How to Avoid Being a Commodity

mike

Mike Stratta founded Arcalea on the idea that digital marketing and advertising should be objective, not subjective. In this interview, Mike talks about the importance of focus: on a very deep and narrow skillset, on a limited niche of (service) industry clients, on engendering a great company culture, and on hiring great people. 

Mike built Arcalea’s service offerings around the things he really loved to do. Arcalea provides comprehensive quantitative analysis and implements tactics based on that analysis and how brands are positioned online. Mike believes it takes significant due diligence to prevent scope creep from paralyzing the creative process. Arcalea stays out of the creative arena by cultivating relationships with partner agencies to provide clients with creative content.

Mike thinks that it is essential for any business to ask itself, “What can we provide at such a depth that we differentiate ourselves from our competition?” . . . and “How can we provide a higher level of service than others in our same space?” Companies that fail to build a deep enough or wide enough economic moat risk becoming price-driven commodities. 

When Mike started Arcalea, he had already built and sold an agency, but one that dealt with blue-chip companies. He tells his audience that, “When working with those big brands, you are just a commodity” and explains how these giants put the squeeze on small agencies to provide more at a cheaper price . . . because they can always find someone else to do the work. 

Today, his agency serves companies with $5 million to $500 million in revenue . . . where the agency can work directly with the C-Suite decision-makers and the client base is more nimble and responsive to changes in direction than larger organizations or subsidiaries of those larger organizations. Mike’s ideal customers are those who are a cultural match for Arcalea: the ideal relationship is one of appreciation/ advocacy/ trusted partner – and he definitely eschews being a “vendor” because vendors are commodities.

Critical to long-term success? Mike says, “Hire slow. Hire the person who sees more in the future of the position than you do. Hire the person who will be a 10x game-changer.” Then, he says, “Lock them down with a cultural fit and cultural environment and even more pay than you first intended so they will never want to leave, no matter how much someone else offers them.”

Mike also addresses the difficulty of implementing policies in a period of fast growth, as his company experienced when it grew 2800% over a period of three years and made position #149 the very first year it qualified for the Inc. 5000 list of the fastest-growing privately held companies in the U.S. Whew!

Mike can be reached on his company’s website at https://arcalea.com/ or on LinkedIn.

ROB: Welcome to the Marketing Agency Leadership Podcast. I am your host, Rob Kischuk, and I am joined today by Mike Stratta, Founder of Arcalea based in Chicago, Illinois. Welcome to the podcast, Mike.

MIKE: Thanks, Rob.

ROB: Fantastic to have you here. Why don’t you start off by telling us a little bit about Arcalea and what makes Arcalea great?

MIKE: Sure. Thanks for having me. I really appreciate it. Could you repeat the question?

ROB: Yeah. What makes Arcalea great? What are these areas of expertise that’s spurring all your growth?

MIKE: A couple of things on what makes us great. First, it’s tough to nail those things down exactly, but I think if we were to look internally, we’d say it’s focus, and that’s market focus, and it’s the people.

Just to take a step back, I had another agency I ran with a business partner for about 12 years, and one of the key learnings coming out of that experience was that we were susceptible to that temptation to take work in marketing in whatever capacity that it might be, because we were struggling entrepreneurs and we were like, “There’s an opportunity to do this and to learn this expertise and to add this.”

I sold out of that 5 years ago. When we restarted, one of the items on my list of must-haves for the next agency was depth in a very narrow area of focus. So that would be the first one.

The second one was the focus on culture and people, because if you hire great people, the rest gets so much easier. But if you’re spending your time managing the HR component or managing through challenges internally, you end up focusing on the wrong aspects of the business and it can just drag it down.

ROB: Congratulations on the sale. It’s not too many people who can boast of having built an agency that someone else thought was worth buying. It can be very hard to sell a services firm sometimes.

MIKE: You’re absolutely right. Thank you. Some of it’s timing and some of it’s being ready for the opportunity, and I do feel fortunate to have had that experience and to be able to . . . and I think it was time also for me, just to say, “All right, let’s see what I can do on my own.” So when I started the second one, it was a challenge to myself to say, “Okay, I’ve done this once; can I do it again on my own?”

ROB: For sure. You also mentioned industry focus. Dial into that a little bit. What are you doing with Arcalea around the industries that you focus on?

MIKE: With regard to that, I’ll just update that a little bit. It’s on the services side. I took a long look at what I was good at and what was interesting to me and what I could be passionate about. I think marketing is such a huge umbrella that you can be in marketing and literally be doing something totally different than someone else who’s in marketing.

The question becomes, what is it that you can provide at depth that allows you to differentiate or allows you to provide a higher level of service than others in the space? Otherwise you end up becoming a commodity. I think one of the best lines from business school is “the value of an undifferentiated product is zero.”

When you unpack that a little bit, you recognize that if you have no differentiation in some capacity that has value or adds value to the service or product that you’re offering, then another product that looks just like it is the next best offer. When that occurs in any market, it ends up driving downward pressure, putting downward pressure on price and value, so your value or your market price ends up getting a cent above the next competitor. So, it’s effectively zero.

When we looked at that – I say “we” – when I was creating the list of must-haves for the next business, I recognized that in order to be successful, especially, as you said, in services, to create value over time, you’ve got to find a way to differentiate. So what I decided to do was to say, “Here’s a list of the things I really love doing that I would do no matter how much you paid me,” and then I decided to create service offerings around that.

What we do today is absolutely quantitative. We don’t provide any creative services, we don’t provide website design and development, because in my opinion, in my experience, creative was one of those aspects that unless you’re really diligent about scope, you can get lost in scope creep, etc. So where we focus today is in the quantitative analysis and implementation of tactics surrounding that quantitative analysis, around how brands are positioned online. We leverage marketing analytics heavily.

ROB: That makes sense and I definitely resonate with that focus. On analytics, it does strike me – even while you’re talking about performance, it seems that creative is still intrinsically intertwined with performance. Even if you’re going to make a performance-focused ad, you’re still going to have to have creative feeding into that. So how do you handle that? Are you partnering on the creative side? Is someone else handling maybe the frontend creation of that, and you’re measuring on the backend and providing insight?

MIKE: I love that question and appreciate your asking. Let’s just break it down. The short answer is absolutely, we have partners. We spend time cultivating partnerships with agencies that can support us and that we can support them. Because you’re right, there is an element of the customer journey which is inherently intertwined with creative and brand and provides for this courtship that occurs once you become aware.

But our challenge and our assessment is before that space. If you look at U.S. business, 97% and change of business is in the small business space. Small business is defined as less than 500 employees. When you look at most entrepreneurial brands – I wish I had a whiteboard I would jump to right now and diagram this – but you typically have a conversion funnel or a customer journey. It’s awareness, consideration, trial, converge.

If you think of brands like Allstate and State Farm – and I use this in some of my presentation materials – when you are considering Allstate and State Farm, the one thing you’re not doing is saying, “Oh, who’s Allstate and State Farm?” That is in the consideration phrase of that funnel. But most entrepreneurial brands’ challenges are actually higher funnel. They’re awareness.

When we start thinking of creative, we’re thinking of a portion of that conversion cycle that’s down funnel. It’s in the consideration phase. It’s once you get to the website, or it’s once you become aware of a brand, then the creative component kicks in. Most entrepreneurial brands’ challenge is not clever ad copy. It is becoming aware, at all, that you have a service that fits their need. With today’s programmatic and machine learning in advertising, we can literally spin up thousands of combinations of ad copy and let the market determine which ones are successful.

So, in that regard, creative really begins when you start entering the brand space of that consideration phase of the customer journey. Does that make sense?

ROB: Yeah, I think that does. I like what you’re saying about letting the market decide what the best creative is rather than trying to get out in front and guess a little bit. When I go to your site and I look through your services and some of your cases – you’ve mentioned those small businesses. Are small businesses the wheelhouse of a lot of the clients you work on? What’s your mix of scope and scale of clients?

MIKE: That’s another good question. When I worked before at the other agency, we had blue chip clients, Fortune 100, etc. There are challenges with those brands. There are challenges with the fact that many are held by holding companies. They put downward pressure on – they squeeze, especially the small and medium size agencies, and even now we’re seeing they’re squeezing the large agencies.

And by squeeze I mean mid-contract, we’ve gotten a phone call from some of them that say, “Hey, we’re changing our terms from 60 days or 90 days to 300.” We literally had this call from a major household name. I won’t say it, but they called and said, “We contracted you for X amount an hour. We can get this elsewhere for $30 less an hour, so we need you to be retroactive to the beginning of the agreement at $30 less an hour.” We were helpless. “And, by the way, we’re not going to pay you for another 100 days.”

So, there are a number of challenges when working with those big brands in that you’re just a commodity, effectively. Unless you have high, high differentiation, they can get it elsewhere, and they’ll tell you that.

When we restarted, I took a hard look at who we wanted as clients. One, there has to be a cultural match for sure. We want it to be an appreciative relationship, not a vendor relationship. The higher we go on the advocacy and the trusted partner scale, the better. If you drop down on that scale and you end up being a vendor, you’re in a bad spot because you’re basically in a commoditized position.

We realized that targeting the mid market actually had a number of competitive advantages. So when we target today, we’re targeting $5 million to $500 million in revenue – and believe it or not, it’s a pretty wide target. We do have some that are bigger than that, but our sweet spot is working directly with the C-Suite, directly with the decision-makers. If we have to work with brand teams, it’s generally less of a fit.

Also, that middle space is typically more nimble. They can make decisions quickly and quickly activate, because in the marketing space, especially when you have analytics running up to the day, up to the minute, you’ve got to be able to make decisions quickly and move on those decision quickly, and the bigger the brand, the slower it is to change that ship and to change direction.

ROB: Right. You’re trying to get tactics approved for next quarter based on data from two months ago, which is a bit of a mess. You mentioned your previous agency was acquired. When you were selling that agency, did you know then that you wanted to dive headlong right back into the agency space? What made you have conviction around that choice?

MIKE: I appreciate the question. No, I didn’t. It’s such an interesting dance. It took about 10 months to complete. During that time, there was a lot going on, and I kind of wanted a little bit of a break. I took about three months. I got married about the same time. About two months, maybe a month and a half after I sold it, I got married. Settled in a little bit. I had three or four different ideas that I was kicking around.

On a whim, I went to a really good friend who’s an entrepreneur. I’ve been in EO, the Entrepreneurs Organization, for about the last 10 years, and have a wonderful peer group and support group through that organization. A friend of mine who’s in it needed some assistance in his company. So, I went and sat with him and I was whiteboarding all these ideas. I was like, “Luke, you could try this. Here’s a number of elements here to consider.”

He looks at me and he says, “You really love this, don’t you?” I was like, “Oh my gosh, of course I do. I love all of this.” He’s like, “Why are you considering all these other business models? You know this space.” He just asked me – not trying to convince me, but just curiosity. I looked at him, and I knew that he was right. I was like, looks like I’m getting back into this in a much narrower field.

And of course, your first idea is typically far from where you end up, and that was the case for me. I first thought I’m going to go into digital marketing, and what does that mean today? I don’t know. There’s so many different aspects associated with digital marketing that it’s effectively just marketing.

It took the last 4 years to really refine our business offering and get to the point where we knew exactly who we were, we knew exactly what we were offering, how we would roll it out, etc. It was by no means an automatic. It was the opposite.

ROB: It’s a great point. Even to a large extent TV ad buys are moving into digital buys, especially across streaming and that sort of thing. Billboards are digital now. So, all of that is going on.

I really appreciate what you said there about having those trusted friends who can help you hold up the mirror to yourself and see the truth of what aligns with you and what is going to work for you and where we might be lying to ourselves a little bit. We all do that as well.

So, what are some things – you probably did some things intentionally different when you started Arcalea. You mentioned some of that around the culture, around the focus. What are some things you have learned this time on what started off as a solo mission that, even if you were starting over again 3 years later, you might do differently?

MIKE: That’s an incredibly salient question for any business, let alone marketers. I think the number one aspect – and it sounds so obvious and it sounds so cliché when you hear it, because you hear it everywhere – but the key to our success today is absolutely the people and the culture that we create for those people. Without that, you just can’t get a business up and running, let alone get it to turn into a scalable business.

The number one item on my list was: How do I nail this culture thing? Because at my prior agency, we had a wonderful culture for many years where everyone just loved showing up. We loved what we were doing. We loved how we were approaching the market. Our relationships with clients were partnerships, not vendor relationships. You can gauge the feel of the whole company based on how your clients feel about you.

Then we had the recession hit in 2007-2008, and it really, really taxed us. We almost didn’t survive it. And in doing so, in surviving it, the culture was erased effectively by this hard economic reset. It was just unrecoverable, because now everyone was walking on eggshells around finance, and the wonderfulness of that business was destroyed by this shock to everyone’s system. It took years to rebuild, and even then, we were fundamentally changed after that. In my estimation.

When we restarted, culture was absolutely the number one thing. Even now, even this month, we’re realizing – I was at the Inc 5000 conference last weekend, and there was a guest speaker that was asked, “You have $200 million in revenue, you’ve got 40 employees; how is it you’ve got such a high revenue per employee ratio?”

Without even thinking, he looked at the audience and he said, “It’s absolutely to hire slow. As a matter of fact, hire excruciatingly slowly. Belabor every single hire that you have. Consider whether or not they’re a force multiplier, like a 10x, not a 1.5x or a 3x, like we would like for a business model. You absolutely have to ask yourself, is this a game-changer?”

And now I’ve started asking myself, does this person see more in this position, into the future of this position, than I can see myself? And if that is the case, then you absolutely have to lock them down – and to that point, be willing to spend more than you might have originally budgeted because you know in your heart they will be a 10x. It does not matter what you pay them. As a matter of fact, you should probably pay them a little bit more and then backfill that with the cultural fit and the cultural environment so they will never, ever want to leave. That is my approach.

ROB: I love the passion there. You’re really on fire for that. It’s awesome.

MIKE: It’s everything. I try and convey that every day at work. I tell them, “I’m trying to spoil you. Someone’s going to offer you money at some point, more than we’re offering you, but my whole game” – and I literally tell them this – “my whole thing is, once you look at the outside world, you will say, ‘I don’t even want to go outside. I want to stay right here in this bubble.’” So, my whole existence is around creating this bubble for my employees in order to make their lives so much better than they could be elsewhere that no amount of money will close that distance.

Harry Kraemer said something – he’s the former CEO of Baxter – he said something last week that was fascinating to me. He said, “If you hire the right people in every spot, then you really don’t have much to do. What you have to do is you spend your time in culture and fostering those people.” He said basically, if you hire a great team, your job now is to farm and tend that garden and to basically walk around and say, “How are you doing? How can I make your life better? What can we do to make you successful?” I thought that was a fascinating, impactful statement.

ROB: For sure. Do you typically describe the culture in that animated narrative way, or do you have some keywords or pillars that you anchor around?

MIKE: That’s a wonderful question. EO, the global organization that I mentioned, is kind of fundamental in that. There’s a book called Traction. Within Traction, we follow the EOS model of weekly meetings and establishing rocks for the quarter, etc. But part of Traction’s fundamental process is to establish your core values and live those core values.

We spent about a year making sure they weren’t “Successories.” It’s kind of a joke, but I wanted to get a Successory to put on the wall just to be like – because some of the folks are young enough they don’t know what a Successory is. But when you see one on the wall, you realize what it is. It’s just a name. It’s just a word only, and we still see it on walls today at some customer visits. But when you see one, you’re like, “That’s total garbage,” because just the fact that – the framing of the word itself is the cliché.

So we spent a year changing and honing – I started with like 12 and narrowed them down, through the help of Traction and EOS Implementer and a culture czar named Will Scott – he helped us formulate our core values, and now we’ve narrowed them down to, “We lead, we deliver, we grow . . . together.”

Packed in each of those words is a series of four to five value statements of leading the client, if you’re on time, you’re late. We deliver, meaning we never deliver anything late. We always communicate in advance. We make sure that we never give a client a reason to devalue us personally or our company brand. We grow both professionally and personally, and we take a big interest in their personal growth.

As part of Traction, we have 15-minute meetings every other week. We just sit down and get out of the office. We go to lunch. I ask them about everything but work. And that’s the point, to invest in the people as people, not as a billable resource. We do all of this together, and that underscores the team environment and underscores the fact that a failure of a student is a failure of the coach, and I take that from an extreme ownership perspective very personally.

Any time anyone fails, it’s a failure of me not providing the structure or the instructions or the process or the feedback or something, fill in the blank. It’s never anyone else’s fault but me. If we all take that mentality and it trickles downward, then you have the core aspects of a really well-defined culture.

ROB: Are you naturally process-driven?

MIKE: No, it’s difficult. [laughs] I’m the visionary and the integrator, I’m the visionary. I can change topics on a dime and I prefer not to create process.

But I heard a wonderful quote a couple of weeks ago, which was talking about organizational size and structure at different sizes. I heard this concept which resonated with me, which is: Processes was created to drive out mediocrity in organizations. If you’ve got great people, they’re generally capable of understanding what’s needed and fulfilling it. You do need processes to X degree, but once you get to a certain size and you start slipping in the hiring, you have to create methods and procedures to reduce variance.

It was just a wonderful concept of saying – anyway, to answer your question, no, I’m not naturally process-driven.

ROB: I think that value of that peer group, I think you’ve mentioned it a couple of times – we’re in Atlanta, in the EO community here; we’ve found it very, very helpful. I have an episode coming out probably a little bit before this one where I had the chance to talk to Verne Harnish, the founder of EO. So that’s a fun one. It’s good there.

So, you were just out at the Inc. 5000 Conference. Congratulations are in order, because you were #149 on the Inc. 5000 list. Did you know that you wanted to be on that list? Was that on your radar, or did you just realize, “Hey, we can apply this year”? How did you aspire to that and what did you learn while there?

MIKE: Inc., Entrepreneur, there’s several magazines that you always have your eye on, and you see the covers and you’re like, “Oh, man.” You’re watching other entrepreneurs as their stories unfold. So yeah, it was definitely on our radar. It was not something that we had applied to before.

Every year, we do a recap of the prior two or three years, and we do it in the presentation format. The new employees get to see just how small we started in our first year. They look around the room and they’re like, “Oh my gosh.” We show pictures of what it was like back then. The first slide is like one employee, and it wasn’t really an employee; he started as an intern, and then he’s our first employee. And he’s still in the room, at our most recent one.

So, you get an idea of where the growth is. Then about two years ago, I looked up the Inc. 5000 and I was like, “I think it’s possible. I’m not sure, but let me look.” It turns out that the requirements precluded us. You have to be in business rolling 3 years. You have to have $2 million in revenue. We were about a year and a half in. Of course, I got the “declined.” It was like, “I’m sorry, you’re not eligible just yet.”

So, I just kept it on the back burner. I set my calendar and said, “All right, a year and a half from now, let’s see where we land.” Then about March of this year, I realized, “Oh my gosh, we can apply,” and we did so. Then we started getting these little hints through interactions. You also have to provide tax returns, and they verify it.

I was on the phone with one of the people and they were just double-checking, dotting i’s and crossing t’s, and they said, “Oh wow, you have a pretty high rank.” I was pressing for anything, like, “What does that mean?” They’re like, “I can’t tell you exactly, but let’s just say it’s pretty high.” [laughs] So, I was trying little tricks to try and figure out how high we were. I was like, “Oh hey, just checking, are we in the top 500, yes or no?” Hoping to make it easy for them.

So yeah, we were super surprised when we found out it was through the roof. 149 is a crazy number out of 5,000, and we’re super excited and humbled.

ROB: You knew your 3-year growth percent, so from year to year, is it pretty similar? I think your growth percent was like 3 years, 2800% or something. Do you have any guidance on where you’re going to land, or does it vary more than that from year to year?

MIKE: Oh, that’s a great question. Being in the analytics space, we calculated our 3-year growth and then went back and calculated where we would land on the prior year’s list. So. we had a general idea. We were like, “Okay, I think we’re going to be in the top 300. If this year is like last year, then we’ll be here.” So, we had an idea.

ROB: And not that you want to spend all your time thinking about this, but I’m sure going to the conference gives you a little bit of a thought of where it’s going to land next year. Have you peeked at where you might end up next year?

MIKE: First of all, there’s a couple of downsides to that growth. There’s some real downsides. It’s impossible to manage process, and process change, through growth that’s 2800%. I think even part of Traction EOS talks about companies failing because they can’t manage process change or they can’t manage growth. It’s not from not having new clients; it’s something about the change mechanism.

Imagine 2800%; it’s just not feasible to do so. When we start trying to processize elements, etc., it’s like as soon as you get the pen out and you’re halfway through a sentence, it changes. So, it’s really difficult. But that is an unsustainable percentage. So, to your question, the first year is the year you’re going to see probably the most. Now my goal is to maintain – like let’s make it for 3 years, let’s make it for 5 years. But it certainly won’t be – it’ll be some other newcomer that’s #149 next year.

ROB: Right. You get to thinking a little bit more about growth multiples. Can you sustainably 1.5x, 2x, 3x the business? You’ll still end up at the conference and you’ll still be struggling to digest the growth.

MIKE: We’ll make it next year, sure. Because it is rolling 3 years, so we did get some good growth this year, but at the same time we’re trying to mitigate and manage that growth. We don’t have external investors. Our growth largely, to this point, has been word of mouth. We don’t even have a formal sales or new business team. It’s pretty gated.

And almost purposefully so. We’re trying to make sure that we don’t start – because it’s very tempting to hire – we literally had this problem the last two weeks. Should we just hire because we need somebody to put in the position? We had this moment internally where I said, “Guys, let’s go back to the resources we’ve got, talk about this forced multiplier thing. Is this the right move?”

That’s an example of saying, if you had continued that growth, you’d be so, so susceptible to saying, “We’ve got to get the work done. Get somebody in the seat.” You do that two, three times, then it’s 30% of your organization or 20% of your organization and you have organizational challenges, and now what was wonderful about the organization is now tainted or fundamentally altered.

ROB: Right. Even that challenge of having a sales process to manage. It’s another process to manage, measure, and improve and iterate on when you’re also trying to keep clients.

MIKE: Yes. And if I’m frank, I’ll just share here, I have had “create a sales process” on my annual rocks or our annual goals for the last two years, and I still will not complete that this year. Partly because – and matter of fact, it’s a real part of entrepreneurship and growth. You will have things on your list that have been there for years, and you’re like, “It’s important but not urgent, and all the urgent things got done, so it’ll be on the list next year.”

ROB: Sounds perfect. Mike, when people want to find you and Arcalea, where should they go to find you?

MIKE: Obviously, Arcalea the website and LinkedIn is my primary vehicle. But the website for sure. We keep our heads low and we spend our time on the work, but that’s just a casualty of the size that we’re in.

It’s funny, because, as an entrepreneur everything is a round robin MVP, in my experience, which is the minimum viable product for whatever is your challenge at the time. We’re literally going around like a 3D printer and just putting one more layer around this MVP product every time that we make a revolution. There’s some aspects that get attention and some that don’t. So, we’re really focused on internal delivery and growth.

I don’t know how I got so far from the question, but I think it’s a fundamental part of finding us online on the website. We’re not too out there, is really where I was headed.

ROB: [laughs] That’s all excellent, Mike. Thank you for coming on the podcast and sharing.

MIKE: Absolutely.

ROB: Congratulations on the growth so far and the energy about that, about the culture, about the focus of services I think we can all learn from.

MIKE: Thank you.

ROB: All right. Take care. Thank you.

Thank you for listening. The Marketing Agency Leadership Podcast is presented by Converge. Converge helps digital marketing agencies and brands automate their reporting so they can be more profitable, accurate, and responsive. To learn more about how Converge can automate your marketing reporting, email info@convergehq.com, or visit us on the web at convergehq.com.

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