There’s a common belief among entrepreneurs that serving a niche is better than being a generalist. Lots of smart people recommend this specialist approach.
Which is why I was surprised to see several research studies on the agency industry that showed that generalist agencies were more profitable than specialist ones.
Are all those smart people wrong? Not exactly. But there is nuance to specialization that few people understand or explain.
Specialization works by ramping up relevance to a group of customers. Relevance is the selection mechanism by which customers choose a product or service from among alternatives. It both adds value and reduces risk.
Niching is just one of several tactics to increase relevance, but it’s the relevance that’s important, not the tactic.
For agencies, the most common channel that they get new customers is through referral. Both specialists and generalists will get referrals, albeit in different ways. For this kind of “word of mouth” channel, being a specialist doesn’t give you the same advantage in relevance as something like SEO because the risk reduction through social trust is the most important aspect of the referral.
Additionally, it’s common for agency clients to have diverse needs. Being able to have one outside partner take care of a multitude of problems is more valuable than working with an army of specialists.
To put it another way, imagine you were hiring someone to build a new home.
You would ask your friends for the name of a good general contractor and not the names of a good plumber, roofer, project manager, framing company, and electrician. A generalist is more relevant for your expensive, high risk project.
In these contexts, a generalist can charge rates that are close to or better than the specialist. But unlike a specialist, a generalist’s success isn’t tied to a niche’s market share.
When a niche declines, the specialist’s profit declines too. But a generalist will just work with people from other niches, maintaining both pricing and throughput.
For the research studies I looked at, I would bet that if you looked at the data, you would find higher variability with niche agency profitability than with the generalist agency. Probably the top three most profitable agencies are specialists. But so are the bottom three. The average of all of these is how you end up with a slightly worse outcome, on average, than a generalist agency.
What should you take away? Specialization isn’t inherently better. But anyway that you can establish relevance is going to help.
Featured image is a young Robert Heinlein who said:
“A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, die gallantly. Specialization is for insects.”
Image used under public domain.