Anatomy Of An Associate Marketing Competition

Here is something interesting we have done to help associates learn to market at my law firm, Duval & Stachenfeld LLP.

Among other things, we have an associate-led Associate Marketers Group that meets monthly to teach, learn, and share various marketing skills and strategies. This year, by way of example, the group read an impressive marketing book called How To Master The Art of Selling (affiliate link), and then they practiced the techniques outlined in the book.

I believe our associate marketing program is unique as far as law firms go. Most law firms don’t really teach associates that much about marketing, at least not until they have achieved a certain level of seniority. We start the first day the associate joins the firm.

In any case, this past year the associates took it upon themselves to arrange a mock pitch presentation — sort of like moot court, but for pitching.

The associates divided themselves into groups and decided to have each group pretend to be representatives of a craft beer company that was pitching a local supermarket chain in order to get their craft beer product on the store shelves. Each group was then judged by a panel that was comprised of four partners and our Chief Marketing Officer, Caitlin Velez.

The associate pitching groups did their best to prepare for — and actually be — the senior management team for the craft beer company. And the partners and Chief Marketing Officer did their best to actually be the senior executives of the local supermarket chain. We all made it as real as possible. I styled myself as the annoying, penny-pinching CFO who didn’t care about the beer at all — just whether we could make money on it in our supermarket. I even annoyed myself in my role!

It was suggested to the groups that they use the techniques outlined in the How To Master The Art of Selling book; however, they were absolutely free to create their own, unique presentations.

I will say that after many years of pitching to clients and prospects, I was convinced I wouldn’t see anything in these mock pitches that I hadn’t seen before, but I was happy to be wrong, as I saw a bunch of creative ideas that I will be thinking about how to weave into my own future pitches.

For example, one group provided sample beer with a new brand and logo. Another provided cheese and crackers to be sampled with the beer. Another one made clear that they had no need for our shelf space due to the power of their brand, and wouldn’t pay a nickel for shelf space, despite me pushing them on that point. And there was much more.

At the end of the day, this project was a great success. Everyone got the real feel of a pitch, including:

Preparing for the pitch;

  • Coming up with a powerful and memorable message;
  • Having butterflies in the stomach of being in a room “across the table” from those who were being pitched; and
  • Pitching a tough group of people — we didn’t make it easy for them at all, but they all rose to the occasion.

It may sound like “I am just saying this” because I am writing a public article and could hardly say something negative about my associates; however, I assure you that that is not the case at all. My associates nailed it across the board. I also like the fact that they came up with the entire idea and it wasn’t from me at all. Hats off to the Duval & Stachenfeld associate marketers.

Our associates leading the project said, “Pitching legal services is tough — especially when you’re not yet comfortable impressing potential clients with war stories and your breadth of experience (because, guess what, you don’t really have any). You have to sell yourself just as much as the services you’ll be asked to provide. By having associates test out their marketing skills in a totally different context, focusing on a fun, more congenial topic than legal services, we were able to see their creativity and confidence soar.”

Finally, I end with the thought that — alas — I wish someone had pushed me to learn about marketing at the beginning of my career. It really wasn’t done in those old days. I just came in and did legal work. I didn’t think about building client relationships until I was in my late thirties. Oh well. I can’t change my past, but hopefully my associates will be great marketers as well as great lawyers.

Power Niche Marketing: Competition Is Evil

I start this article with an incredibly powerful quote from Peter Thiel. Mr. Thiel is a very smart fellow who started, and then sold, PayPal and became a billionaire. Now he is a professor who teaches at Stanford.

Thiel coined the phrase “Competition is Evil” in his book Zero to One, which should be on your reading list.

What Thiel means by this short phrase, is that your goal is to avoid being commoditized and similar to everyone else (which destroys your pricing power). Instead, you should create your own little baby monopoly that you really “own.” In other words, Thiel advocates creating a smaller “niche” that is absolutely your own.

Once you follow Mr. Thiel’s advice — once you become a monopoly in your niche — you aren’t “competing” anymore within your niche. And the best thing about being a monopoly is that monopolies have pricing power. Note the use of the word “power” just now.

Keep this thought in your mind. When a client or customer asks you: “How would you compare yourself to [name your number one competitor]?” —  you have probably already blown it because in your client’s/customer’s mind he sees you as “competing.” The essence of competing implies your products are “comparable” and so the client or customer could easily ask you:  “Why are you more expensive?” And then it is likely that you and your competition will end up in a race to the bottom of pricing and you lose all pricing “power.”

You want to be able to say something like. “We’re not actually competitors. The other party you mentioned is really great at [X]; however, when it comes to [Y] we are the top/only game in town, because….”

Thiel’s point, at heart, is a statement that you have to be “different.” It is important that you outperform in your smaller niche — it is the first thing you must do — be different!

And Thiel is not the only one making this point. Indeed, all the smart thinkers are saying the same thing:

Peter Drucker says you have to “innovate” which means do something differently.

Michael Porter says that the biggest mistake companies make is trying to be “better” than their “competition” (which only enriches the customers, employees, and other related parties), when instead they should be striving to be “different” from their competition.

Seth Godin, who wrote some brilliant marketing books, including Purple Cow, which should also go on your reading list, touts the virtues of standing out (i.e. being different), like a purple cow would stand out.

And of course yours truly, that incredibly intelligent, and arrogant-in-a-nice-way, columnist writing this article, is pushing that view hard. There is literally nothing worse than being indistinguishable from the “crowd” — you have to be different and thereby avoid the “evil” of competition.

Power Niche Marketing: The First Power Niche Marketing Lesson

Let me start this article with a short story, which I read in the New York Times about five years ago. It was about two warring pizza parlors. They were almost next door to each other in New York City and as far as I know they were both doing very well. I think they were each selling pizza slices for over $1.50 per slice. In New York at that time that apparently was a perfectly satisfactory price, which gave the seller a reasonable profit, and customers were quite willing to pay that price. All was well with the world.

Then one day, one of the pizza parlors lowered its price to $1!!!

The other one matched this lower price and then, in perhaps a fit of pique, lowered  his price to $.75.

The price war quickly resulted in the price almost dropping further to $.50, which is apparently break-even. This meant that neither pizza parlor was making anything at all. They were working for free. Their customers were getting all the upside of the pizza.

I don’t know how it ultimately ended, but one of the owners was defiantly quoted in the article as saying that if the other guy dropped his price further he would go even lower.

It was a sad and foolish story that resulted in a race to the bottom and, if it continued further, would logically have resulted in the bankruptcy of both pizza purveyors.

Well, when I teach marketing to my young lawyers, I tell them very simply: We don’t ever ever ever want to be like those pizza guys. That is the first lesson.

Ultimately, if you are selling the same thing as someone else, then you are in a very weak position. You have to rely on being likable or other clever strategies to market commodities, which really consist of trying to convince the customer your product really isn’t the same, or tying your “same” product to “non-same” services. Otherwise your customer has an easy ability to just say that the other guy is cheaper than you and you have no choice but to match the price, and away goes your profit. If you are reading carefully here, the (ironic) point is that if your product is the same as everyone else’s, the goal is to make it appear that it is not really the same.

So now we come to a very important insight about Power Niche marketing, so please read carefully here, as this is critical.

The concept of marketing in a niche is counterintuitive but very powerful. It means that instead of trying to be “all things to all people,” you instead pick a smaller subset of whatever industry you are in and learn every single thing possible about that smaller subset and dominate it. Basically instead of a small fish in a big pond, you become a small fish in a smaller pond, but since the smaller pond is so much smaller, you now look like a big fish!

Let’s go back to our poor pizza players and illustrate what I would have done in that situation. Let’s say that one of the guys had recognized that he was of Indian background (which was true based on the article). What if he decided to market Indian Pizza, which would be pizza that had interesting Indian toppings on it. Instinctively, this sounds like a losing strategy to many since you would be kind of giving up all the customers who like regular old pizza. So you might say instinctively that this is not a good idea.

However, the key fact that makes the Power Niche work so well is that you don’t need every customer to want you. You just need a tiny little bit of the market to want you in the worst way.

Please keep the foregoing thought not just for a minute but for the rest of your life. If you get nothing else out of my articles, this thought alone is of incredible value.

When someone tells you that they want to start a business and only one percent of a ten billion dollar market will make the product a success, your first question should be, how will she stand out in that market?  How will she be different?  If there is no answer to that question, then she will either completely fail or, if by some lucky break she succeeds, she will not make any profit from her success.

To continue here, a Power Niche for the pizza seller of Indian background could have been Dalal’s Indian Pizza Kitchen, “which creates mouth-watering Indian dishes fused with American pizza. After you have tried this incredible cuisine just once, you will never want plain old pizza again!”

This would have transformed this pizza seller from a pathetic player dropping his price lower and lower to beg any customer to come in, into someone with ownership of a very narrow niche that appealed to a much smaller subset of customers. How much could he have charged for a pizza slice in the center of New York City?  $3.00?  $4.00?  $5.00?  Or maybe $11.00 for the Tandoori Chicken Pizza Supreme?

Would this have worked?  Of course I don’t know that without trying — and part of marketing is trying new ideas and failing with some and succeeding with others; however, one thing is crystal clear, and that is that the Dalal’s Indian Pizza Kitchen idea has a greater chance of success than does selling plain old pizza next to someone else perceived to be doing the same thing.

Did you note that here I am proposing to innovate, as well as market?  And did you note that I am “creating” customers too – since I am suggesting a new cuisine that customers didn’t really know they wanted until they tried it?

This would be a perfect example of a Power Niche in action, since by being the “only” Indian Pizza purveyor he would have ultimate bargaining power over a very small subset of customers who would learn that this is the pizza they really want. So instead of being in a weak spot with no bargaining power, our pizza purveyor would now be sought after eagerly.
If you are smart, you will realize that this monopoly bargaining power position lasts only as long as no one else also decides to sell Indian Pizza. I will talk about this later, which is the fact that it is rare that a Power Niche will last forever.

The bottom line is that if you are just a salesperson selling a commodity and begging your customers, employees, bosses, and everyone around you, just to talk to you, buy your product, keep your job, etc., it is kind of a pathetic existence.

However, if you can truly build, develop and “own” a “Power Niche” you become someone who everyone wants to do business with inside your niche. In that niche, instead of you begging others to do business with you, they are genuinely interested in what you have to offer and hopefully begging you for your product or service and, of greatest importance, willing to pay top dollar for it.

Power Niche Marketing: Moving On To Michael Porter

Sorry for all the intellectual “stuff” as I try to effectively “teach” professional services marketing through this column, but sometimes you have to buckle down to the books rather than just winging it. I didn’t get to where I am in the marketing/legal world by just wandering out and bumbling around. I took the time to read and think. So I am moving on from Peter Drucker (the topic of my last article) to Michael Porter.

Michael Porter is also very cool and a famous professor at Harvard Business School. He is known for his incredible insights into competitive advantages and his famous “Five Forces” to assess competitiveness of an “industry” are taught in “every” business school.

He has written a ton of stuff and if you are a scholarly type, his books are like catnip to a cat; however, if you want to just learn the basics, they are explained in a great book by Joan Magretta called, aptly, Understanding Michael Porter (affiliate link). In any case, the buildup is over and let me get to the point.

Professor Porter is often asked what is the biggest mistake people make in the business world and he answers “trying to be better” than their competition. If you try to get “better,” all you do is spur your competitors to do the same thing. Then pricing falls or efficiency rises, etc. All that then happens is the upside from your industry (and indeed the upside from your investment in getting “better”) goes straight to the customers, and not to you. Indeed, when you are the absolute “best” you can be and so are your competitors, the result is zero profit!

So what should you do? Mr. Porter answers “be different.”

This is not far off from the concept of “innovating” is it?

Also, by the way, for those of you who read my prior series of articles on Above the Law — Reinventing the Law Business — you may recall I started out that series of articles with Messrs. Drucker and Porter. They are always a good place to start.

Now to sum up and put Mr. Drucker and Mr. Porter — my intellectual heroes — together, your plan in the business world should logically be

Innovate and market to create customers

I know this article is shorter than usual; however, this really is the basis for my marketing plan and the essence of the Power Niche — and it is worth dwelling on it.

Here is the definition of Power Niche again so you have it handy.

In brief, a Power Niche is a small-sized niche within a bigger industry that no one else yet dominates or owns. The niche isn’t obvious so you have to figure it out and “create” it. You step in and learn everything about it and everyone in it. You tell everyone about what you are doing – incessantly – and become the real “owner” of the niche merely by staking out your homestead in virgin territory. This then becomes a virtuous cycle as the more you know, the more you do, and the more you do, the more you know. Before long you are the world’s unquestioned expert in this (smaller) niche. All of this enhances your bargaining power within that niche. Instead of begging for business in the bigger industry, you now have eager clients paying you top dollar within this smaller Power Niche.  

What is a Power Niche?

One of the most important things for any real estate business and, indeed, any business is a successful marketing program.  Of course in our hearts we want to believe that if we just do something great then everyone will figure it out and be impressed.  But alas, that is just not true.  Indeed, Einstein flunked physics and couldn’t land a job.  And everyone has an example of a super-talented person that ends up just toiling in the trenches for someone else.  Like it or not, the world belongs to the marketers.  And I believe that this will increase more and more over time.  Someone – but I cannot find the exact quote – said something like this:

“The world will increasingly belong to those who create the ideas rather than those who execute them.”

In the real estate world it is no different.  If you have a great “brand” (which of course is built by a successful marketing program) you typically succeed — and the converse.  This is the basic reason why Warren Buffet – arguably the world’s most successful investor – focuses on brands; namely, for their long-term premium pricing power.

So how do you create a strong brand in the real estate world?  The simple answer is that you do this by creative and intelligent marketing.

I have become a student of marketing over the past ten years, including both reading everything I can lay my hands on and at the same time analyzing what works and what doesn’t work and delineating the reasons for success and failure.  After thousands of hours of study, I have come to the conclusion that the secret of a successful marketing campaign and, concomitantly, the essence of building a successful brand (almost) always centers around what I call:

  • a “Power Niche”

This is a concept and phrase I have invented and coined; however, for any intellectuals reading my writings, you will quickly realize I am building on the works of Peter Drucker and Michael Porter and other great intellectual giants in the business world.

As an aside, I note that there are certainly other ways to be successful, such a being the low-cost-producer; however, generally the other angles (including being the low cost producer) are typically much more difficult to effectuate and maintain; however, just about anyone can build a Power Niche.

So what do I mean by a Power Niche?  Here is my definition:

In brief, a Power Niche is a small-sized niche within a bigger industry that no one else yet dominates or owns.  The niche isn’t obvious so you have to figure it out and “create” it.  You step in and learn everything about it and everyone in it.  You tell everyone about what you are doing – incessantly — and become the real “owner” of the niche merely by staking out your homestead in virgin territory.  This then becomes a virtuous cycle as the more you know, the more you do, and the more you do, the more you know.  Before long you are the world’s unquestioned expert in this (smaller) niche.  All of this enhances your bargaining power within that niche.  Instead of begging for business in the bigger industry, you now have eager clients paying you top dollar within this smaller Power Niche.  

A Power Niche is often difficult to identify and at the same time counterintuitive, and indeed kind of scary, but once figured out is very easy to accomplish and can be crazy-lucrative.  Indeed, just about anyone can create a Power Niche successfully.

Indeed, for my law firm, I am a lot better off as The Pure Play in Real Estate Law than I am trying to be all things to all people.  It was surely an unsettling decision, to become the Pure Play in Real Estate Law as when we enacted this we were theoretically scaring off the 99% of clients in the world who are not in real estate.

But consider that in the (smaller) real estate world my firm is a major player.  We are able to know everyone and everything.  This makes my partners and me very useful to our clients in ways that are in addition to “just doing great legal work”.  This of course includes effectuating our mission of “helping our clients build their business” due to our connectively, contacts and industry knowledge.  If I tried to make my firm full service, I would be competing with multi-thousand-lawyer global behemoths and I have no idea how I could convince a client we were the optimal, or even a useful, choice.

In the business side of the real estate world, it is the same thing.  Let me give you an easy example, which is deliberately quite simplistic.  Let’s say you are in the multi-family business.  You do what is called “build-to-core.”  This means that you find locations for multifamily buildings, you get a construction loan and you build a high-quality building.  Then you rent it out.  Simple, right?

However, if your building looks like other buildings, how are you going to make a profit that on a long-term basis will be greater than just average?  You could convince yourself that your building is “better”, but what does that really mean?  Does it mean you paid more for a better location?  If so, your costs are higher and hopefully your rent is higher to make up for it.  Or did you do a better job of building it with higher quality contractors?  Same thing – you paid more and hope to get more rent.  I wonder whether that is really much different from making it cheaper and charging less?  It is two sides of the same coin.  In the short term you are making bets that may or may not pay off.  In the long term, what you are doing is making a product better and hoping to charge more for it because of that.  Indeed, Michael Porter says that the biggest mistake people make in the business world is making things “better” when they really should be concentrating on making things “different.”  And of course that is what I mean by the Power Niche.

So instead of the usual plan (outlined above), what if, for example, you modified the marketing and business plan for your residential real estate company to more narrowly concentrate on the LGBTQ community?  I picked this concept at random but please follow my point through.  What would now happen?  A bunch of things:

  • You would learn everything about the LGBTQ community

  • You would learn what they like and dislike

  • You would target your building towards LGBTQ people (and figure out if in fact they wanted to live with other LGBTQ residents)

  • You would develop intellectual capital at your company around this

And you would build your building to make it one where LGBTQ people would want to go.

You would be building a Power Niche.

Your market would be smaller – much smaller – but if you did it right you would do what Dale Carnegie says in his famous book, How to Win Friends and Influence People, namely, to “arouse an eager want” in the customer.

Would LGBTQ people pay more rent to live in a building that was really about the LGBTQ community in New York City?  Honestly, of course I don’t know that and there is always risk in any new idea.

But this is just the beginning of the Power Niche.  Once it became clear to the market that this was your business’s focus, LGBTQ people would want to work for you.  LGBTQ businesses would want to do business with you.  Advertisers would want to advertise with and through you.  You would find all sorts of opportunities you wouldn’t otherwise see because you would be the “only one” focusing on this.  You would learn more and more and become a font of intellectual capital on the LGBTQ community’s interaction with the residential real estate world.  People would want you to speak at conferences.  You would be the expert’s expert in residential real estate for the LGBTQ community.

If the idea worked for a first building, your next building would be a no-brainer to get investors and lenders and other parties.  And after a while, everyone would be chasing you to invest with you and do business with you.

Instead of trying to be “better” and playing the odds on paying more for a better location, you would be a “brand” that had a small but targeted customer base.

You would have established a Power Niche in the real estate world and as Warren Buffet would presumably like, you would be able to sell your product (i.e., brand) at an above market price for a long-term period of time.

Guaranteed success?  Of course not.  Obviously there are social issues at play here as well (for this particular Power Niche), but I still like it a lot better than the other game plan in “build-to-core”, in which you are a lot more at the mercy of the market.  Indeed, when the market falls apart for multifamily, which place do you think will hold its rental value better?  All the buildings that look pretty much like each other, or the “one” building where LGBTQ people really want to be.

Power Niche Marketing: Always Start With Peter Drucker

In this column I have staked my marketing reputation on the theme and theory that marketing is (almost) all about creating, owning and building Power Niches. Last week, I outlined what a Power Niche is – and that definition is found at the end of this article so everyone remembers it, without having to go back to my first article.

In order to move forward and establish the intellectual basis for Power Niches, I start with Peter Drucker. Indeed, he is always a great place to start in the business world. He is one of my intellectual heroes. He was not only incredibly smart; he was also someone who took the time to figure things out and put workable and usable theories together. Drucker, if you don’t know, actually invented the science of “management.” He died a few years ago. If you want to be a real thinker in the business world – or the marketing world – I urge you to read his work.

Anyway, Drucker says that there are two things which every business must do to be successful. If the business doesn’t do those things, the odds of success are not good, and the converse. Can you figure out what they are? Don’t worry, I couldn’t either, but as soon as Drucker told me it was so obvious I was kicking myself. The two things are as follows:

  • To innovate
  • To market

Of course! If you don’t “innovate,” you have nothing to sell, and if you don’t “market,” then no one will realize why they should want your product in the first place. But if you put them together, then you have something powerful.

Consider Apple. What would Jobs have done without Wozniak? What would he have had to sell? And what would what Wozniak have done without Jobs? He would have tinkered around until someone stole his ideas or maybe he would just have gotten a job somewhere. If you put the two together; however, you have Apple, which is arguably the most successful company in world history.

So, although I would like to “just” talk about marketing in this column, it is hard to extricate marketing from innovating. If your law firm just does widget-like legal work that is indistinguishable from the legal work of other law firms, you have a serious problem. I will talk about how to solve problems like this in later columns; however, the first step in a successful marketing plan, and in building a Power Niche, has to be some level of innovation.

Let’s look at another very powerful, and indeed in my view the most powerful, thing Drucker ever said, which is when he identified a key and basic question; namely, what is the purpose of a business?

Don’t worry if you can’t get this one either. I couldn’t get it, and I suspect it took Drucker many years himself to figure it out. I was thinking it was probably to serve your customers, to serve your employees, to make the world a better place, to just make money; however, none of that is right. The purpose of a business, according to Drucker, is:

“To create a customer”

Wow! Makes you tingle a bit, doesn’t it? It is the use of the word “create.” He doesn’t say your purpose is to “get” customers or to “sell” to them or to “market” to them. It is to “create” them.

This goes back to the basic idea that you have to do some innovating if you want to market and sell effectively. Synthesizing Drucker, the ultimate plan as I see it is as follows:

Innovate and market to create customers

Steve Jobs said this beautifully when he said “don’t ask the customer what it wants; instead, show the customer what it should want.”

Or in another way, “it is not the customer’s job to know what they should want.”

The point here – as both Drucker and Jobs are saying to us – is to

Innovate and market to create customers”

Please consider this for a few minutes and take a moment to think how it applies to your law practice. Are you just “practicing law,” or are you innovating and marketing to “create” customers?

I used to just be a plain old lawyer, and my career went absolutely nowhere. Now I spend every single day thinking about how to “create” customers – just like Steve Jobs said above – and my career is quite successful. And to be clear, I “really” do this. The purpose of these columns is to teach you exactly how I do it.

This is the first lesson. You have two weeks until my next column. Your homework is to read what I wrote (above). Reread it a couple of times. And think!!! How can you “innovate and market to ‘create’ customers”? You might just be flailing around now and maybe even have no clue what I am talking about. But if you read what the Power Niche is (below) and just turn on your brain, I assure you that your time will not be wasted.

Here is the definition of Power Niche again:

In brief, a Power Niche is a small-sized niche within a bigger industry that no one else yet dominates or owns. The niche isn’t obvious so you have to figure it out and “create” it. You step in and learn everything about it and everyone in it. You tell everyone about what you are doing – incessantly – and become the real “owner” of the niche merely by staking out your homestead in virgin territory. This then becomes a virtuous cycle as the more you know, the more you do, and the more you do, the more you know. Before long you are the world’s unquestioned expert in this (smaller) niche. All of this enhances your bargaining power within that niche. Instead of begging for business in the bigger industry, you now have eager clients paying you top dollar within this smaller Power Niche.

Power Niche Marketing: What Is A Power Niche?

Welcome to my new column, “Power Niche Marketing.”

This column has a very simple purpose: to teach marketing to lawyers and other professional service providers.

Astonishingly, all of us lawyers need clients in order to survive, yet when we go to law school and start our careers and our careers move forward, there is simply no one teaching us how to get these clients!

And we are desperate to learn. We see the big rainmakers, with their (figurative) cigars having all the fun and making all the money, while we toil away in the trenches wondering “why?”  It doesn’t make sense. It doesn’t seem fair. But we have no idea what to do about it.

In our desperation, we may ask a successful rainmaker, “How do you do it?  What is the secret?”

The rainmaker is always 1000% confident in her answer, and you hear things like this:

  • You get your clients from across the table.
  • You get them on the golf course.
  • You go to seminars.
  • You work the room.
  • You network relentlessly.
  • You get them from your high school, if it is connected.
  • You get them through just doing great work, and people hear about it.
  • You get them at the synagogue/church, etc…

The list goes on and on and on, with the only theme being that there is no rhyme or reason to it. And yet the rainmaker who gives you this advice is super-confident in it for an empirically misleading reason: whatever she is telling you worked for her!

Some of us in our desperation go to marketing courses, or seminars, but, alas, just about all of them (and maybe all of them) are taught by people who didn’t actually go out and bring in clients. Perhaps they are non-lawyers or, worse yet, people who failed at being lawyers and then turned to teaching marketing, thereby validating the old saying that those who can, do; those who can’t, teach.

There really is nowhere to turn. But meanwhile, our profession is becoming utterly relentless in the simple truth that:

No rain = bad career.

Your troubles are now over!  Just read my column for the next year, and you will be a great rainmaker. Simple!

Okay, it is not that simple; however, I will stick my neck out and say the following:

  1. I am not some guy who couldn’t succeed and so is now teaching. I am out there every single day marketing and trying to provide strong value propositions to prospective clients. I am in the trenches, and I know what clients respond to.
  1. I have gained my expertise by ruthlessly examining internally my own strengths and weaknesses and, with brutal honesty (to myself), I have analyzed what works in practice and what fails. At the same time, I have tried hard to understand what is really and truly important to my clients. After many fits and starts – and more outright failures than I like to think about – a lot has become clear to me. I will be sharing what I have learned in this column.
  1. Finally, of everything that I have learned in the marketing world, by far the most important lesson I have learned is the importance, and indeed the power, in the “Power Niche,” which is a term I have coined. Although there are numerous sub-parts to my marketing plan, at the heart of it is the Power Niche; accordingly, you will hear a lot about it throughout the articles.

Ultimately, virtually anyone can become a successful rainmaker by following a few simple teachings. This is really true. There are some tricks of the trade, but it is not a secret handshake – it is actually quite easy. Just keep an open mind, and I will be of great use to you.

I will get into the heart of the Power Niche in my next article, but so I don’t become one of those “annoying” serial writers who always puts the excitement in the “next” article to bring you back, I will let the cat out of the bag right now and tell you what I mean by a Power Niche:

In brief, a Power Niche is a small-sized niche within a bigger industry that no one else yet dominates or owns. The niche isn’t obvious, so you have to figure it out and “create” it. You step in and learn everything about it and everyone in it. You tell everyone about what you are doing – incessantly – and become the real “owner” of the niche merely by staking out your homestead in virgin territory. This then becomes a virtuous cycle as the more you know, the more you do, and the more you do, the more you know. Before long you are the world’s unquestioned expert in this (smaller) niche. All of this enhances your bargaining power within that niche. Instead of begging for business in the bigger industry, you now have eager clients paying you top dollar within this smaller Power Niche.

The goal of this new column is to teach you exactly how to build a Power Niche and become a rainmaker (or grow your book of business if you already are a rainmaker).

What is Up with China? Effect on the Real Estate Deals? News from the Real Estate Front in NYC

My law firm is in NYC handling real estate transactions in the US that originate from counterparties based all over the world.  A bunch of these transactions depend on money coming in from China (debt or equity or other structure).  It used to be there was always a degree of uncertainty about the viability of this capital, but this uncertainty was gradually diminishing as more Chinese players developed stature and reputation in the US.

However, there are some recent events that are hitting US real estate pertaining to the use of Chinese capital.  I cannot say we are a canary in a coal mine, but as a law firm in the thick of deals in NYC and other places in the US, I have seen the following just in the past couple of weeks:

A China law firm that I have been dealing with regularly had a client planning on doing US deals.  We were moving forward together until I received the following email:

“As you may know, recently China is facing to the emerging issues of increasing Chinese capital outflows and devaluation of the RMB.  Therefore, the Chinese government has tightened the regulation policies on out-bound investments in recent days, especially the investments by Chinese [investment funds] in the form of partnership and investments into foreign real estate markets.  This makes it difficult for the client to move forward with their US real estate projects.  They are now under internal discussion and evaluation of the situations so we may have to wait for some time.”

A friend of mine in China who is very connected to the US and the Chinese real estate industries gave me the following quote.  I respect him highly but he did not want attribution.  He said:
“….. the open tap of Chinese money for US real estate was if not shut completely this week then it is now at best left a dripping faucet.  The authorities may backtrack, or not fully implement the announced draconian controls, but the atmosphere has changed beyond recognition.”

A client of mine had its Chinese financial partner drop out of a deal due at the last minute due to the counterparty’s China office overruling the New York Office, which had approved and strongly backed the deal.

There is much more going on as well, including the new Presidential administration, the sharp rise in interest rates, general volatility in the markets due to a possible belief that the up-turn in the US economy is getting long in the tooth, public  statements from companies like Starwood that they are hitting the “pause button” on real estate acquisitions, stalled sales of luxury apartments in New York City, and much more.

As per prior Real Estate Philosopher articles, I do NOT make predictions about the future, except to state with certainty that neither I (nor anyone else) has a crystal ball; however, anecdotally it seems to be true that a fair number of investors in US real estate are indeed pulling back right now.  And the China money spigot slowing to a trickle may have a deleterious effect on pricing, deal flow and other matters pertaining to US real estate transactions.

Of course, one party’s troubles is often another party’s opportunity; accordingly, potentially all of this may spell a chance to make advantageous US real estate investments for opportunistic real estate players.  That is not of course a formal prediction but seems to be getting more likely every day.

One last point I will make about Chinese money is to distinguish between money that is “on-shore” (in mainland China) and money that is “off-shore” (outside of mainland China).  If the money is “on-shore” that likely means that it will be a lot harder to have it show up in a US real estate deal.  If it is already “off-shore” that likely means it will be a lot easier.  I don’t have the skillset to be able to dig much deeper here, but the foregoing is generally an accurate statement.  So, if you are a US player working with the Chinese right now, this should be a threshold question that you might use to gauge the likelihood of the investment succeeding.

Finally, if you have anecdotes you would like to share, I would certainly appreciate learning as much as possible.

Finally, finally, here are links to some recent articles on this subject:

Failure in Business is (Mathematically) A Lot More Likely Than You Think

Sometimes someone tells you something that is so ridiculously obvious but so dramatic to everything you have ever thought about, that it kind of shocks the heck out of you.  So here is something that just sent me for a loop.  It is a certainly philosophical in nature, so that fits in well in this publication – and it concerns the juxtaposition between luck and skill and how the two are intertwined.

Consider if someone has a strategy for starting, growing and succeeding in a business.  His strategy is to be brutally honest with everyone about everything all the time and insist that every single person in the company do the same.  Anyone who deviates – even the slightest – is immediately terminated.

Possibly to your surprise – or maybe not at all – it works!  And it doesn’t just work – it works incredibly well.  It is a runaway success.

By the way, my belief is that there is a company that has exactly this strategy, which is Ray Dalio’s Bridgewater Associates.  Many believe it is an extraordinarily successful hedge fund with an exceptional track record.  On information and belief, the culture just “clicks” for some people who thrive in it and is awful for others who quickly depart one way or another.  It is self-selecting for those who will be optimal for the business.

So what are the implications of this?

Well, others starting businesses might consider whether this is a great strategy?  After all, it worked at one place and that implies it might work at another place too.  But then, let’s do the math……

Let us pretend 100 such businesses were started with this exact strategy.  Most businesses fail, but for the sake of argument, let us pretend half succeed and half fail.

So now we are out in the world with 50 businesses that use this strategy that we know about – that the newspapers are reporting on – and that we can analyze for our determination on optimal business strategies.

But what about the other 50?  We kind of don’t know about them any more since they are just…….gone.  And presumably the reason they are gone is that they used this strategy and failed!

So we are – foolishly, or worse than foolishly – evaluating a business strategy only by looking at the businesses that succeed with the strategy and ignoring those that failed with the same strategy!

How stupid is that?  We evaluate a strategy by only looking at those who succeed with it?

We do this all the time for a very simple reason, which is that it is super easy to find examples of successful strategies, but very difficult and close to impossible to find examples of failed strategies, since the failures just disappear.

I feel entitled to kick myself because I myself fall into this trap all the time.  I eagerly read articles about Google and other great companies and much of the time conclude that my law firm should emulate their (successful) strategies, without considering whether maybe Google – or Ray Dalio – just got lucky.  Maybe 99% of those who try Ray Dalio’s brutal-honesty strategy fail!!!  How do I know?  The answer is I don’t have a clue because I am under-evaluating failure when assessing a strategy.

I give credit for this line of thinking to Michael J. Mauboussin in his book The Success Equation (Untangling Skill and Luck in Business, Sports and Investing).  He is very insightful and, among other things, teaches at Columbia Graduate School of Business.  Also, from my daughter — a mathematics major and neuroscientist working for Google — she says that in the science world this is referred to as a variant of the well-known concept of “selection bias”.

So how does this apply in the real estate world?  It applies just about everywhere.  For example, if you are an investor you presumably have your own investment style and your own manner of evaluating deals, hiring people, putting a team together, etc., but unless you are incredibly arrogant you will naturally look at the strategies of others that have succeeded and evaluate what you think they are doing right for possible emulation.  Have you considered that maybe those parties you are looking at were just lucky and others that tried that particular strategy aren’t around to be evaluated any more?

So what should you do with this knowledge?  The answer is simple – take emulation of successful strategies with a couple of grains of salt.  Maybe the strategy is excellent, or maybe the strategist just got lucky…..

A Tectonic Shift is Happening in the Real Estate World

As you may have heard by now, real estate is set to become a separate asset class on the Global Industry Classification Standard (GICS) and the S&P 500, separating it from the Financials Sector.  Notably mortgage REIT’s will be left behind in the Financials Sector under a newly created sub-industry group called…you guessed it…Mortgage REIT’s.

What are the implications of this?  I think they are dramatic and possibly one of the biggest changes to the real estate investment world since the internet popped up twenty some-odd years ago and made information freely available.

There are a bunch of articles already written on this subject, and almost all of them deal with the effect on REIT’s themselves; however, here I am going to give my thoughts on the effect of this transition on the non-REIT portion of the real estate world.

For background, please click here for some of the articles (that pertain to REIT’s).  These articles make some possibly (obvious?) points as follows:

They predict that a lot more money will now flow into REIT’s.  One of the articles points out that right now the total market cap of REIT’s is about 0B and that another 0B additional dollars will now flow into real estate due to increased real estate investment targets by major investors, such as Norway’s 0B Government Pension Fund.  I suspect there is no real way to quantify this and the number is plucked from thin air, but it does seem like “a lot” more money will indeed flow into REIT’s.

They also predict that REIT’s will become a “have to own sector” for appropriately diversified investors and, logically, REIT stocks will go up.  I will not touch that prediction.

And one of the articles states that it “will increase the visibility of real estate as a distinct asset class and encourage investors, their advisors and managers to more actively consider real estate – especially REIT’s – when developing investment policies and portfolios [and this will] likely lead to the creation of new investment products, such as active and passive mutual funds and exchange traded funds.  Advisors and managers will have more real estate fund options to recommend to their clients, likely facilitating positive capital flows into listed real estate equities.”

Here are my thoughts on the effect of this transition on the non-REIT portion of the real estate world.

First – I hate to be obvious myself; however, I do think that overall this change means that a lot more money will flow into the non-REIT portion of the real estate world.  Real estate will be considered its own asset class and investors of many different kinds will take it more seriously.  Investment professionals will steer their clients into these investments to a greater degree.

Second – I think this will to some extent move real estate closer to a place where, for more parties, real estate assets are thought of by many like “widgets” that happen to be in the general category of “real estate”.  This is because many, new, investors will want some vague concept of “real estate” in their portfolios, without knowing (or even likely caring much) what the underlying real estate really is.  In other words, much real estate will be invested in by parties that have no idea exactly what they are investing in.  I will call these parties, who are buying real estate for diversification of investment reasons, “Diversification Purchasers”.  To be clear here, I do not think Diversification Purchasers are necessarily “dumb money”; instead, they are potentially very intelligent parties who may recognize that they have no real ability to analyze real estate assets and, accordingly, will want a diversified portfolio that includes real estate in it without specificity as to the exact nature of the of the assets themselves.

Third – I suspect that this latest development will “never, ever” change.  Things like this (i.e. real estate now being a separate asset class) never, ever reverse course, so my sense is that this change is here to stay forever…

Fourth – my suspicion is that a lot of money will slosh towards the (perceived) safest part of the capital stack where the theme is (perceived) safety in yields, as this will be the easiest to sell to the Diversification Purchasers.  Returns for core and other income-producing real estate will likely fall if this is the case.  And, since “core” often consists of assets priced for perfection, there is a good shot that Diversification Purchasers will lose money from time to time, even when they think they are buying the safest alternatives.

Fifth – I suspect that this change in asset class for real estate is brought on by interest rates staying so low for so long that real estate, with higher yields, looks better and better by comparison.  Sometimes changes like these are made at exactly the “wrong” time in the market, so I wonder whether this is the bell ringing that interest rates are finally about to go up?  But I don’t dare predict this.  Many people much smarter than me have predicted that interest rates will go up (for sure) over the past eight years and they may be smart, but so far they have been wrong in that prediction.

Sixth – since there will likely be an increase in the number of parties buying real estate without really knowing what they are buying (i.e., the Diversification Purchasers) – and possibly inadvertently paying top dollar for it for diversification – it will make a lot of sense for “players” in the real estate industry to buy or develop real estate and package it for sales to these Diversification Purchasers.  I suspect that this is a good real estate strategy that will become better and better over time.  Sort of an enhancement on “Build to Core,” it will essentially be “Build to Diversification Purchasers”.

Seventh – it will be plain old dumb to compete with Diversification Purchasers.  They simply will have a different motivation to purchase than a sophisticated investor in the real estate world.  Accordingly, if you have a fund that is buying core assets – or assets close-to-core – it will get harder and harder to acquire assets of this nature at prices that are within logical and traditional underwriting, since there will be more and more Diversification Purchasers competing for it.  So, I suggest – don’t compete with the Diversification Purchasers – sell to them or manage their money in a public or private vehicle.  I wonder here whether possibly public non-traded REIT’s will come into greater vogue.

Eighth – it will be more and more important to be “the guy who creates value”, as I pointed out in my earlier articles in The Real Estate Philosopher.  If you can create value, then the products you create will be in more demand than ever from Diversification Purchasers.  However – I think, a bit sadly – the pressure will be on you to “create” real estate assets that fit into the “checked boxes” of the Diversification Purchasers, so innovation may become harder to justify.

Ninth – the companies which are advising the Diversification Purchasers will do better and better.  Diversification Purchasers will logically gravitate toward the biggest and most well-regarded advisors and, in turn, those advisors will be able to increase their market share.  If you are starting a career, this will likely be a good place to get a job.

Tenth – I suspect there will be more and more deals that are huge in size, as more money-manager-type “elephants” that are really financial services providers wade into the real estate area.  They will need to have very large portfolios to provide necessary diversification to their investors.  They will probably not want to acquire these portfolios piece-by-piece, but instead will want to gain control of them in one fell swoop.

Eleventh – I suspect that the regulatory changes sweeping the real estate world will increase significantly.  Over time, as real estate looks more and more like a part of the financial services sector, it will become more and more regulated like the financial services sector.  This will be a good thing for lawyers, compliance officers and other parties who work in this part of the industry.

Twelfth – “average performance” will become the goal for most real estate money managers catering to Diversification Purchasers.  Since the Diversification Purchasers are not (almost by definition) looking to outperform, they will want a diversified portfolio that includes an “average-performing” class of real estate.

These are my thoughts. Of course, I likely will be right in some of them and wrong in others; however, one thing is for sure, and that is that as real estate becomes a separate asset class there will be a significant impact on the real estate world (both the REIT and non-REIT portions).  All of us – lawyers, as well businesspersons – would be well advised to be perceptive about how this will affect our businesses so that we will benefit from the changes afoot, rather than the converse.

Additional Links:

Real Estate Takes Its Place as the Fourth Asset Class

GICS Classification of Real Estate  

Real Estate to Receive Dedicated Sector Classification

Everything You Need to Know About the New Real Estate Sector Coming to the Global Market In September 

Real Estate Strikers Out on Its Own in the Stock Indexes 

Real Estate to Be a Sector on Its Own