Differentiation: The Key to Growing Your Consultancy
Notes from the book "Spiraling Up"
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I recently finished reading a book about consulting businesses called Spiraling Up by Frederiksen and Taylor.
And it might be the most insightful book on consulting that I have ever read.
So if you want to start or grow your consultancy, I highly recommend picking up this book.
Recommended by the folks at an accelerator I’m in called Vixul, Spiraling Up analyzes what top-performing consultancies do differently to command premium valuations.
These professional services firms:
grow 9x faster on average
make 50% more profit
while spending slightly less on marketing and sales.
And there was one factor that cropped up repeatedly among all of the top consultancies, which is a strong differentiator from competitors.
A differentiator is a unique selling point of your business that other competitors can’t fulfill.
For example, if others can build a product in 6 months that you can build in one month, that’s a clear differentiator.
If others bill by the hour, and you bill on outcome, that’s a differentiator.
If others work across several industries, and you focus only on one vertical, that’s a differentiator.
But if your differentiator is that, “we have the best people, best technology, and are devoted to our clients,” almost every consultancy says the same thing.
So this is not a strong enough differentiator.
In today’s article, I’ll discuss:
Why differentiation matters
And how to differentiate your consultancy from the rest
Why Differentiation Matters
The most important reason why differentiation matters is that it creates a more balanced client-consultant relationship by making you less interchangeable.
If you look at the power dynamics of client-consulting relationship, the client has significant control including the ability to:
Push back on your advice
End the engagement
Whereas a consultant’s main leverage is to withhold their expertise.
But withholding your expertise is not impactful if the client can go and find another consultancy to do what you do.
The service your consultancy offers at that point is practically a commodity.
Differentiation is a consultant’s moat.
However, if you have a strong differentiator, then finding a replacement for you becomes much more difficult.
It evens out the power differential and incentivizes both parties to find successful resolutions rather than ending engagements at the slightest hint of a disagreement.
This creates a much more balanced power distribution in the business relationship.
The importance of differentiation was further confirmed in research done by the authors’ of Spiraling Up.
In the book, the authors conducted a survey among various consultancies asking what their differentiator was compared to competitors.
They rated the differentiators based on two criteria:
Was their differentiator understandable?
Was it believable or supported through evidence?
They found that high-growth consultancies were almost 3x more likely to have a strong differentiator compared to an average consultancy.
So strong differentiation is critical for the success of your consultancy.
Here are two ways to differentiate yours.
Solution 1: Crosshair Positioning
The first way to differentiate your consultancy is to have a “Crosshair” positioning statement.
Generally, a consultancy can position themselves in two different ways: horizontally or vertically.
Horizontal positioning means the service your consultancy offers applies to a broad range of industries or sectors.
For example, if you provide IT services for companies, this would be horizontally positioned because you could provide IT services for any industry including hospitality, construction, energy, and government sectors.
Vertical positioning means you’re positioned in a specific industry - for example, if you only work with hotels, motels, Airbnb’s, and event caterers, then you’d be vertically positioned in the hospitality business.
Most consultancies are either horizontally positioned (most common) or vertically positioned, but very few consultancies have crosshair positioning where they are positioned on both axes.
So the idea with crosshair positioning is to position your consultancy such that you are both horizontally AND vertically positioned.
For example, there are a lot of website builders out there (horizontally positioned), and there are a lot of businesses out there helping law firms (vertically positioned).
But if you combined the two such that you only built websites for law firms, then you’d be crosshair positioned.
In fact, this is what Lawlytics does, as they only build websites for law firms.
Through crosshair positioning, they’ve made it hard to find a replacement firm that specializes only in building websites for law firms the way they do.
That gives them premium pricing power, and let’s them be much more targeted with their ads.
So if you’re struggling to find a differentiator, consider adding an element of vertical positioning to your horizontal positioning.
This will definitely differentiate you from the rest.
Solution 2: Differentiate on 4 Dimensions
Another way to differentiate is to differentiate on these four different elements that the authors of Spiraling Up mentioned including:
This is similar to cross-hair positioning where instead of solving a broad problem for anyone, you focus on a very particular demographic instead.
For example, Redhawk IT is an IT provider that focuses specifically on winning IT contracts from the government.
Although IT consulting alone is horizontally positioned, the fact that they only cater to the government gives them a clear differentiator in that they uniquely understand the governments’ IT needs more than anyone else.
So they’ve differentiated themselves by focusing on a specific target audience, the government, which makes it hard for any other IT provider to compete with them for those government contracts.
With this approach, you narrow in on a specific problem that your audience has that other competitors don’t focus on.
For example, most IT Providers offer IT services, but if you focus on a specific set of IT problems, like migrating services from on-premise to the cloud, you’ve differentiated yourself by the problem space.
With this approach, you can offer additional services that competitors don’t offer to differentiate further.
For example, if one furniture store only sells you furniture but another furniture store offers additional services including:
Disposal of your old furniture
Then those extra services could be a differentiator that makes the second furniture store more competitive.
Lastly, if everything else you do is the same as your competitors, the one thing you could change is your business model, because the business model alone is a differentiator.
For example, if one newsletter provider offers a flat subscription fees for their service, you could differentiate by offering a commission based service instead.
It’s exactly this business model change that differentiates Substack from Beehiiv the most.
Differentiation is the moat that prevents a consultancy from becoming a commodity service.
By making sure your consultancy is “crosshair” positioned and tweaking your service based on the:
You'll enhance your consultancy's market positioning, leading to a higher valuation when you exit.
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