because a seller is going to ask you why you want to sell? The age-old answer to that is always, "Well, we have always longed to play on a bigger stage."

When you hear that, most of the time it's not true. Most of the time, it's just, "I'm done and I'm tired." Sometimes it's true. Most of the time it isn't, but you have to really be careful about the reason why you're selling your firm. Now, the buyer does not have to be careful about why they're buying a firm, but you need to be careful about why you're selling a firm. Otherwise, that's going to show up.

This is why when you start to see yourself being less engaged, even if you predict that "Oh, I could see myself getting out of this in three to five years," you need to start thinking about it now because you're going to have to stay engaged through your sentence as well, otherwise known as an earn-out. The sooner you think about that stuff, the better. Going back to the very beginning, ideally, you're running a firm that's very sellable at a moment's notice.

That's the perfect outcome of this because then if that happens, if you get an opportunity, you'll not only have a firm that's ready to sell, you'll have so many of these reasons why they might buy wrapped up. You'll be profitable. You'll be growing all these other things. It's a win-win.

Blair: Run your firm like you're going to sell it. Run your firm like you're never going to sell it.

David: What about McDonald's? Don't forget the McDonald's thing.

Blair: Oh, and McDonald's. Run your firm like you're going to franchise it. Thanks for this, David.

David: Thanks, Blair.

Through the process of writing his latest book, Blair's thinking has evolved on whether or not firms should resist the urge to productize their services as they work to creatively meet the unique needs of each client.

David C. Baker: All right, Blair, it's been, uff, months since we've actually recorded an episode because we've both been doing things. You were traveling. Now we're recording again. I had to go look for my mic, dust it off, and all this stuff, but I like the way 2025 is starting because this is a mea culpa where you've just made this long list of places you've been wrong. We're just going to work through them,-

Blair: The list of one.

David: -hopefully we'll get through them in this year.

[laughter]

Blair Enns: We'll devote the year 2025 to fixing Blair's mistakes.

David: Yes. The topic, I guess we'll just call this, "To standardize or customize." In the past, you've been a proponent of customizing wherever possible. You've rethought that just a little bit. Tell us more about this.

Blair: Yes.

David: Ignore all of my unnecessary context setting right there.

Blair: [laughs] I always do, but thank you for the invitation to do that. I'm going to frame this through my thought processes or what I saw as true while I was writing different books. While I was writing the recent book The Four Conversations: A New Model for Expertise, I knew I had to revisit this topic that I addressed in my previous book from 2018, which was Pricing Creativity: A Guide to Profit Beyond the Billable Hour. In Pricing Creativity, I was pretty adamant that as a creative firm, your services or your delivery model should be customized.

What I mean by that is, when you look at your client situations, you should see every client as unique, therefore every proposal should be unique. You didn't see yourself as doing the same things to different clients. You would harness your creative superpower, and again, creativity, as I see it, and this comes from Mihaly Csikszentmihalyi, creativity is the ability to see, the ability to bring a novel perspective to a problem. I believe that the superpower of a creative person and a creative firm is the ability to think about the problem differently. I still believe this, I'm just less rigid.

I thought, as a creative firm, you should resist the urge to productize your services for that reason that you shouldn't impair that superpower, which is your ability to think differently about the problem. You and I both know Jack Skeels, and I've referenced his thinking on this before on multiple episodes. I've said I was really struck by the first time or one of the first times I heard him speak.

He was talking about the differences between agencies and consulting firms, and he pointed out that consulting firms have this convergent thinking model where they converge on the single solution for whatever the common problem is, and then they apply that single solution, obviously with some variation, across all of their clients in a sector. They converge on the solution, whereas creative firms are really businesses of divergent thinking, of you get different thoughts, different thinking styles, different ways of viewing and thinking about the problem, and you recognize the uniqueness in every situation.

I've always been a fan of the customization of your services where you see every client is a blank slate. You bring that superpower to bear. My experience when I saw my clients first start to productize was that they made similar mistakes on the pricing dimension. They would start to price the product, not the client, which led them away from value-based pricing. When I wrote Pricing Creativity, and I was all in on value-based pricing, and I still feel very high on it, but I would say short of all in on it. It was my point of view that all creative firms should be fully customized in the way they deliver their solutions and the way they price those solutions.

David: Yes, and that was sort of the larger context, right? Because the reason it came up so logically when you're thinking about pricing is because if you productize something, there's the potential that, one, maybe you're not listening carefully in those conversations, which is also something you talk about, if you just automatically jump to the same solution every time. You also are potentially leaving money on the table because you're not delivering what this particular client needs. I've noticed something when I talk with my clients or I'm at an event or something, and this topic of productization comes up, the objections to productizing services often come from kind of two areas, sometimes both or just one or the other.

One is they don't understand how that would even be possible because they're thinking of it from the perspective of an undifferentiated firm. In those cases, every one of the situations is different because the clients that they're faced with are different every time, and so it's hard for them to picture that. Then the other is that they're sort of in the mindset of not so much leading the client.

A client of mine wrote a book about account management called Tell Your Clients Where to Go! I thought that was just such a great topic. They're more in the order-taking mode. In that mode, you can't, you know, you're not imposing a productized service because you're simply doing whatever the client wants. This is one of those topics that just keeps coming up over the last few decades. I always enjoy thinking about it. Maybe to make this a little bit easier, can you walk us through this two-by-two model of this? We'll put this in the show notes as well.

Blair: Sure. I think, of all the sections I wrote in the book, the largest piece that was left on the cutting room floor that didn't make the book was this big, long diatribe on customization versus standardization. In the end, I think I looked at it, I thought, "Oh, this whole section has to go." It was pages and pages because it was me thinking through the problem. We've talked about this before. I think through my fingers. I have to write to fully understand and arrive at some sort of cohesive point of view on it. In the end, I wrote and wrote and wrote and wrote around in circles. Then what made it to the book is a simple two by two with only a couple of pages of explanation.

The two by two is customization or standardization on one axis, and delivery model and pricing model on the other axis. Making the point that you simply have to make the decision, "Are you going to customize or standardize your delivery model?" We'll get into this, and "Are you going to customize or standardize your pricing?" Basically, these are the four options. There are four quadrants in a two by two, and those are really only your four options. I look at the four options and I could make a case for being in any of those quadrants.

I never studied economics in depth, but I feel like I turned into more of an economist as I get older where what I mean by that is I just see less right and wrong and more trade-offs. It's just trade-offs. What are their trade-offs of customizing your delivery model, how you deliver your services versus standardizing your delivery model? It's really as simple as that. There are trade-offs, and everybody would kind of prioritize their trade-offs and is going to do what they feel is best for them and their business. What's best for them and their business is often very much kind of a personal story of what makes the most sense for them as a person.

David: Yes.

Blair: Do you want me to walk through the model?

David: Yes, walk through the model for us.

Blair: Okay. I've got customized and standardized on the vertical axis, and delivery and pricing on the horizontal axis. If we start with delivery models, customized delivery model means that you sell an infinite number of bespoke solutions. Like I said earlier, my previous firmly held point of view that all creative firms should think about it this way is that every client is a unique slate of possibility, therefore every solution, every proposal should be unique. I won't talk about pricing here, but everything is a blank slate.

When you first fall in love with value-based pricing and the value conversation, you realize the value conversation, client comes to you self-diagnosed, self-prescribed, and they're just looking for sometimes a highly specified solution. Then you have a value conversation with them and you essentially transcend if not the problem as they've defined it, certainly the solution as they've defined it. You open up this field of infinite possibilities, that you might do anything for them. Now, obviously you're limited by your capabilities, but you can go higher or acquire to increase your capabilities.

Theoretically, there are infinite solutions that you might bring to bear on a client's problem when you customize your delivery. You think of it as you want to buy a suit, you go to a tailor, the tailor is going to make a suit for you, and it's all about you, it's a perfect fit to you, and you're going to pay a premium for that, by the way.

David: And it's going to take a while. Sometimes that's exactly what you want, but other times, you don't at all. It's like, "No, let's not take this long. I don't want to spend that kind of money." Anyway, yes.

Blair: "The wedding is tomorrow." Yes. Right.

[laughter]

Blair: Yes. That's customized delivery. The other end of that spectrum is the standardized delivery where you have a small number, sometimes as small as one. We have this one program, a unified program, a small number of solutions that you have packaged up into products or productized solutions. That's what I mean by standardizing your delivery model. There are only a certain small number of things that your clients can buy from you. These things are packaged up into products, they have names, et cetera. That's basically two ends of the spectrum, infinite customization, or finite, not just finite, but small number of neatly packaged products or productized services.

Now, in the pricing dimension, when we move over, so let's move back up to customized. A customized delivery is infinite bespoke solutions. Customized pricing is essentially value-based pricing. It's where you are pricing the client. I'm a big fan of pricing the client. Now, I can also see examples where it doesn't make sense to price the client. We largely don't price the client because we're a training company, although we could do that, and there are ways to do that in almost a hybrid way that we can talk about.

You might recall, David, that when I started to go down the pricing rabbit hole, I talked to you about your business, and I said, "Man, you should just start doing some form of value-based pricing," and you don't really do that. You kind of dabbled with it a little bit where you could use the size of the firm as a surrogate for the value being created, and you could have different thresholds where clients have a certain size. You have a set number of standard products. It might be three or four. Is that right? You've got two main ones?

David: Two main ones and three other small ones, yes. I actually experimented in building after that conversation. I built a program for that, and actually, three clients bought it. I was paid a little bit less at the beginning and then I got some nice bonus based on actual results at the firm a year later. The problem was that the firm that wasn't doing much better, was doing worse actually, was sucking all of my time, and then the two firms that were doing much better didn't have me come back a year later because they didn't want to pay me that extra bonus.

Blair: [laughs] It's not the answer to every profit question, is it?

David: That's when I quit listening to you years ago.

Blair: [laughs]

David: No, I actually think there's a lot of value in pricing the client. I don't have the patience to do it, honestly. I think it takes somebody with more patience and more willingness to dive in. Anyway, I don't want to take us off track, but yes.

Blair: No, that's a great digression or going a little bit deeper into the topic with an example. That's customized pricing, value based, where you price the client. Standardized pricing is where you price the service. If you've got a standardized product, you have this product, that service, you put a price on that. I think that's what you do with the TBR or the new business audit, correct?

David: Right. Yes, it's a base price of $25,000 for 20 people. Then if the firm has more than that, then there's an upcharge of, I think it's $250 per person.

Blair: Yes. That's an example of a hybrid that I want to talk about. There is some value base built in, or maybe you're looking at it from a cost point of view and saying, "Well, there's more work for me to do, therefore I'm going to charge you more."

David: More surveys to read, more profiles, and those cost us money. Yes. Right. There's more at stake. It's more complication. There's more people to figure out who's in the right role and all that stuff.

Blair: Yes. I consider that a bit of a hybrid, and we'll come back to hybrids. It's standardized pricing where you're pricing the service or in an agency world where you're pricing the time. If you think of a typical agency, ad agency would be infinite bespoke solutions, we'll do whatever the client needs. That's customized delivery in this parlance, but standardized pricing, whatever you need, it's $200 an hour.

David: Right.

Blair: Now, if we stick with standardized pricing and we move the delivery from customized to standardized, like in your business, now we're pricing the product.

David: That's the opposite of pricing the client, right?

Blair: Yes.

David: Okay, so it's either pricing the product or pricing the client.

Blair: I forget where I got this. I think maybe it was from Greg Alexander, either his book The Boutique or some of the content that he puts out into the world. It's great content that he creates from Collective 54. I think this came from him, and maybe it was somebody else, but let's give Greg some credit. The most lucrative model for a professional firm is this combination of standardized delivery, so productizing your services, and customized pricing where you price the client, it's value-based pricing. That seems to be, and I can't cite the source, so take it with a bit of grain of salt, but intuitively, this feels right to me. It seems to be the most lucrative business model.

David: Productized service offerings sold in a customized pricing environment?

Blair: Productize your services, but don't put prices on those services. Instead have a range of prices, don't necessarily publish those ranges. You could publish those ranges. You could have kind of a bit of a rate card, but instead reserve the right to change the price or charge a price that's based on the value of these services to the client rather than the market value of those services, in air quote, or the value of your inputs of time and materials.

David: Or even a consideration that takes the particular client into account. Like maybe they need more hand-holding. Maybe they want you to show up at certain meetings to explain this to other bosses or whatever. I've read Greg's book as well. I don't remember if he said that in there or not, but that does resonate with me, tying those two things together.

I'll tell you, if you don't mind, some other reasons why I like productization in some cases, you mentioned a big one that we'll talk about in a few minutes about how it's easier to sell. You can describe it so much easier. For me, it's also easier to train your team about this is what happens and then this happens, and then here are the things you can read. It also helps control scope creep a little bit because somebody signs up for something, right?

Blair: Yes.

David: The big objection to productization, this is just through my filter, this might not be the big one, but just through my filters, you're leaving money on the table, but I feel like one thing you can do is just charge more for the same thing. Anyway, let's keep going here. Can we back up just a minute? What is it specifically that got you thinking a little bit differently? Was it when you were writing the Four Conversations book about this?

Blair: Well, I've been writing that book for years, so it coincided with writing the book. I'm not sure if it was the impetus for it or not, but I became aware in the last few years that one of the things that I was guilty of, and we may have talked about this in an episode on rethinking some of our mistakes, or maybe we never released that one. I don't remember. I realized that for too many years I operated under the assumption that there was one agency business model. Then I woke up one day and I realized, "Oh, it's really, there are just multiple models." The landscape has really fragmented.

I'll give you an example. When Alex Hormozi wrote his first book, $100M Offers, I read that book and thought, "Wow, this is a really good book, but it doesn't really apply to agencies." I still took a lot from the book because the business that he owned, his primary business at the time, was he had a marketing business that helped--, he had a very specific niche audience, owner-operated single-location gyms. He helped those owner-operators to achieve top-line and bottom-line growth. He converged on a solution, like the consulting company world, created one standardized product in the form of a program, and he sold that at massive scale, and he value-priced it.

I don't think he value-priced it initially. Maybe he didn't value-price it. I might be misremembering that, but my first pass at it was, "Oh, this is a really good book. It's not really something for me to recommend to my agency clients, unless they're really interested in the subject of pricing because his isn't an agency." Then sometime later I realized, "What am I doing? Of course, this is an agency--" Like you and I did an episode on the idea of should we even use the word agency anymore?

David: Yes.

Blair: I think we both came down on the no. There's so much baggage. It's been a long time since any of these businesses were agents of anybody, let alone the daily newspapers. That's the origin of the term. If we drop agency and think marketing firm, this productized into one standard program applied to a niche at scale, that is a very lucrative business model.

He made tens of millions of dollars and probably still continues to do so from that model. I realized, "Well, that's got to go be within the pantheon, within my collective set of agency models." I have to quit always coming down on the side of customized services, because there are these really lucrative businesses out there that are standardized, and standardized down to just one program for a very niche audience.

David: Yes, there has to be room for this. That's an example of a productized service that's being sold under a value pricing rubric. It's true, right? You hold this model, you and I both have perspectives on lots of things, and then something pops up, and it's like, "Oh, wait, I need to adjust this. I need to figure out why at first I didn't warm to this idea." Can you talk just for a second, maybe just give me your initial reaction to this thought, but when our audience, our normal audience, like creatives, people, creatives doing lots of different things.

Blair: Freak audience, accountants, consultants, financial planners.

David: When they hear the idea of productization, they have a visceral reaction against it because their whole life is about seeing things differently. There is this innate reaction about productization that seems like it's not creative. I think it's false, but people do have that reaction when they think about this. Like no, the idea that we're going to package this up. No, we see things differently every time.

Blair: Yes. My recency bias is I'm thinking to the most recent call I had right before we recorded. I had a sales conversation with a highly creative individual, owner of a successful creative firm, and he just fits the standard mold of the really creative person who was a planner at an agency, launched his own agency. As soon as they show up on Zoom and the conversation begins, you realize the pattern, "Oh, these people are what I love about this business, is just so highly creative," but it's like they're all over the place. They're big thinkers. They're highly curious. They're fascinating. They're all over the place.

My job is really to rein them in a little bit and to harness some of that frenetic energy and channel it to business outcomes. We didn't talk about productization in the call, but I would imagine that a person like that resists the idea of productization because they're really interested in doing the thing they haven't done before. The idea of selling and delivering the same product, it's intellectual torture. Now, that's not the reality, but that's the idea at the time. It's like they just can't. To them, it feels like death.

David: Yes. What I love about somebody who can get past that barrier is they don't spend as much mental energy reinventing the wheel every time. Now they have a mind that is free to observe so many more things as they go deeper and deeper and deeper underneath that productization. It's just a beautiful-- they start to see about research possibilities and so on. Your new position is that you're more flexible.

There are times when you prefer customized pricing, customized service offerings, but there's room for productized. Can you walk us through the arguments for these just sort of like in bullet point fashion so that people can hear them and say, "Ah, yes, yes." Then, of course, they can go back to the notes to look at them, but the arguments for standardized delivery first or productization.

Blair: Yes, sure. There are so many arguments to standardize your delivery. Most of them are about efficiency and scale. The first is, you've already touched on it, it's just easier and therefore faster to sell products. It's easier and faster for the client to buy products or productized services. It's easier to communicate what they get, what they don't get. It's easier for them to grok that.

It's easier for everybody to make a decision on it. Now, the flip side of this and one of the reasons why I was not a fan of productization for so long is something else that you already alluded to is, and that I noticed, as soon as a salesperson has something to sell, they quit listening. In a sales model, that's about conversations, and conversations are not about presentations. They're about actually being attentive to the client. Having a framework for questions, being legitimately interested in the answers and the conversation that happens, that is impaired. You listen just long enough to figure out which product this person needs, and now you're selling a product.

David: The second call is unnecessary and frustrating. It's like, "We already know you need this. Just you're going to buy it or not."

Blair: Yes, yes, yes. It's also easier to bring consistency to scoping, right? You're not reinventing the scoping wheel. Most agencies, once they get to a certain size, whether they acknowledge this or not, there's this force within the agency, usually starts with the finance person. That's really about the pursuit of efficiency. We've talked about this, and it bumps up against creativity and innovation, but most creative firms can be a whole lot more efficient than they are, and productization allows that, it just takes you less.

If you do the same thing, if you're taking the service, putting it in a box and delivering the same service multiple times, after the 4th, 5th, 15th, 50th time you do it, you do it way quicker. It becomes a lot more profitable.

David: Yes.

Blair: Not necessarily as profitable as customized, but it becomes profitable. Then you can add the second thing, which is scale. You can do it quicker. Now the price isn't higher to the client, but the margin is there because you can do it quicker, and then you can do more of them. Scale comes from repetition, the ability to replicate something. It's easier to replicate a standardized product than it is, "Oh, well, let's just figure it--, go out there and create a bespoke solution." Just by their nature, they're not going to be replicated, therefore you're not benefiting from efficiencies that way.

David: You said something during your recital of these points that probably ought to be on a bumper sticker. It was something like creative firms could be more efficient. It's like, "No shit."

[laughter]

David: The arguments for standardized delivery, productization, those are those. Now, next, the arguments for customized delivery on the other side of this, and you're advocating that you ought to be open to both and there probably ought to be a mix of these things in your firm.

Blair: No, I don't necessarily say there should be a mix of them. I'm going to assume that almost everybody listening is in the customized delivery model quadrant as opposed to productized, but even those who are at productized started at customized. That's not going to be true, but that's my assumption. I think you start there and you start to see the appeal of productization. It would be nice if these engagements had end dates. It would be less messy if there was a nice neat box around what it is that we're going to do for the client. It'd be nice to know where the finish line is. It would be nice to know where out of scope is, right?

These are the reasons you start to fall in love with the idea of productization, but customization, there's less pricing pressure because what you're doing is unique. If you truly are customized and you're not just going through the motions of customization, you're really thinking uniquely about your client's situation, about how you can create value, and you're constructing unique bespoke proposals for solutions, it's difficult for the client to go shop that around, find something to compare it against.

David: You know what? Isn't an RFP sort of the client's attempt to productize your customized services?

Blair: Oh, that's a great insight. I've never thought of it that way. When you put it that way, it's so logical. It'd be like, all right, all you cat herders out there, all you crazy, freaky creative people, I'm going to define for you what it is that we need, and then you're going to come in with solutions that match my very narrow definition, and we're going to forget all this childish running around, "Ooh, we can do this. Imagine we did this." This is the most sympathy I have ever had for a client in their RFP process. It makes sense from that point of view. Duh.

David: Yes, we're going to knock down your childish glee about making money from us, and all the things you want to experiment on, and no, this is what we need. I'd never thought of it that way either.

Blair: My next book, I was wrong about RFPs. You should reply to RFPs. I think I've had too much time off.

David: Yes. Arguments for customized delivery, less pricing pressure, because, and you're saying that these solutions are different, so you can't just go here and say, "Hey, what would you charge if you were going to solve this problem," right?

Blair: Right.

David: What else? What other ones on this list?

Blair: I was making the point that productized services are easier to sell, but I'm pretty confident that customized solutions are easier to sell against a productized service.

David: Yes, if the client wants that, right?

Blair: Well,-- and the reason for this is, and I've talked about this book multiple times, The End of Average, this idea that a productized service or a product, they're built to a mental construct. They're built to an average of a segment. In this book, The End of Average, the author, whose name escapes me, makes the point multiple times, multiple ways, that in almost any cohort, the number of individuals who are exactly like the average is zero.

David: Right.

Blair: If you just take that on board for a minute and recognize that your standardized delivery, your productized services are going to be good for a lot of clients and perfect for none. That's one of the reasons why it's cheaper than customized. Think of suits again. How much more are you going to pay for a fully bespoke tailored suit as opposed to a suit off the rack? You're going to pay multiples of the price because it's perfect for you. Now, if that's important to you, if you value that.

David: Right.

Blair: Therefore, customized services tend to be higher priced, higher margin, more valuable.

David: This is under the context of it's easier to sell against a productized service. I mentioned that's true if the client wants it. If the prospective client has already had a conversation with one of your competitors, and they feel like they're just getting thrown a productized service and they don't feel heard, whatever, then you come in with a customized, more value-pricing approach to that sales conversation, you will blow that other firm out of the water because in this case the client wanted something different.

Blair: One caveat, this is true only at the higher end of the market, right? You think of it.

David: Ah, yes. Yes, I'm thinking, I just pictured somebody who's a time suck at the lower end, doesn't want to pay for.

Blair: Yes. "I'm not paying $5,000 for a suit."

David: Yes.

Blair: "I can get it for $500" or whatever people pay for suits these days.

David: I haven't bought one in a long time.

Blair: At the high end of the market, it's easier to sell customized services, and clients with money who are willing to spend that money would rather have customized services.

David: Okay. The arguments for standardized pricing, there's some overlap here.

Blair: Yes. Also easier to sell and buy. From a salesperson's point of view, just like what's the price? It's part of the Four Conversations. One of the conversations is the value conversation where you endeavor to determine how much value your services might help to create and therefore what the price should be. It's the last step in the four-step framework of the value conversation. We did an episode on it years ago now. That last step of setting pricing guidance, it's really stressful for some people.

It's like, "Well, would I just pick these numbers out of the air?" Yes, you get the inputs of the value, economic value, non-economic forms of value. Then you start saying, "Would you pay this much?" "No." "How about this much?" "How about this much?" Some people would rather just not have that conversation. I've sold both. It's far easier to say the price of a private workshop is $45,000. Then people try to negotiate. You can negotiate or you can laugh at their lame attempts at negotiating, but when it's a bespoke solution, you're opening yourself up to negotiating.

David: Yes, and you have to be willing to do it. The client has to want that as well. One of the objections I hear when I'm selling a productized service is like, "Well, how customized is this to me?"

Blair: Yes.

David: My typical answer to that, and I really do mean this. This is not just some flippant thing. I really do mean this, is that I've seen most-- everything. Every once in a while, I'll see something I haven't seen before, but what's different in every situation is the way you have uniquely screwed things up. I've seen all the ways to screw things up, but I haven't seen this particular combination, so we're going to have to think really hard together about that. I'm bringing the same tools to this engagement.

I'm not going to use all the tools, and I'm not going to use them in the same order, but we've got what we need to fix this. It's going to be customized, as we think through it, but this is just easier. Like I've done this enough, this is what it costs, this is how long it takes. It'll vary, but not that much.

Blair: Yes, and if the listener is identifying with this situation, you can create a, I'll call it a product, that is called customization. If somebody says, "Well, how customized is this to me?" The answer might be, "Well, it's not very customized." Obviously, you're in the target market of the businesses that we do business with and that we're best aligned to help, so there's a lot of patterns.

We're making assumptions based on the patterns. There's a small amount of input information that we take that forms the engagement moving forward. Other than that, it's not very customized. "If you want it to be more customized than that, we can add this feature, and it costs X. Here's what customization looks like." We go in and do more analysis, change these things.

David: You're productizing.

Blair: You're productizing customization, yes.

David: I never thought of it that way. That's great. You're saying that it's not strict, there's room for both. Do you have any example of a hybrid model from our listeners, like a firm you know of that's kind of customized?

Blair: We, interestingly enough, have ended up doing a lot of work with financial planning firms. Financial planning firms tend to productize their services. They do once we're done with them, if they're not already, but it's another example, at the high end of the market, really high net-worth individuals, they don't want to buy a productized service. They want something that's bespoke to them. That's an example of a market where you really should have a customized offering. You should reserve the right to put forward a customized bespoke solution at a customized bespoke price at the high end of the market, but for most of the market, it should be standardized delivery and probably standardized pricing.

David: Yes. As you say that, this is kind of how I would wrap up my thoughts. The problem we get into in this industry is that people are customizing things but only getting low-productized prices for them.

Blair: Yes.

David: They have to do their best. They have to do work that their peers are going to love, that their employees will love, and forget about making money. They're doing it for the lower end of the market. It's okay to do that for the higher end of the market, but you can't take the worst of each side and combine them in that two-by-two little chart that we put together.

?Blair: It's a great way to think about it.

David: Yes. Thank you, Blair.

Blair: Thanks, David.

In Blair's experience, the most common reason a lead generation plan doesn’t get executed is it doesn’t recognize and leverage the strengths or motivations of the individuals executing.

"The Best Lead Generation Plan" article by Blair Enns for WinWithoutPitching.com

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

David. C. Baker: All right, Blair, I have two marketing plans. Each was sent to me by a client that I'm working with currently. One was 93 pages.

Blair Enns: Get out. Seriously?

David: That was the shorter one.

Blair: No.

David: The other one was 122 pages. I have a question for you. No instinctive sort of gut answers. I want you to think about this, okay? How much of the marketing plan do you think they were able to execute? This was a year and a half ago they wrote them.

Blair: Almost none, I would guess.

David: [chuckles] Yes. Except you can just cross the almost out.

Blair: Houston, we have a problem. If your marketing plan is longer than-- what do you think? Where's the cutoff point at which--?

David: Two or three pages.

Blair: Yes. Tell me those numbers again. One was 93 pages?

David: Yes, and the other was 120-some pages. I don't know if you've seen this or not, but I've seen that the lower you push the marketing plan down, like the staff member who's going to write it, the longer it is.

Blair: Oh, yes. [laughs]

David: That's the problem we're solving.

Blair: I'm getting flashbacks to my first agency job when I wrote a few marketing plans for the firm and clients. I remember the first one I wrote for a client. Oh my God, it was a novel. It was a horrible, horrible novel. Everybody dies, not at the end, in the beginning.

[laughter]

David: I don't think I started to think differently about marketing plans until you said one time, maybe six or seven years ago, it's like you really just need to simplify it and kill one or two things. That's the theme of what we're talking about. The best lead gen plan is the one that you will do, and the one that you will do is not long and complicated, right?

Blair: Yes, and it's also highly personal to the way you are wired. That's the part I really want to get into. Your business and my business, they're not very similar, but there are enough commonalities. I could write a marketing plan for my business. I could hand it to you and it might be entirely wrong just based on who you are and based on who I am, not so much based on who or what the businesses are.

David: Yes, I could see you writing a marketing plan for me that had me making 18 phone calls a day and just with glee waiting for me to fail.

Blair: No, my marketing plan for you is one sentence. Keep doing what you're doing. That's your marketing plan.

David: Done. Yes. When I think about what I'm doing, I think an early mistake I made in consulting clients was just assuming that they ought to do the same thing that I'm doing without realizing, wait, I'm a different person. I want to get into, there's two things that you call out at the beginning. You basically define ability and motivation as key factors in this. Let's distinguish between the two of them.

Blair: There's this age old formula in organizational behavior, performance equals motivation times ability. The interesting part of that formula is that ability is a multiplier seen. I don't know how valid this is, but I've repeated it enough, so therefore it must be valid now.

David: It's never stopped you before.

Blair: [chuckles] The pseudoscientist. Ability is a multiplier of motivation, but if we describe or define motivation and ability, ability is really the answer to the question, can you do this? Is this something that you are able to do? Motivation is the answer to the question, will you do this? Whether it's a sales plan, it's a marketing plan, whatever kind of plan it is, whatever you're planning for, you or some other person to do, you're writing this plan thinking, well, they can do this. The bigger question is, will you do this?

I think back to these plans that you mentioned in the 100 page range. What do you think the reason is that these plans didn't execute it? Maybe there are too complex, too wordy, it's just a high volume of work and not a lot of thought. At the end of the day, I think there's this desire or request via the plan, for people to do a whole bunch of things that they are able to do, but they're not going to do them.

David: You do think that motivation, that's the problem more than ability?

Blair: Yes. Ability, we're talking about marketing. How hard can it be? [laughs]

David: It's what you do for a living for your clients, right? In general, so you better be able to do it. It's the motivation.

Blair: That was a little shot to the listener. No, there are some aspects of marketing that are hard and the lead generation type of marketing we're talking about, say, getting on a stage. That's intuitive and comfortable to some people and some people are horrified by it. How hard is it? Everybody can do it, but some people really don't want to do it. As you pointed out, if I gave you a lead gen plan that said, "David, I want you to make 16 phone calls a day," you're not going to do it, even though you're perfectly capable of doing it.

David: Right. This is a side. We're taking a detour here, but what is it that motivates people to do marketing? Obviously some glaring need in their business, like they need more business, but is there something deeper there? I don't have an answer to that question. I'm just curious, it's like, what gets people off the couch to do it other than their back is against the wall? It seems like some people have a deeper motivation that's more disciplined than that, like they hate desperation, they love options. I'm just wondering how we unpack the motivation for people here.

Blair: Yes, and it might fall into what we're going to talk about next in terms of how people are motivated. The need to eat is a profound motivator, but when you're putting food on the table and you're whatever comfortable level of success is, or maybe slightly uncomfortable, yes, it's fine, but I wish there was more. When you're at that level of success, different people are going to step up and do marketing for different reasons because we're all wired differently. Unless you had an answer to that question, you were hoping I would or wouldn't hit. What do you think? Do you think there's another motivation we haven't considered?

David: I feel like there's something deeper going on here that I'd love to think more about and I haven't collected my thoughts on it. I don't know. I was just curious if you had something because here we're talking about two things that equal performance, motivation and ability. We're leaving ability behind and we're assuming that people have that ability and you want to unpack motivation a little bit more and what you're saying is that motivation needs to be understood individually in order to get a marketing plan that's actually actionable.

Blair: Yes, if I'm going to create a marketing plan for you, it would be helpful for me to know what you like to do, what you are willing to do, because there's so many different ways to skin a cat. When it comes to lead generation, there's so many things that you could do. Now those 93 and 120-something page marketing plans that you referenced, they're probably guilty of just listing everything that could possibly be done without some deep consideration of what's the most appropriate thing for this firm? Then what's the most appropriate thing or things, set of activities and tasks, for the individuals to whom these tasks will be assigned. That's where I want to go deep.

David: Right, because otherwise those long marketing plans feel to me like they're throwing things at the wall hoping something will stick, instead of concentrating on what you're talking about. What does this firm need and what motivates this particular person? How do you break these down? What are the different broad categories here?

Blair: Okay, so here's a thought experiment I'll give to the audience that I've given to, I don't know, hundreds, maybe thousands of people. Imagine three lead generation "tools" and I have tools in air quotes. These tools are on the table in front of you and I say to you, "You can only use one tool." You think of all of the leads that you need to drive to achieve your growth goals, whatever they are. You do the rough approximate math. You need a certain volume of leads, a certain percentage of those will turn into a certain amount of revenue. You think of your growth goals, you think of the leads that you'll need and you're looking at these three tools on the table in front of you and I say to you, you can only pick one tool.

This is a constraint driven exercise. You can only pick one tool, which one do you pick? I'll describe the tools in a minute but I'll just point out there's no wrong answer. You're really balancing what you think will work, with what you will do. I want to know which tool do you gravitate to, because I can make a case that you can achieve success with just any one of these tools. Here are the tools. The first one, speaking and writing. Now clearly as I described the tool, that's really a tool set. It's a massive tool set. Speaking and/or writing is tool number one.

Number two is networking, and I mean at events in person and/or online. Number three, unsolicited outreach. Email, phone calls, direct messages on social media, however you want to do it. The tools again, speaking and/or writing, number one. Number two, networking at events and/or online. Number three, unsolicited outreach. I want the listener to take a minute and think, okay, if I could only use one of those tools to drive all the leads required to achieve my growth goals, which one am I going to choose?

Now that you've chosen one, go ahead and add a second one. Now you have prioritized that list based on, my assumption is and I'm generally correct, and won't always be correct, based on your motivational makeup.

David: Right, you would choose one for yourself, right?

Blair: Yes, and you?

David: Speaking and/or writing, the same thing, yes. Then number two, my second one, my B plan would probably be number two, networking at events or online, like participating in LinkedIn for instance. Who picks number three first? Who picks unsolicited outreach?

Blair: Highly competitive people who have high achievement needs and who look at the list and think, "Okay, I understand the appeal of speaking and writing and networking, but I'm in a hurry. I want to achieve my goals quickly. I'm going to do the less desirable but more immediate tasks. More immediately fulfilling or rewarding tasks of unsolicited outreach."

David: Wow. I admire those people.

Blair: I do too.

David: I am not one of them.

Blair: I would place that second, even though you and I are wired to the same extent because we've tested this when it comes to network, when it comes to the need for affinity or affiliation. It's low in both of us. I just abhor the idea of networking. I like going to events. I like meeting people, but going to an event thinking I'm going to actively network. I would rather cold email people than I would build an approach around networking.

David: Yes.

Blair: Now, I'm not right and it's not that unsolicited outreach is better. It's better in some ways and it's worse in other ways and we could talk about that in a few minutes Now this is just a personal preference. What are the things that I'm going to do? Yes, I'm going to speak and write. I see myself as a writer and other reasons we'll get into here, I know I'm going to do that work The challenge is if you chose that tool, the first tool of speaking and/or writing, these are high-status, low-immediacy activities.

I did a talk this morning to a group in the UK and I made this point and I said, "You want to be seen as the expert in your space. You want to drive inbound inquiries? Maybe you decide to write the definitive book on your area of expertise. Maybe you'll get that book finished in two years, maybe. I've learned it takes me four years to write a book. Four painful years, and then another year to get that book out into the marketplace, and then maybe three and a half years since the day that you started, maybe it's driving leads. Now speaking works quicker than that, but these are high-status, low-immediacy activities. We'll come back to that.

David: Yes. When you look across an audience, let's just say that most of the people listening to us are running firms, so they're entrepreneurs. Would you imagine that people would choose these in roughly equal groups or not?

Blair: That's a good question. I think it depends on that sample, depends on the group. If we just took all entrepreneurs, all creative entrepreneurs, I can't see any reason why they wouldn't be roughly equal.

David: Yes, okay. This is the test, speaking and/or writing. Second would be networking at events and/or online, and then third would be unsolicited outreach, email, phone calls and so on, direct messages. How do you match these to motivation, so pay this off? How does this relate to how people are built and so on?

Blair: I'm a big fan of what's known as McClellan's needs theory of motivation or the three needs theory of motivation. I'm sure I've talked about it a few times on other episodes. What this model says or what this theory says, is people are primarily motivated by three different things. One is the need for power, one is the need for affinity, and one is the need for achievement. McClellan lists them in reverse order, I think. Power is the need for authority and respect, affinity is the need to connect with others and to like and be liked by others, and achievement is as it sounds, the need for success, accomplishing one's goals.

I've devised this three lead generation tool thought experiment to line up with the McClellan's three needs of motivation. If you chose speaking and writing, you probably, like me, have a high need for power, authority and respect. The podium and the pan, you gravitate, maybe not both. Just because you have high power needs doesn't mean you're comfortable speaking or writing. There's things going on there beyond just your motivational makeup. You might have a strong preference for one over the other. I really enjoy both. I think you do too. Is that right?

David: Yes, it is.

Blair: If you have a high need for affinity, then it's really important to you to see the whites of the eyes of the people you're going to do business with. You want to like them. You want to connect them. Business is very personal to you, therefore you are a natural networker. If you have a high need for achievement, you look at the most immediate fruit bearing tasks of direct outreach and you say, well, that's the obvious one and I'm not going to shirk from that, so I'm going to go do the thing that is most immediately successful. Generally speaking, I'm pretty comfortable with the generalization that I can give you this test and I can get a rough sense of your motivational makeup based on which tool that you've chosen

David: If the firm has written a long marketing plan that touches on all of these things, would it be fair to assume that the things that are actually going to happen. They have the ability to do all these things, but the motivation is going to pull them towards doing the thing that drives them as a person. That would mean that maybe two-thirds of the marketing plan isn't done because they're not drawn to that.

Blair: Yes, exactly. Now, these three lead generation tools of the podium and the pen, networking and direct outreach, they're not the only three tools available to you, but they're the three tools that tell me most about your motivational makeup. I haven't talked about paid media, haven't talked about sponsorship, all kinds of other things. Most of the things that I've left out are the things that don't depend so much on a person's motivation, as they do on their ability to simply manage a project.

David: Right.

Blair: You come up with your first draft of your lead generation plan, and if it's just you, or you're the only one executing the plan, then you look at this draft that you've come up with and ask yourself, what's the most interesting to you? What's the one that you want to do? If you say, "I love networking. I'm so good at being in a room. When I'm in a room at a conference with somebody, I end up taking a bunch of people out for dinner. Some of those people end up buying from us. I stay in touch with them, like, that's my thing." Then I would say, well, why don't you double down on that? The tool that you place third on your list, maybe it was direct outreach. Why don't you just take that off the table for yourself?

You can keep it into the plan, but the tool that falls under whatever was number three for you, who are we kidding here? You're not going to do them. Can we just admit that you're not going to do them?

David: Yes.

Blair: A, take them out of the plan, or B, assign them to somebody who will do them.

David: Right.

Blair: I make the point in this article that it feels like I'm giving you permission to just skip the vegetables, skip the broccoli and go right to the peach cobbler. I also make the point that your broccoli is somebody else's peach cobbler. Just because you're not going to do it, doesn't mean somebody else isn't going to do it. Is there somebody else in the team that can do this? If there's not somebody else on the team, just farm it out. Pay somebody from the outside to do it.

David: Do you feel like the principal, or at least one of the principals in a two or three partner firm, needs to be doing one of these anyway?

Blair: I think I see a pattern and you may have studied it more scientifically than I have. In any firm that's got multiple partners, usually one is just kick ass at business development. Then I would further wager that they're not great at all the different aspects of business development. They're good at the podium and the pen or networking. They've got the golf membership and they have these deep relationships and their friends end up hiring them, or they're a force of nature when it comes to selling and they're pretty good at outreach.

David: I want to go back to a point that you alluded to just a minute ago. These are the three sort of big tentpoles that sort of hold things up. Underneath all this, there can be other things that can be happening that will deliver opportunity to you in a way. I guess you would make those decisions based on whether you have more time or more money and also, what's the nature of your focus? That would have something to do with whether it's an ad spend on LinkedIn or whatever it is. That stuff can happen underneath. Is there much difference in those things that happen underneath or is those pretty much the same regardless of the personality of the principal?

Blair: Speaking and writing, networking and outreach, think of those as the, you call them tentpoles and they might be tentpoles. To me, they're the ones that are most motivationally dependent and everything else that I can think of, I think, oh yes, that's just project management. Project management isn't one of my strengths. If you give me some detailed elaborate plan that requires a lot of project management, it's not likely to get executed, but there are people on your team who have great project management skills. I think that's a pretty easy one. I do want to point out too, that you recently published a post that talks a little bit about this as well.

It's called marketing is essentially about fame. In that, one of the many great points you make is-- I think you just hit on this. I just wanted to go deeper into it a little bit. There is something about what it is that you do that should imply some obvious lead generation tactics and should negate some as well. If your audience is Fortune 500 CEOs, these are difficult people to get to. Posting on Facebook or TikTok probably is not the domain for you. You want to write for Harvard Business Review or speak at certain Davos or whatever, some highfalutin conferences. There is that element that people have to consider. I just haven't gone there in this post.

David: Yes. If your focus is fashion or motion picture stuff, they're probably not going to read a blog post of 2,600 words or something like that. Is there something about where a firm is in its chronological history, where somebody might be drawn to writing, that first one, writing and speaking, but maybe there aren't the opportunities and they do something else and then they land on that eventually? Or can they pick something that's pretty much going to be there regardless of where they are in their firm's history?

Blair: You and I have talked about this in numerous conversations. Some of them may have been recorded as podcasts, but this idea of your lead generation or sometimes we call it marketing plan, but it can encompass things beyond marketing. In the early days of the business, it really is like a flywheel. It's like a lead generation flywheel. The amount of effort that it takes to move that flywheel initially is substantial. You really lean your shoulder into it. You do a lot of hard work. The hard work can be up and down what I think of as the ladder of lead generation.

You start the high-status, low-immediacy activities. Let's say you chose speaking and writing as your number one tool, as you and I have. You start these activities early. When I launched my business, the first thing I did is I just sat down and wrote. I ended up writing a book and then I ended up writing blog posts. I'm a writer. I think through my fingers. The first thing that I'm going to do is write. The second thing I did is look for speaking engagements where I could get on stage and speak to those things that I've written about.

I worked on that immediately even before I launched the business. The day I launched my business, that very day, I remember it like it was yesterday. I had a massive email list. This was 2002. People actually replied to your emails back then. Day one was just a series of outbound unsolicited outreach. I built the early days of the business based on unsolicited outreach and I built the long-term basis of the business based on speaking and writing.

David: Right. You talk about that in The Ladder of Lead Generation, where you climb as high as you can at the beginning like you did with cold outreach. Some other stuff wasn't available to you at the time. Then you swap that out as you climb that ladder later.

Blair: Yes, I talk about this in more detail in my new book, The Four Conversations: A New Model for Selling Expertise. We recently did an episode on that. It's out now, everywhere fine books are bought, meaning Amazon. I unpack this idea of The Ladder of Lead Generation, where you put all the lead generation-- I think we've done an episode on this too. You take all your lead generation activities and you can put them basically on three rungs. The highest rung is a high status activity. The low rung is the lowest status activities. The trade-off with high status tends to be low immediacy, with low status tends to be high immediacy.

You really want a balanced lead generation plan, kind of as I've described how I launched my business in 2002. You have to do the immediate stuff because you need leads today, right? Basically I'm making the mistake of assuming everybody's wired like me and that you should do these things. If you don't do them, maybe there's somebody else in the organization who can do them. It's best to have a balanced lead generation plan where you're doing things across the ladder of lead generation. You're generating high status activities, leads in the future, but you're getting leads now.

David: What I'm taking away from this episode is I'm in a firm, we're writing the marketing plan for ourselves, and I see what I've assigned myself to do and I'm just dreading it. That is not going to happen. The typical response is like, "Well, get over it, be disciplined, do what you should, do what the firm needs of you." That's not necessarily the right approach. Land on something that you're actually excited about.

Blair: Yes. Play to your strengths. Strategic coach founder, Dan Sullivan, has this great line. He's got many great lines but this, "If you keep working on improving your weaknesses, you're going to end up with some strong weaknesses." Which I think is as funny as he means it to be. Play to your strengths. Why try to get better at doing something you don't even want to do? If you're honest with yourself, you know you're not going to do it. Focus on the things that you will do. If you double down on that, and if you have more immediate needs or whatever's missing, just accept that they need to be done, but you're not the person to do them.

David: There's a sigh of relief everywhere, as Blair says, cobbler for everyone.

Blair: Remember, your broccoli is somebody else's cobbler.

David: I don't know if that's true, but we'll just end on that. Thank you, Blair.

Blair: Thanks, David.

David describes the differences in what kind of people principals should hire during the early stage of their creative firm’s development when it’s all about “what we can afford,” the middle stage when it’s about “what we need,” and then the later days of an agency when it’s about “what we can learn.”

“How Your Hiring Strategies Change” by David C. Baker for punctuation.com

“The Problem of Standards” by David Maister

Blair Enns: "David, you really have my attention with this week's episode." Pause for retort. [laughs]

David C. Baker: Unlike previous episodes.

Blair: [laughs]

David: It only took 200 episodes to get your attention. That's not bad.

Blair: How Your Hiring Strategies Change. I really like this post that you wrote. People can find it on punctuation.com, your website. We'll post the link in the show notes. I have questions. I have so many questions, but let's start at the top. What was the impetus for this article?

David: I think as an outsider, I can see how firms take the employee thing differently, how they treat it very differently at different stages. It's more obvious to me as an outsider. Then I was sitting one day thinking, "Oh, how did you do this, David, when you ran a firm?" That was a mistake because I did not find a lot of encouraging evidence from my past year. I don't think I ever got past the first stage. I think that was one of the problems with the firm.

It was just a reflective moment noticing how we hire people at different phases. Sometimes things just hit you in the forehead and you think, "Wow, do they not realize how crazy that is? Do they not realize that having 16 people answering to them is not a good idea? That's a sign of a firm that's using the people that they hired in an earlier stage and they can't quite get out of their own way, and they're having to control everything that happens."

Anyway, it just hit me that we have different stages. We're going to talk about them in three stages, but they're not quite that obvious when you're in them. I think it's a lot more incremental when you're actually making these decisions. You don't all of a sudden wake up and say, "Oh, I need to hire differently." It's just more that every time you do it, you start to learn a little bit differently.

I'll tell you the other thing that hit me too, to answer your question about what prompted this, I used to say that what would make you think differently about your firm was when you just got really tired of clients. I'm not sure that's the case as much anymore. I don't have any science behind this, but I think it's more when you get tired of employees, that's your fault. That's 100% your fault. You're in charge of that. It's worth thinking about, I guess. That's to answer your question.

Blair: You've laid out three different stages of hiring, early days, middle days, late days, and we'll get into each of them. I looked at it, I thought, "Oh, yes, this is all very logical. It's intuitive. It makes a lot of sense to me," but it didn't always make a lot of sense to me. After 20-plus years in business, when I was reading through the post, I was actually recalling specific conversations that you and I had, and you effectively giving me advice about where I was and the people I was hiring, or how we had evolved to another level.

As you go from one stage to another stage, your hiring strategy should probably change. Is this a logical progression? Should we all start with the early days approach and progress in this? Is this a prescriptive approach or is this just an observation of the way it happens?

David: Yes. I'd say if we can skip the early days, we ought to skip the early days. [chuckles] I don't think there's any advantage in early days. The only reason you hire in the early days the way you do is because you're forced to.

Blair: You're cash-constrained. Let's unpack that first stage of early days. It's really about affordability, right?

David: Yes.

Blair: The people you hire have what characteristics?

David: They're cheap.

[laughter]

Blair: Okay, that's early days. [laughs]

David: Next, as soon as you can, go to the middle days. Now, they're cheap, right? Not a lot of great things come from this, but a whole lot of great memories come from this. These are people that are cheap, they're inexperienced. They're blank slates because they're just hungry to basically learn everything they can from you. To whatever extent you have great habits or great knowledge or great approaches to solving problems, then by God, they're going to learn them, but they're going to learn all your bad habits too, right?

Blair: Yes.

David: These are people that are eager, fresh, dedicated, glad for the opportunity. They don't think about how many hours they're working. There's a camaraderie here because these are people that are thrown into war completely unprepared generally. They're generalists, they're young, they're not making much money. The word I would write on a banner across this time in your life as a business is family. That's how you think of them. It's not a good plan, but that's how you think about them. [laughs]

Blair: We're going to come back to this idea of your team as a family because I encounter this a lot. I have, and even to this day, continue to think of my team as a family. I think there are times when I have to look in the mirror-- These days it's mostly family.

[laughter]

David: That's why it's family.

Blair: Because it's family.

David: All the rest of the non-family members decided, "Oh, let's just let the family take over here."

Blair: Yes. Maybe I'll quit using my own example to illustrate this. I think everybody can identify with this. The early days, it's like, "Okay, we need somebody. We can't afford somebody really expensive." Is there also this idea of, are we threatened by people who are more experienced and more expensive than us?

David: I think that's probably true in some cases. I hadn't really thought about that. You could test that by saying, "Okay, if I had the money, would I hire somebody?" I don't know. Most folks probably in a sane moment would say, "Oh, would I love to have a really great account person, and I don't have to watch everything they do. They can handle a client who is a little bit annoyed with us at the moment. They can help grow accounts or something like that." I think this is a little bit related to our industry because if you're building a law firm, you go to law school, and then you might work at another firm to learn how to deal with clients and so on.

In our field, it's like you have a particular skill, and now all the rest of it has to come, how to run a business, how to deal with clients, how to manage work. What's all this insurance stuff? It just becomes a little bit overwhelming. On top of that, you have all of these people who are usually hired because of their work ethic and because they're a great fit for the culture, but the rest of it is lacking. They don't necessarily have those skills because if they had those skills, they wouldn't work for what you're willing to pay them. They'd go somewhere else.

Blair: Yes. They're also at that point in their career, so it's win-win for everybody. I know you say we should skip over the early days, but I still think there are a lot of good things that happen in those early days, as long as you don't get stuck there too long. As you were saying, these new blank slate employees or team members, they pick up your good habits and your bad habits.

In the early days of your business, if you're a young entrepreneur, you're imprinting all of your dysfunction onto these people as well, and here I am speaking of myself, so it's good and bad. At some point, and maybe you want to speak to when that point is, when do the early days turn into the middle days, and if early days are characterized by this idea of, "Here's what we can pay," what are the middle days characterized by?

David: What prompts it is you just get tired of this, and you start to flirt with the idea that, oh, maybe I could spend more money-- Like you're talking with a peer. They're talking about the team members that they have and so on, and you contrast that with yours, and you think, "Oh, my. I'd love to be able to take some time off and not worry about the firm." You think, "Now, what are the weak spots at the firm? Oh, now let's think about the strong spots. Oh, I don't see many. What if I hired one person that, in fact, I have a specific person in mind, who could probably take the place of two of my people, and I'd be further ahead." You start playing with this idea, and you just do it.

If you're starting a firm from scratch, and you're in your 30s maybe, something like that, late 20s or 30s, you can't really skip the early days. If you have worked at a bunch of other firms before, you're probably going to hire people that you know who have been at the same level you have been, and so you're jumping right into the middle days. These are the people-- there are significant upgrades.

They have experience of at least two or three years that they're bringing. Still some good and bad habits, but they have experience. They don't have all the same basic questions that the other people do. They expect more formal things, and so they prompt you when it's like, "Oh, benefits? Oh, what's an employee review? We ought to be doing those?"

Blair: Policies?

David: Yes. Titles become more important at this stage. There's always a carryover from the early days to the middle days, and that's usually one person. I call it the power position. This is one of the first people you ever hired, and they're still with you in these middle days. What makes them unique is that they have done every position at the firm, and they are sure to tell every new employee that they used to do that position.

That's not the bad part. Where it starts to go a little bit bad is when they start to lose their footing because they don't have the same deep expertise that the other new employees do, and so they're sitting here thinking, "Where do I fit in all of this? Oh, what I have that the other people don't have. I don't have that deep experience, but I do have a very close relationship with the principal, and maybe I can leverage that." Then they start to say, "Listen, if you need to know where the bodies are buried, I can help you here. If you need to know how to approach Tim or Jan, let me know." They start to gather some power for themselves.

This is the carryover from the early days and you have to get rid of them at some point. It's that power position. That's usually the only carryover. The rest of the people are people with two to three years' experience. They're not high price people yet, but they cost a little bit more. They have expectations. They have more boundaries around their work life and they expect you to, I guess, respect those a little bit more and so on. This middle stage is the weird stage. It's a lot easier to describe the early and the late one. This middle one is sort of like a mess.

Blair: Early stage is family, late stage is more like a team. This is the mix of family and team.

David: Yes. You are closer to some people than others. You know more about their lives. You go to their wedding. They may pick up the dry cleaning for you or catch a kid at school because your meeting is late. The rest of the people, you're not that close with them. You still haven't figured out how to really be a boss. It's still a lot of fun. You're starting to see, "Oh, we broke a million or two here. This is pretty cool."

You're starting to find your place in the world. You maybe are starting to specialize and you're realizing that this needs to carry over to how you hire. Your clients are starting to get attached to individual people at your firm, not in a bad way, in a good way. There's just a messiness. It's like the awkward middle-aged stuff that happens to all of us as we're growing up, I think.

Blair: Is it fair to say, whether we like it or not, most of us are going to start in the early stage where we're hiring based on what we can afford?

David: Right.

Blair: We really want to get to the later days where it's-- you call it what we can learn. We'll get to that in a minute, where it's more of a serious team. We would be well advised to get through the middle days period as quickly as we can. Is that correct?

David: Yes, that's a good point. Yes, exactly right. This is where you're not just hiring because I've only got this kind of money, I need a body to fill the seat that can take direction from me. This is, "No, I need people who have a little bit more experience. They still can't be turned loose, but it's not quite what I envision. It's not what I see when I talk to my peers who are running firms full of really tight specialist people who really know what they're doing, but it's a necessary stage to get to." I don't think you can go from the early days straight to the later days. You have to learn how to hire differently, how to manage differently, and you earn this by just sticking in this middle-day stage.

Blair: Yes. It's really the transition from generalist roles to specialist roles. As you point out, that power position, that early employee who is so valuable in part because they could do everything, they knew where all the bodies were buried, they become less viable in the new model moving forward. They hold on. It creates some tension. I've seen this a lot. I just imagine a lot of firm owners listening to this are thinking about that one person in this moment.

David: Yes, probably so. Right. Glad that they're gone or also thinking, "Oh, I probably need to make a change." We have to remember too that our clients are different in these different stages too. In the beginning, you have more unsophisticated clients. Some maybe you brought with you when you left the company and they said, "Yes, we'd like to be one of your first clients." In this middle stage, the clients have different expectations of you as well. You have to meet those in the moment and can't just make stuff up.

Your clients, it's not just you as the principal wanting different things around your life at the firm, it's your clients are demanding things too. There's a really obvious difference between the employee who just has the right instincts in the moment and the one who doesn't. You just slap yourself and say, "Oh, gosh, I can't keep solving these things. This is better than the early days, but it's not quite where I want to be."

Blair: Yes. You're the safety net and you'd really rather not be the full-time safety net. The latter days, let's get to where the place we want to go eventually. You characterize it as hiring based on what we can learn. What do you mean by that?

David: In the early days, you know more than anybody else. In the middle days, you still know more than anybody else, but they aren't blank slates. They're bringing some experience. They've had two or three years of experience somewhere. You just twist that a little bit, redirect it a little bit, but you're not having to start from scratch. In this third phase, the biggest difference is that you're trying to hire people who can teach you something. These are people who, on the first day, they hit the ground running, and they are bringing processes or experience or knowing how to use tools.

You're not giving them direction anymore, you're simply creating the culture and the environment where they can thrive. You're hiring people who are not blank slate to the very beginning, not people who have two or three years. These are people who know more about what they're being hired to do than anybody else at the firm. This is where your firm shifts into overdrive and begins to really thrive. Some of your clients will appreciate it. You're having to charge a lot more for your stuff too. Other times, you'll look across your client base and realize, "Oh, wow, we are actually quite a bit better than our client base right now."

Sometimes your client's needs for what you do grow faster than your capabilities, but that's not usually the case. Usually, your capabilities grow faster than what your clients are asking of you. It becomes pretty apparent in this stage where a client in the past would have said, "Hey, this is what we need from you," and these new people that you've hired say-- they say it gently, but, "No, that's really not what you need here. This is what we need to do." The client's looking there with their mouth open like, "Oh, wow, we've never gotten this kind of advice from this firm before."

It's a whole new day, and all of a sudden you feel you're taking this firm very, very seriously, you realize, "Oh, this could be a career here. The sky is the limit." Your focus now is not on clients like it used to be. Your focus now is on keeping an eye out for other amazing people that you'll need to hire, and maybe even jumping on an opportunity for somebody that comes across your path that you don't even need right now, but you hate to miss. You start to realize that if your life is going to get better, it's not so much about clients, it's about your team, and this team is amazing. That's that third phase.

Blair: It reminds me of the David Ogilvie line, "If we hire people who are bigger than us, we will become a company of giants." You also make the point that now you're hiring for competence and it's not really about the money. It reminds me of a line-- There's somebody you and I know. A highly paid, highly competent person in the field we serve was looking for a new home. I put some feelers out for this person. Their salary demands were very high. I won't say the number here, but really high.

When I shared the salary demands with the potential employer of this person, his response was, "In my experience, somebody at that price range is free." What he meant was if somebody's insisting that they're worth that much money, they're almost certainly going to generate multiples of it. He was not afraid of the number. That's to me a sign of somebody who is at this level of hiring. They're seeking to hire people bigger than themselves so that the company will become a company of giants.

David: There's one mistake that sometimes firms make here in that they decide to go to this third stage, this latter stage, and they hire an expensive person. That first person is usually sacrificial. They don't usually last.

Blair: Like the first pancake, they get thrown away, yes.

David: [laughs] Right, because you don't know how to hire that person first, but often you're hiring somebody that comes from a less of an entrepreneurial environment, and you stick them in your environment. They don't have all these people to delegate to like they did where they came from. They also don't operate as quickly as you do. Don't hire somebody you love because they're going to be sacrificial. Save the second hire for the person you love.

Once you figure out how to hire really experienced people and pay attention to the signals around culture, then it's like, "Oh," then there's a light shining on all the people who are not very good at your firm. You're not discussed, but your impatience with some of those people is accelerated because of the new people that you have at your firm. It's not like these phases are so obvious to you. It's not like they happen overnight, but it's easier to step back and say, "Oh, I can see the broad patterns here about how I hire and what I did well, what I didn't do well."

Blair: I think the same patterns that I do among-- Most of our listeners here are owners of independent creative businesses, ad agencies, design firms, hybrids, et cetera. I see in the independent firm, I'll put it into this category of the third hire, the first third hire, this is the point where we're going to go hire the big agency person from the big network agency in New York. It almost never works out because they think that big agency person is going to bring some big agency magic. What they bring is big agency systems and bureaucracy and demands for other things. That's a generalization. I'm painting a lot of people with the same brush, but I've just seen that pattern over and over again. You see it too?

David: Absolutely, I do, yes. I think there's probably ways to avoid it. In fact, if you could avoid even having these big three jumps, that would be great, but it's just a warning that I've seen it over and over and over again, that first one. The other thing that happens there, I think, too, this is a psychological thing, is that you're paying somebody more than you ever have, and your expectations are a little bit whacked.

You have less patience for anything that doesn't go perfectly well, and that's not really fair to this person, but because you're paying them so much money and they have all this experience, you just think that, "Oh, it's going to be magic. There are going to be very few mistakes. They're going to bring in all kinds of work." When that doesn't happen, you're realizing that your expectations don't match reality, but part of the problem is not reality, part of the problem is your expectations too.

Blair: I have some more questions, but let's just sum up what we've talked about so far. The subject is how your hiring strategies change. You delineate these three stages of early days where you hire based on what we can pay, middle days we hire based on what we need, and the latter days we hire what we can learn. You've also talked about going this transition from it's a family at first to eventually it evolves into a team. This reminds me of what I have for 10 or 15 years now said is I think the best piece of thought leadership I've ever read. It's David Meister's post from davidmeister.com, you can find it. I think we sometimes post a link to it in the show notes.

It's from September 2001, it's called The Problem of Standards. There's a lot of really good things in that post, but one of the things that I take away from it is this idea-- He doesn't use the term macro culture, so they're different cultures. There's an infinite number of different cultures of different businesses out there. Based on that post of Meister's, I see only two macro cultures. There's a macro culture of family, and there's a macro culture of Olympic team, and it's one or the other.

As Meister points out in this post, there's no right macro culture, but you can't mix. You can't have people who just want to belong to a family be on the Olympic team because the Olympians are going for the gold, they're trying to be the best they possibly can be. If there are not high standards that are enforced, then those people leave. When I look at your three stages, I see this transition, or what I think should be this transition, I think you probably agree, you can speak to it, from family to team.

I understand why it's a family in the early days. It's like you're living this. This is just an extension of your family. This is your baby, this business as you birth it. The first people you invite in, they are family members. At some point, for a lot of different reasons, you do want to get to this place of the team. You want to be surrounded by people who are going for Olympic gold, do you not?

David: Yes, you really do. Yes. I remember after writing this and saying something about it on LinkedIn, I remember thinking, "Oh, what would be good advice for an employee at these different stages." I thought, "Oh, this is such a glaring omission from this article, because what's the right role for an employee to play at these different stages?" If you don't mind, I want to touch on that just a second.

Blair: Yes. I want to know if you're the person in the power position, I'm sure you'll get to it, what do you do? Go on.

David: Yes. In the power position, your best bet is to hang on to something that's very incriminating of the principle.

[laughter]

David: If you're working in this first place, and you're younger, you're not making a lot of money, you should try to figure out where you want your career to go over time. You're a generalist, and you've talked about how it's really a phase you shouldn't try to skip. That's where you learn your strengths and weaknesses, and you learn enough about other areas where you become more valuable in the area where you will eventually focus. This is where you ought to experiment and figure out what you're good at. In fact, nobody goes to school for account management or project management.

They all go to school for something else, and in this early phase, they realize, "Oh, I'm not very good at those other things, or at least I'm not as good as my peers are, but I can see where I'm shining in some other role here." That's the first stage. You figure out what you're good at. In the second phase, you ought to figure out how to manage people because you're not going to go far in your career unless you manage people. It shouldn't be this way. I think it's a big mistake in how we run businesses, but it's just a fact of life. If you don't learn how to manage people in a way that they appreciate your management and they learn from it, then you're not going to go very far.

Learn how to manage people, take that experience. Any opportunity you're given to manage people, do it well, and think not just about your job, but think about how to manage people. In that third phase, you need to begin to think like an owner. If you want to be really valuable in an institution at this highest level, you think like an owner. The owner knows you think like an owner, and they keep giving you more and more responsibility, and eventually, you might just buy the firm from them. Those are the three ways I would react to this if I were an employee.

Blair: That's really good advice across the three rungs. I have nothing more to add to that. This has been a really interesting topic. Once again, you've given me some things to think about, as I'm sure you have to the listener as well. Thanks, David.

David: Thanks, Blair.

Blair borrows a concept from finance and fitness to help creative agencies find the balance between low risk and high risk pricing strategies.

David C. Baker: Blair, you've titled this The Barbell of Pricing Risk, and just for the audience, a few notes for the audience, it's a little bit different. This is sort of a provisional notion you have. You're not super sure about it, but what we're going to do is just have a conversation, almost as if you just called me up out of the blue, and the tape isn't running, and we're just testing this idea out, and you want somebody to bounce it off of, and so on. We're just going to have that conversation today. This isn't all neatly buttoned up. It's just a conversation about a concept that you find interesting, right? You want to explain the concept first?

Blair Enns: Yes. I really like this format too, because I expect to be smarter at the end of this, and I shared that with you earlier, and you said-- what did you say to me in response to that?

David C. Baker: I don't know what I said. Probably something smart-ass, yes.

Blair Enns: I said, I'm going to be smarter at the end of this conversation. You said, I can't do miracles in 25 minutes.

David C. Baker: I'm proud of myself for coming up with that line though, that's true.

Blair Enns: You didn't remember it. It was only 20 hours ago. The idea is, I'm hesitant to say this, because by the time this airs, we're recording a couple of months in advance. I don't know what the state of this project will be, but I've been writing daily. I'm taking a cue from our mutual friend, Jonathan Stark, who's been writing daily for years. He got the idea from our very good friend, Philip Morgan. He should get some credit. I've been writing daily to see if I can maintain the cadence, and I'm pleasantly surprised.

One of the trade-offs that's necessary and wonderful about writing daily is you have to write shorter. I'm writing 200 and 250 words. I pulled out this thing I wrote a while ago. It's in the library of a whole bunch of stuff I've written. I may publish it one day. I may move to a daily blog post in addition to the one every two weeks or not. I shared this thing with you I wrote a while ago, and it's basically me trying to reconcile two different models from two different brilliant human beings. One is Nassim Taleb's idea, the Barbell Risk Strategy.

I think he's probably the smartest, most interesting person to listen to or read on the subject of probability and risk. I don't follow him on Twitter anymore. I'm not really on Twitter much anymore because I don't like the way he treats people. If you put that aside, he is a genius on this subject. He says about risk broadly, and then we'll get to specific domains, you should take more risk in your life, but it should be balanced. His original domain is finance. In the world of finance. He says your investment portfolio should be, I think he says, 85% to 90% safe, solid, low-risk, low-return investments. The remaining 10% to 15% should be high-risk investments, and you ignore everything in the middle.

That's what he means by Barbell. You've got low risk out on one end and high risk out on the other, and you ignore the middle. Then he's extrapolated that to other domains in life. Let's stick with investing. The other brilliant person I've also learned a lot from is Ron Baker, his numerous books on pricing and his great podcast that he does with Ed Kless called The Soul of Enterprise. Baker has this model that I cite often, and that is that we should view our client base as we do our investment portfolio. It's essentially the same thing. I think I've talked about this before, but like any investment advisor, before they sold you some financial instruments, they would do some sort of risk analysis.

Let's say you come out with a moderate risk tolerance. They're free to sell you high risk, medium risk, and low risk investments as long as it balances out to meet your risk profile so that you're able to sleep at night. Just because you have a moderate risk level doesn't mean there isn't room for some high risk investments in your portfolio. Where they differ here is Ron is fairly insistent that you should never price your time. When we look at the various things that you can price, you can basically price the inputs of time and material, the outputs of the deliverable, and then you can price the value, getting higher risk here as we go, or the outcomes.

Then there's a version of value-based pricing known as performance pay where you're guaranteeing value. This is really high risk. Ron's a big fan of value-based pricing, as am I. I believe there's a time to sell time. He's fairly insistent. I'll check with him on this to make sure I'm not putting words in his mouth, but we've had conversations on this point. He's fairly insistent that at no point you should sell time. What I'm trying to do in this 250-word post that I sent you and what I wanted to talk through with you is reconciling these two different things.

I'm really enamored with this Barbell Risk Strategy of Talebs, and I've thought about it across multiple domains, and I think it's really wise, and I think it's wise to adopt that. When we look at our clients, the message would be sell time. If we applied Taleb's model to the idea of seeing your clients as an investment portfolio, the majority of your investments, 85% to 90%, you would be billing time, and then a very small number, you would be doing performance pay.

I'll just say one more thing before I turn it back to you about Taleb's Barbell Strategy, and that is, he says, you never take existential risk. He's adamant about this. It might even be the first rule. You never bet the firm. Rule number one is survive. You never take a risk that is so high that if it fails, it's going to be existential to your life or the existence of the firm in this case. You've seen my notes. I've just unpacked the idea. What do you think?

David C. Baker: You and I haven't talked about this at all, so there's some confusion in my mind, and then a couple of pushbacks, but the confusion is maybe the way he names this, the Barbell thing.

Blair Enns: It's a pretty lopsided Barbell.

David C. Baker: Yes, it's 90 to 10 or 95 to 5. My first thought was I struggled to think, okay, what's in the middle? You can sell time, which is at one end, or you could price by value where you're guaranteeing some outcome, but what's in the middle? When I think about applying this concept to our own financial situation, and this would probably be duplicated with most of the people listening, it's like you own a home. Very likely that you're going to make money on that home over time, not as much as you think when you wrap all the costs in taxes, utilities, all that stuff, but that's your really safe investment.

If you're in the stock market, you might take more risks there. I think the biggest investment mistake people make is they don't realize that their home is a part of their portfolio, and it's on the very safe end of this Barbell, and the more risky thing might be options. Then the middle would be just buying an index fund. I didn't understand what the middle was here on this. I understand selling time, I understand selling value and guaranteeing the outcome, but I don't understand what the middle is.

Blair Enns: I think the middle would be if we've got these four rungs, time, the deliverable, pricing based on value but not taking any risk, and then pricing based on outcomes, performance pay, will I get paid based on the actual results. The middle two would be deliverables and then value-based pricing without any risk, where it's a set fee based on value, rather than tying the fee to the actual outcomes rather than the desired outcomes. There's a bit of a distinction there. When you're value is pricing, it just means you're pricing based on value, but you can be pricing based on the expected value you uncover in a value conversation that the client wants to hit certain metrics, achieve a state, hit certain metrics, and let's say create $5 million in net new profit.

David C. Baker: Even productizing could be in the middle too, where it's uncoupled from time a little bit?

Blair Enns: Yes. Productizing, for the sake of this conversation, I would put it at pricing the deliverable. He's adamant you stay away from the middle. To me, if you apply this model, just because the absolute safest is time, I don't know, it doesn't mean that you couldn't move in a little bit from that absolute end. I suspect Ron would say, no, on the low end, the safe end, you're pricing the deliverable. It's not completely safe because when you price the deliverable, you're costing it, you're making an analysis of what it's likely to cost, and you have this range. It's going to take us between X and Y time, therefore it's X and Y price.

You're taking some risk and the risk is, well, how long is it going to take you to do it? If you could do it quicker, you'd make more money. If you do it slower, you'd make less money. That's where you take a little bit of risk. I don't even know if it's considered a moderate amount of risk. It'd probably be a smaller amount of risk in exchange for price certainty, that's what the client gets in exchange. You could make the argument, like if we switch this to an exercise domain, maybe we'll do that in a couple of minutes because I think there's more to say here.

The exercise equivalent is actually something just in from the lowest risk. In the finance world, lowest risk is, and I'm going to push back on, this isn't a finance podcast, but there's a famous book in Canada written 30 years ago called The Wealthy Barber by David Chilton. I write it as a young adult. A lot of people in this country have read this book. I don't know how far it's traveled, but one of the first points he makes is your home is not an investment. It's the place that you live in.

Yes, it's an asset that accrues, but it's not like you're going to sell that at the end of your life and cash out and leverage it. He said, the reality is my parents did this. They had a big home. They sold it, not for the financial reasons, but to move to a smaller space. They downsized to a smaller space, much smaller, same price.

David C. Baker: Oh, I know. It's a wealth building tool. It does build wealth, but you just invest that wealth in the next home. You don't live on the difference in wealth that you're generating with the home. It's like at the end of your life, you have more money tied up in home, but it's still tied up in home. This is one of the problems for me when I hear arguments like this from other people. I'm not saying that applies here necessarily. It's the idea of, okay, we've mastered getting paid for our time. Now we're in a position where we can risk maybe the 5% or 10% or 15% over here. Let's experiment with some pricing things. In almost every case, they have not mastered that. They are not getting paid for their time.

Blair Enns: They haven't mastered the first part. Is that what you mean?

David C. Baker: Yes, they haven't mastered the first part. Right. Don't talk to me about value pricing until you're at least getting paid for all your time. Now we can talk about value pricing, but this is like skipping four grades because you want to go to grad school or skipping college because you want to go to grad school. It's like, no, value pricing requires tight positioning, arms around your systems, knowing exactly what time it takes because that's the floor. You can't be charging less than that. Ideally, in some cases, you're charging a lot more. Other cases, maybe a little bit less. Based on the risk you're taking and so on. It just seems a little bit empty when people do that.

Blair Enns: I'm going to push back on that. I don't think you have to master input pricing time and materials to be able to move on to value-based pricing. In fact, I think one of the challenges, and we did a podcast on this. I wrote a post on it called The Five Levels of Pricing Success. The first one is labor arbitrage, my label for selling time. The second level is maximum efficiency. The point I made about maximum efficiency is it's a trap. By the time you get to the place where you're really good at selling time, it gets hard. It's very difficult to let go of that and move past it.

I actually think you don't need to nail selling time. You don't need to be a master at it to get good at value-based pricing. The point that I did agree with that I was deriving from what you made is if you're just dabbling in not just value-based pricing, but performance pay, if 90% of what you're doing, is just billing time or pricing the deliverables, and you're just dabbling at it, I think it's a good question. It's an open question. How good can you get at performance pay if you are just dabbling at it? I think that's the provocative point for me.

David C. Baker: Okay, so let me just expand on what I was thinking and tell me if you still push back on it. Because when I say that people aren't getting paid for their time, what I really mean to say is they are not good salespeople for selling something that costs them more than it should in the first place. Why don't you get better at selling all the time you're actually spending, then we can talk about the advanced selling. You're going to have to sell the same stuff for a lot more money.

Blair Enns: Is that a pricing problem or is it a scoping problem?

David C. Baker: I think it's probably both.

Blair Enns: Yes. Because sometimes it's a surprise to people.

David C. Baker: I think you're right.

Blair Enns: It's a surprise to people. It's like, "Really? Oh, I didn't realize we were leaving that much money on the table." Then what's the solution to that? Unless they change to value-based pricing, then they're just simply saying, "Oh, we made a mistake. The same job that cost you $28,000, now it's going to be $37,000. Sorry, my bad." Clients aren't going to go for that, right?

David C. Baker: Yes. I think your point is that the high-risk investments shouldn't be there to compensate for all the mistakes you're making in managing your low-risk investment portfolio.

Blair Enns: That's a better way of saying it.

David C. Baker: Yes.

Blair Enns: We could have saved a lot of time if you just corrected me.

David C. Baker: I was just thinking of a client you and I have both worked with in the last year or two, and they're a great example of low-risk and one high-risk investment that's just added millions to the top and bottom line. It's basically, it's been the difference maker in that business. I think that's a great example. I think of another firm that you and I have both worked with, the owners have become pretty good friends of mine. One of them was visiting me in Palm Springs one year and telling a story, I think I've told this story too, about this consumer product where he wanted to get paid in the fees in cash and it was low millions. It was past startup. It was in scale-up mode, but it wasn't a publicly traded company yet.

The founder of the business offered half in cash and half in equity. He insisted on taking the cash. The guy went and raised a little bit more money and paid the fees. I said, so what's your equity worth today? The equity that you didn't take. He very calmly said, $250 million.

Blair Enns: Yes. To make that story complete, you would have had to have asked, "Okay, what about the other equity that you were offered?" I don't know if you read the Union Square guy, Fred Wilson, but he came out with an email this week that I found really fascinating because you always hear that VC people, not so much PE, but VC people are going to-- they're going to lose their shirts on almost everything. Then they'll make up for it because a small percentage is going to hit really big, right?

David C. Baker: Yes.

Blair Enns: He actually went back and studied that for their entire portfolio over the last 30 years. He compared that with the same results from Andreessen Horowitz, who did the same thing. They discovered that, one, maybe 2 out of 10 investments make up for everything. 3 or 4 out of the 10, just like nothing. It's like the money's completely gone. We wasted that. The other three or four, it's like, "Oh, we got a return of, but not a return on capital." Then the one or two just blew us away. These are people who have money, it's their money and other people's money they're risking. They're also pretty good at assessing those kinds of things.

I just wonder if our audience is good at that stuff. Just think about all the firms that have tried to build a product or an app or something and how few of them actually take off. You wouldn't necessarily see this, but I see their financial projections all the time. It's like, "Really, let's just compare what you said you'd do this year and what happened." They just don't even conform to any sort of reality.

David C. Baker: That would point back to your very first point. Don't take an existential risk. Don't go out of business if you mess up. People in this field are definitely good at taking risks. Are they good at taking the right risks? I don't know.

Blair Enns: Yes, it's a good point. The VC model, that's a hit maker model, like Hollywood studios, like publishing, like pharmaceuticals, all of those follow-- I guess it's a Pareto principle where the majority of returns come from a minority, a small minority of actions or in this case investments, and the rule of thumb that's used is 80-20, but it's not always 80-20. Pareto himself didn't say it was 80-20.

David C. Baker: The last time I did some just basic web research on the hit ratio of venture capital firms was a few years ago when I was preparing for a webinar. The ratio I came up with was 1 in 26. 1 in 26 goes big and there's a small few that cover the cost, maybe make a little bit of money, revenue positive. That's a crazy ratio, even if it's 1 in 10 and then pharmaceuticals I don't know what it is, movies I don't know what it is, but if you look at those other businesses, they're really interesting and interestingly different from a creative or a marketing firm in that these hit maker models have investors.

Venture capital firm has these limited partners, the general partners are not risking all their own money, they have some of their own money in it. They're involving others to underwrite the risk. In a studio making a movie, it's not the studio taking all the risk, the executive producers are the financiers and money raisers, so they go out and get investors. A pharmaceutical firm is really well capitalized at publicly traded company and the investors understand what the model is, so there isn't an equivalent in the agency world. Those hit maker models they're betting everything.

They understand that-- Let's use your ratio of 1 in 10, that 9 in 10 are not going to produce revenue. That's not what we're talking about here, but if we take that model, let's say 80% of your portfolio base is safe, maybe it's inputs or outputs, and then the other 20%, you apply that 1 in 10 hit maker model to, so of the 20% of your client portfolio, 9 of those performance pay deals are going to go to zero or close to zero. Maybe the 9 together net out at something approaching your cost, and it's the 10th one of 20% now in a creative firm where you've got 10 to 20 clients at any one time, that's a lot of years before you get to that volume of clients.

Blair Enns: Yes.

David C. Baker: Here's the final thing that when I got your note that stirred up in my mind. Let's say I buy, and I do, I buy the notion of this Barbell, let's keep a lot of stuff towards the safer end. Let's do some thoughtful risks on the other end. Why does that have to be in pricing. Why couldn't it be in something else like service offering design or developing a product or an app or something. I'm not fighting for that, I'm just asking the question because it seems to me like pricing is so difficult to get right. It takes so much training.

I'm not sure a firm is going to master different pricing methodologies and it seems like the staff, they're just going to get confused with it unless maybe this is just something the principal does and say, "Hey, we're taking this risk. Here's why." It doesn't have to be in pricing. You could believe in this Barbell distribution of risk, but you could acknowledge that it should show up in other areas besides pricing too, right?

Blair Enns: Yes, I suppose it could. You're the pricing guy.

David C. Baker: Yes, and I really wanted to look at this issue through the lens of pricing specifically. When we get to other domains, exercise is really interesting. If you know anything about Nassim Taleb, he wasn't in very good shape. Other people call him a philosopher. He describes himself as a flaneur. Do you know the definition of flaneur? It's a French word.

Blair Enns: uh-uh.

David C. Baker: It means to wander without a destination. He refers to himself as a flaneur. When he travels, I hope I'm getting this right, he spends a lot of time, like an entire day sometimes, just wandering through a city aimlessly without a destination. It's basically, there's something in the word or the meaning of the word that implies like a delightful discovery, not being planned, not being prescribed. His exercise routine is a whole lot of walking, and then he does high-intensity heavyweight training.

You can see him applying that Barbell Strategy to exercise. I was thinking about that. Then I was thinking, I'm a big fan of Peter Attia, the longevity doctor. He talks about spending most of your exercise time in zone five is basically 100% of your maximum heart rate, and zone one is, I think, something 10 to 20%. Taleb would be spending the majority of his time in zone one and then a very small amount of time in zone five. Attia's prescription is similar, a little zone one, a lot of zone two, and then zone five. He completely misses the middle. What I love about that is it's an argument against jogging, which I hate.

Blair Enns: That's why your ear's perked up, because you hate jogging, yes.

David C. Baker: Walking, yes. Sprinting, yes. Heavyweight training, yes. The stuff in the middle, it just strikes me as somebody who spends a lot of time exercising and observing other people exercise, especially as you get older. There's a whole lot of people doing the stuff in the middle, and it just, the benefits don't accrue to you. I am really enamored with this Barbell Strategy and thinking about applying it to different domains in life and business.

The pricing one, I don't feel like I've solved this problem or we've solved this problem in this conversation. I don't feel smarter on the subject, so you win. You can't work miracles. I appreciate the conversation, and I hope the listeners appreciate the conversation too, because I'm still completely fascinated by this, and I'm going to keep working through this until I come up with some sort of recommendation for our clients.

Blair Enns: I'm drawn to his flaneur thing. We're recording this September 12th, and early tomorrow, I'm flying to Chicago, and I'm flaneuring for three days with this other Leica guy from the Netherlands. I've never met, but I follow a lot of his stuff, and we're meeting there. We're just going to wander Chicago aimlessly for three days taking pictures.

David C. Baker: That's right up your alley, flaneuring.

Blair Enns: Oh, I do it all the time. I did it in Madrid for three days recently, and I'm doing it in Guatemala and Havana in the next two months. Yes, absolutely, but I don't run fast anymore anywhere. Okay, but one last question here for you. Let's say that people are buying this. They want to experiment with it. They want to get up to the existential line, but not cross it. How much would you risk? When people ask me that question, I say don't risk more than your total profit. Maybe that's 10% a year like that. Maybe normally it's 20%. What would you risk? Where's that line where if it fell through, you'd still have what? What would you risk?

David C. Baker: I think it would be scenario dependent, and it would also be dependent on where the firm is and what your propensity for risk is in that moment. It would depend on your prediction of your ability to actually create the value and earn the money. I think there would be scenarios where you would consider a total contingency basis, which is you risk all revenue.

Blair Enns: All revenue.

David C. Baker: On that one account or one project. Yes. I don't see why not. As long as the total amount of investments that you make at the high-risk end, do not become an existential threat, do not cause you to give up all profit in the firm across the board. I wouldn't risk the profit of the firm.

Blair Enns: Yes, so let's say you're a 20-person firm. You expect 20% profit, and some client comes to you, and they want you to take that equity, like what you just mentioned about your Palm Springs friend, and they want you to make some money or maybe risk it all, but it's for massive equity. If it works out well, you're going to get very rich. If nothing happens, that person that's running that firm is risking everything. That's existential risk for them. For you, it would just bring you back down as a firm to breaking even and not making profit, but you wouldn't lose any money. You'd lose all the money you bet on that firm, but you wouldn't lose money on your firm itself. Is that a repeat of what you said?

David C. Baker: Yes.

Blair Enns: I think that makes sense. Until you get better at managing those risks, my wife does options trading, and I want nothing to do with it.

David C. Baker: Why?

Blair Enns: I get too emotional. I don't want to know what the investment decisions are she's making because I'd have something to say, and it would almost always be wrong.

David C. Baker: Yes, stay out of it. Knowing your wife, she's fine. Leave her alone. Yes.

[laughter]

Blair Enns: All right, so neither of us is smarter, but hopefully the people listening to this are smarter, right?

David C. Baker: It is a mental challenge. It's a puzzle. I'm fascinated by it. I'm really interested in it, so if you've got some ideas on this, if you can help me think through this, or you've got some experience in this, I'd love to hear from you. All right, thanks, Blair.

Blair Enns: Thanks, David.