Why There's Margin in Mystery
LinkedIn Article by Tim Williams
January 11, 2016
Are you selling what's scarce? One of the most basic principles of economics is that products and services which are difficult to find, in limited supply, and available from only a few providers, are able to command a premium price. For professional services firms, there's a valuable lesson in the law of supply and demand.
Advertising agencies, in particular, are under assault from corporate procurement departments who seek to marginalize and commoditize agency service offerings by demanding to be able to compare apples-to-apples services. These professional buyers want to benchmark firms against "industry standard" costs, rates, and service lines.
That there should be an industry standard for businesses that sell intellectual capital is a pretty nonsensical notion in the first place. Back in 1937, the author of the celebrated "Think and Grow Rich" remarked, "There is no standard price on ideas." Napoleon Hill's deep belief was that the creators of ideas can set their own price. The more valuable the idea, the higher the price.
SCARCITY IN ACTION
The independent agency Heat, named by Adweek as the "breakthrough agency of the year," stays about as far away from conventional static advertising as it can. While the great majority of other ad agencies persist in selling the creation and placement of traditional advertising messages, Heat built its reputation in long-form video, which is emerging as a more engaging, effective way for brands to tell their stories. But their real genius is the development of IP like Radeator, which generates personalized advertising messages based on predetermined triggers to which the messages can react in real time. That kind of capability qualifies as singular in today's marketing world.
Large multinational organizations can offer scarcity just as well. Modi Media, owned by the world's largest agency holding company, WPP, offers advertisers the ability not only to serve up television commercials to households in a specific zip code (like direct mail), but to send a specific commercial to one single household at a time. Ultra-effective solutions like these make it much harder for procurement professionals to dictate a price they're willing to pay.
But scarcity in professional services doesn't have to involve developing radical inventions. Sometimes it's just a matter of packaging up existing competencies in unique ways. The firm Stranger & Stranger (great name) in London does package design for liquor brands. This unique focus enables them to attract premier brands of wine, beer, and spirits around the globe because they offer a rarely specialized skill set capable of commanding an atypical price.
CAN YOU BE THE ONLY ONE IN YOUR CATEGORY?
Astute marketers have long understood the power of perceived scarcity (limited editions, private sales), knowing that "the power of limitation" can significantly boost sales and conversion rates.
Marketing author Seth Godin observes that "The only things that are scarce in today’s interconnected world are the things that are difficult, and the only things that are valuable are the things that are scarce. When we intentionally seek out the difficult tasks, we're much more likely to actually create value."
If what you offer is scarce enough, you have the opportunity to create a monopoly in the best sense of the word. When advising start-ups, venture capitalist Peter Thiel encourages the founders to tenaciously build a one-in-a-kind company, where they are the only one in a small ecosystem. "You always want to aim for monopoly," preaches Thiel. "All unhappy companies are alike," he says, "because they fail to escape the essential sameness which is competition."
Jean-Marie Dru, the head of the legendary agency TBWA/Worldwide said it well: "It's not good enough to be the best at what you do; you need to be the only one who does it."
TO GET UNCOMMON PRICES, OFFER UNCOMMON SERVICES
Enigmatic service offerings have pricing power because it's difficult to compare them to anything else, and prospective buyers have little or no prior experience buying similar things. You likely know what a "fair price" is for a gallon of gasoline, but would have a lot more difficulty judging the price of an ounce of American Paddlefish Caviar (which apparently is about $36).
The principle at play here is that there is margin in mystery. This memorable term was coined back in the 1980s by angel investor Dave Berkus when counseling computer hardware makers on how to wring more profit out of a rapidly-evolving industry. If it's possible to make above average margins on metal, plastic, and circuit boards, surely the potential is exponentially higher when what you sell is game-changing solutions to business problems. No sector is better positioned to inject mystery into their offerings than professional services.
In price negotiations, some prospective clients will appear to push back against "black box" solutions because they want to simplify their buying decision by "leveling the playing field." They say they want to compare apples to apples. That's their job -- that's what buyers do. And you, the seller, what's your job? To unlevel it. Only uncommon services fetch uncommon prices.