How Specialization Impacts Your Agency’s Growth, Margins, and Valuation

Sei-Wook (00:03.303) Hello, on today's episode we'll be talking about agency specialization and how narrowing the focus of our agencies has helped them grow. Peter, can I ask you some questions? What do we mean by specialization? Peter (00:16.782) All right, so we're going to be using specialization and another term, positioning, a little bit interchangeably, but this is how we think about it. Specialization is more about the internal — what you choose to be an expert in. For an agency that could be picking a vertical that you're going to be really knowledgeable about. So it could be the automotive industry, fashion, or whatever it might be, and going deep into that. Or it could be some kind of service line — a capability like branding, motion design, or web design and development. Or it could be something more specific like platform. Within website design and development, it might be, hey, we're experts in building sites on Wix or building something on WordPress. Specialization is really about defining what you're going to master as a business. And then positioning — we use these interchangeably, but positioning is really about how that mastery is expressed to the public. You might outwardly be talking about how we make really great e-commerce websites for the leading fashion brands of the world. So that could be an example of positioning. That's the way we think about specialization. Sei-Wook (01:40.766) We shared a lot of different ways an agency can specialize. Why would you say specialization is important or helpful? Peter (01:49.739) Specialization — to think about its usefulness, it's good to look at the inverse. When you're a generalist agency, what are some of the pros and cons? If you are a full-service agency in the marketing space — you're able to do all kinds of things, make websites, do the design, do a little bit of PR, some paid advertising, help with conference events — you might be able to do this for a dentist's office, but also for a financial services firm or a consumer brand. When you think about a general agency and the ability to service all these clients across all these different capabilities, one thing you could argue is that it's cool — the people working there are going to get variety and they could be creative in different ways with all these different types of clients. But the trade-off might be, hey, are they able to do it really well for that client? Are they able to help that dentist really reach their customers and understand their problems and needs deeply, versus the financial services client who might have a totally different ICP and need a different set of skills to really engage and get the marketing done for their customers? So there are going to be trade-offs. When it comes to specialization, where it's helpful for an agency is it can really streamline and provide depth to how they service their clients. In the case of the dentist — if you're an agency that does marketing for dentists, now you have a very clear idea of the customers that the dentists are targeting. Maybe you develop processes, and because you've got a wealth of experience going after the same kind of client, you can pattern match and get better and better at how you deliver results. You might have solved some hairy problems specific to that type of client that you can then help navigate much faster — it's not a first-time thing you have to figure out. And you're also giving the dentist a degree of confidence. Hey, you've done this for 10 other dentists — great, I feel like I can trust you more to deliver for me. All those things provide value both in how the agency is perceived by clients and in how they can deliver services more impactfully. Sei-Wook (04:46.673) Amazing. How about some more stories about our own agencies? If you could talk a little bit more about how our agencies are specialized and our journey in getting there. Peter (04:56.875) Yeah, across Barrel Holdings — part of the reason we're so passionate about this topic of specialization is because we've taken a very long road to get here in terms of how we think about it. I'll start with Barrel first, our original agency. We started out doing branding, graphic design, website design and development, some paid marketing — a lot of things for different clients. I distinctly remember one time we had a recent blog post where we talked about launching a website for an investment bank and a nail salon in the same post. That was how much of generalists we were — whoever needed a website or any of our services, we'd go for it. Over time, we realized we could be more successful if we narrowed our focus more. One of the things we ended up really pinning on was the e-commerce side from a capabilities perspective. We latched onto the Shopify ecosystem. We thought, hey, e-commerce is growing at this amazing clip, Shopify is the platform we want to be the best at, and we started to hone in more and more within that space. That space got competitive really quickly — there was a time where we were winning a lot and it was easy to get deals, but then a lot of entrants came in. So it wasn't enough to just be Shopify experts and be specialized in that way. We added another layer. Thankfully we had experience working with a lot of CPG, especially in the food and beverage category. Combining e-commerce and CPG, that focus has been really great for Barrel in that we are in many respects a go-to agency. If you're a food and beverage brand trying to leverage Shopify and reach customers that way, we have a wealth of knowledge in that space. We know how to think about omni-channel, not just e-commerce direct-to-consumer, but also the retention marketing aspect, the SEO side, the content side with things like recipes and store locators. All those things have given us this specialized positioning that we can go and market to potential clients. Sei-Wook (07:37.987) Amazing. If you do specialize, does that mean you can't take on other work outside of that specialization? Peter (07:46.41) Yeah, and this is where there's some degree of decision making that has to be done in terms of how seriously you're taking specialization. But then there's also the reality of running a business — a small business especially — where some of these opportunities we need, the dollars are very important and they're going to help give us that runway so that we can specialize further. An example: going back to Barrel, as we specialize in that CPG, food and bev, and e-commerce space, we're still getting opportunities to bid on things like fashion and apparel, or maybe some other kind of electronic equipment, where it's still e-commerce. There's a degree of expertise we can apply, but it's not quite that CPG, food and bev vertical category we're going after. I think it's a case-by-case assessment — if this is an opportunity we can pass up, and passing on it leaves us free to pursue a CPG, food and bev client, then we'll say no. But if it's an opportunity where, for financial reasons and also relationship reasons, we should think about taking it on, then yeah, you can still take that client on — but remain committed on the external positioning side to that CPG food and bev commerce focus, and still send the signal that, hey, this is what we prefer, send us those kinds of deals. On the back end, you might still take on things that aren't a perfect fit. Sei-Wook (09:42.318) For agencies that might be early on in the journey, or currently more of a generalized agency, how would you go about thinking about moving towards specialization? What are some tips you have there? Peter (09:58.023) Yeah, I think we're seeing this with another specialized agency in our portfolio, BX Studio, a Webflow agency. Right now they're very much specialized on the Webflow side of things — we build websites on Webflow. But within that, they have a lot of different types of clients they've done websites for. You could argue they're specialized, but they're still generalists to a certain degree. One way to move further along the specialization spectrum would be to identify clusters, especially on the vertical side — we tend to service a certain type of client that needs Webflow websites, and maybe we can lean in a bit deeper and find ways to be more useful to them, more expert in how we provide a service system. An example might be hospitality. BX has done dozens of sites for hospitality clients — hotels, restaurants, real estate developers doing hospitality projects. We've learned a lot from those. There are certain booking engines that might be integrated, certain marketing features on the websites, certain content management considerations. If we do a better job of really codifying that and proving to these types of clients why we're experts for that vertical, there's a case to be made. Maybe it starts with a landing page — these are all the things we can do for hospitality companies, and this is why we're the clear choice if you're looking for a website — then going to market with that and driving the positioning and the demand for those kinds of services. That's one way to deepen that specialization. Any company is bound to have clusters where you've done something more than once, and from there you can understand how to go deeper and build out the expertise. Sei-Wook (12:21.548) From our position at Barrel Holdings, with our goal of building a portfolio of specialized agencies, why would you say it's important for us to go down this path versus just agencies in general? And maybe you can touch a little bit on valuations and how specialization impacts them. Peter (12:42.471) Yeah. Our thesis for Barrel Holdings is — and it's not to say general agencies can't succeed, but I think it's our opinion that general agencies succeed because they get to a certain degree of scale. Within that, they're able to touch upon different things that are important to different clients, and that scale becomes very important in winning deals: hey, you're working with X number of clients, you have X number of headcount. For the areas we play in — agencies in that two to six, under $10 million in annual revenue — we think specialization offers a degree of durability and profitability that drives the value. We're also optimizing for long-term hold and cashflow generation. If those things are important to us, we think specialized agencies give us the best chance of finding those qualities. If you think about the advantages of specialization in a client relationship — one, you could argue it leads to longer-term relationships with a very sticky group of clients. You know exactly who your ICP is, you know how you're providing value to them, and if you're doing it right, there should be less competition for that client to switch to some other provider. There's a degree of retention and longevity there. And because you're providing some kind of specialized expertise that's different than somebody doing it at a much lighter level, you should be able to command higher fees and therefore stronger profitability. Those things should also positively impact valuations — if we're looking at agencies on EBITDA, their margins are going to be super important, and specialization should flow through to allow for higher margins on their profits. Sei-Wook (15:02.442) We've covered a lot about specialization. To wrap things up, if our listeners want to learn a little bit more about specialization, any resources or books you'd recommend? Peter (15:15.386) Yeah, I have to mention the OG on the positioning side that we've followed for many years now — probably 10-plus years. David C. Baker, his book The Business of Expertise, has always been a good one for thinking about agency expertise, positioning, and specialization. I still refer to it every now and then — I just love some of the concepts he talks about in there. Corey Quinn has a really helpful book, especially on verticalizing as an agency, called Anyone, Not Everyone. And then there's another classic I love, Positioning for Professionals by Tim Williams, also super helpful. All three of these folks are great follows on LinkedIn too, because they're always talking about positioning and the benefits of it. Positioning and specialization — we've used them interchangeably, but I think it's a path worth going down for an agency, especially if you haven't gotten to the big scale of a general agency that could be super successful. Specialization is an alternative path. Sei-Wook (16:31.722) All right, thanks Peter for sharing all the background about specialization. That's it for today and we'll see you next time. Thank you. Peter (16:38.757) All right, see you. Bye.