There’s new money to be made in the agency business, but it lies in the white space of our business model – the unmet needs of today’s marketers. Unfortunately, most firms are too busy selling yesterday’s services to uncover and develop the solutions marketers will need tomorrow.
It’s as if we believe the solution to more profits is more work. More work can mean more revenue, but it doesn’t necessarily mean more profit. Not every dollar is a good dollar. That’s because most agency revenue streams are made up of work that could be categorized as “widely available services.” As a result, most agencies are swimming in overserved markets, offering common services, but hoping to make uncommon profits.
When markets are saturated with providers who all appear to do roughly the same thing (which is how many clients perceive the advertising agency industry) economists call this a state of “perfect competition.” While you may think of competitive markets as good old American capitalism, it’s actually not a very desirable place to be.
Venture capitalist and Paypal co-founder Peter Thiel observes that firms selling homogeneous services in competitive markets have no market power, meaning they must sell at whatever price the market determines. And whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. By monopoly, Thiel doesn’t mean the big bullies of industry, but rather the firms that have such unique products and services that they literally have no direct competition.
Better to be blue than red
The question Thiel advises businesses to ask is “What valuable company is nobody building?” That’s a pretty profound question, because the answer points us in the direction of the uncharted waters of the “blue ocean.” One thing that’s increasingly clear is that there is very little profit to be derived from the “red ocean” (red from the blood of competitors fighting for every shred of business).
Agencies need new revenue streams, not just more of the old ones. To start heading in this direction, we should be asking questions like:
- What new services or solutions could we offer to help clients successfully navigate through the continually changing multichannel universe?
- What are the persistent frustrations (beyond cost) that marketers have with agencies, and what new approaches could we develop that would solve them?
- In addition to strategic innovation, could our firm also be characterized by operational innovation?
- What keeps our clients up at night, and how could we develop products or services that would help them sleep better?
- Which service areas provoke the least amount of price sensitivity among our clients? How can we develop and provide more of these types of offerings?
- What are the capabilities that most client organizations would never attempt to develop in-house?
The tyranny of “best practices”
What holds us back? Certainly the pressures of day-to-day client-related tasks, which all masquerade as “urgent.” But at a deeper level it’s the ingrained belief that the job of management is to study and adopt “best practices,” as if mimicking another firm’s current approach is the pathway to future success. As Jules Goddard & Tony Eccles write in their insightful book Uncommon Sense, Common Nonsense, “Best practices are simply plagiarism on an industrial scale.” While continual improvement is important, it’s not nearly important as continual innovation.
That’s because tomorrow’s profit pools will not be derived from today’s services. So instead of sliding further down the client’s value chain, muster the courage to go where no agency has gone before. There is tremendous value in first-mover advantage, and the first agencies to move into new territory will not only have a competitive advantage; the best of them will be able to do what the planet’s very best companies (like Apple and Google) have done; create “monopolies” in the best sense of the word.