John Davids (0:00)

This company makes $60 million a year selling colors. Kinda. They don't actually sell them or print them or make them or anything like that, really. I'm gonna tell you all about it and the amazing business lessons that you can learn from them. That's coming up in just a second. Welcome to the podcast. My name's John Davids, but you can call me J.D. i'm the founder of Influicity, and on this show I like to share the stories of some of my favorite businesses and. And the people behind them. If that's your thing, subscribe wherever you're listening and leave me a review of this episode. Get my best stuff to your inbox@johndavids.com now let's get to the show. You're listening to Making it with John davids. Rewind to 1956. This guy Lawrence just started working at a printing company. But there's a huge problem, and Lawrence spots it right away every time a new project comes in the door. His print shop is just eyeballing the color they're estimating, and that means it's a new shade every single time. Rose, petal red might be one color on Tuesday and a different color by Friday. And clients are complaining. There's gotta be a better way to do this. Lawrence knows exactly what to do, so he's got a really simple idea. Color should be a language, not a guessing game. We need a system to. To identify every single shade every single time. For example, Barbie isn't pink. It's 219C, which tells you the exact recipe so that the box always looks the same. Zero variations. It's basic and it's brilliant. So Lawrence gets to work. He's mixing inks and sorting through pigment, cataloging each and every formula as he goes along. And then he makes his big move. He scrapes together his life savings and buys the print shop. Then he renames it Pantone. And this place is going to be iconic. He's about to change the color culture forever. Pantone's first product is a little book, and it's filled with premixed ink formulas, each with a unique code. It's called the Pantone Matching System. Pms. And we're going to come back to that a lot in this episode. Right away, PMS is a hit. Designers and printers start using it to. Then brands jump on board pretty quick. For example, Tiffany Blue becomes 1837C. Campbell's Red becomes 485C. National Geographic Yellow becomes 116C. Every color has a code so that it's the same no matter who's printing it. Pantone is now the language of color. And it's a great business, too. The main thing Pantone sells is still that book from 60 years ago. It's a must have for anyone who talks in color, from painters to printers to packagers. Each book sells for 200 to $1,000 a pop, depending on the size and the specs of the book. Plus, you need to buy a new book every couple years because colors change, colors fade, and some colors even disappear. But don't worry, Pantone always has another book ready to sell you. Plus, there's licensing fees. When Sephora sells their color of the year makeup, Pantone gets a cut. And I'm going to get into that whole business model in just a few minutes because it's pretty amazing how they've completely integrated into pop culture color. They also sell digital color libraries, color consulting, color training, and a lot more. They've literally created a universal language around color, one shade at a time. They've monetized it, and they effectively own it today. It's very hard to do your job job without Pantone. If your job involves color, Pantone is kind of like a data company wrapped in a training company dressed like a publishing company. They did the dirty work of organizing every color in the world and identifying the exact buyer who desperately needs that information. When you're standardizing an industry, it really is a winner take all market, but it's also super niche. So these guys aren't competing with billion dollar players. It's been six decades, and Pantone is the undisputed champion of the industry. That's how you make 60 million bucks a year selling colors. So there are a whole bunch of really interesting business lessons that I pulled from the Pantone story. And I dug deep. There's so much on this company. I mean, they're owned by a much larger company now, but they still dominate this really niche industry. And I want to get into some of those lessons right now. The first really big one that I love is the idea of necessity plus niche. And when you have this business formula of necessity plus niche, you really have a market monopoly. So let's set the scene for a second picture. That you're a graphic designer in the 1960s. You're in New York City, Don Draper, Mad Men vibes. And your client is a national food brand, right? Think Kellogg's, think Coca Cola, Nabisco. And this client is rolling out new packaging across the country. The design is locked in the typography is locked in. They've got their font choices, they've got a brand new color for their box. And this is important. It's going to be red, but not just any red. It's a very specific kind of red. And this red has been split, tested. The red's been in front of focus groups, it's been tweaked up and down the color palette, and finally everyone has signed off on it. You're the last person to see it, and now you've got to sign off on it on that final proof before it goes to the printer. You send it off to three different printing shops. You got one in Ohio, you got another in California, and you got a third in Chicago. So then the packages get shipped to the retailers all over the country. You got Walmart, you got Kmart, you got Price Club. Remember, we're in the 1960s here, so that's what it looked like. But the product that ends up on the shelves looks different from store to store. This isn't good. The stuff that came out of Ohio is maybe a fire engine red. California shipped a ketchup red, and Chicago is a little more of a rusty red. They're technically all red, but clearly that's not what we're going for here. We wanted an exact shade of red, and you've got zero quality control to nail those specs. So what happens next? Well, your phone starts ringing. You got angry clients. They're pretty pissed. They just spent the last 10 months testing this color, and they got signed off at the highest levels of the organization. And this was supposed to be the color, and now it looks different. This sucks. You didn't do your job. So the picture I'm painting here is a big problem in need of a solution. I actually can't believe that, that it took this long, really the 1960s, for them to figure out that this was a problem that had to be solved. All I can think about is that this was the age really that TV and billboards and mass market advertising were really taking off. And you had these brands post war coming out and essentially being national. And it was so important that the look and the feel of it was modernized. And it was the same standardized across the board. I think that's what was happening in the 60s and, and that creates the necessity piece of this formula. So now let's go ahead and look at the niche piece, because here's what's really interesting. If you didn't work in design or printing or packaging, you would have no idea that this problem even Exists. Most people, even the people at those businesses never thought twice about color. It just didn't even come up. And this creates a real first mover advantage. Think about it. Most people don't know the problem exists. The people who do know the problem exists don't know how to solve it. And the people who know the problem exists and might even have an idea on how to solve it probably aren't gonna do anything about it. Let's face it, most people aren't entrepreneurs. They're not gonna go and just create a solution. So whoever builds the solution has a durable and defensible business. Takes a guy like Lawrence to make it happen. And that's exactly what Lawrence Herbert figures out. He's already in the business. He's close to the problem. He feels it. He feels it every day. That painful picture I just painted, that was Lawrence. So he focuses on the intersection of technical pain and business consequence. Ooh, that's magic. And he creates the solution that no one can live without. Here are the two checkboxes. One, is this a must have solution for the people who need it. And two, are you serving a very specific group of people? If you got those two things, you're onto something. So let me dig into that second point a little further. You know, I had a marketing professor in university, I think her name was Professor Snow. And she gave me a solid framework on how to think about finding a good niche. And for all you MBAs out there, this is the same formula for market segmentation. But I'm gonna dumb it down. I'm not that smart of a guy, so grab a pencil, I'll tell you what the formula is and you're going to want to use this for yourself. So a good niche must have four things. Number one, it must be homogeneous within. Two, it's got to be heterogeneous between. Three, it's got to be reachable. And four, it's got to be profitable. Let me break that down and say it one more time. It took me a while to really understand this. Number one, it's got to be homogeneous within. That means the people in that niche have to all be kinda sorta the same. They're homogeneous. Number two, they have to be heterogeneous between. That means these people must be pretty different from other people. They can't be the same as other people. They're the same as each other, but different from other people. Number three, they've got to be reachable. You need to be able to reach them somehow. You can't sell to A market that you can't talk to. And number four, they've gotta be profitable. If you're gonna sell them something, they've gotta be able to pay you. You gotta make that cash flow. Otherwise what are we doing here, guys? There's just no point. So let's look at Pantone's niche through this framework. Number one, is this market, is this niche homogeneous within? Well, Pantone is selling to graphic designers and printers and packaging specialists and brand managers. They all have one critical need, which is color accuracy. So yes, I'd call that pretty homogeneous. Number two, are they heterogeneous between? Are they different from other types of people? Hell yeah. Most people aren't obsessed with color pigmentation. I mean, I don't nerd out on this stuff. I'd assume most people don't either. They probably never think about it in their whole life. Check number three, are they reachable? Can you market and sell to them in some way? Definitely. You can sell to design schools, you can go to trade shows, you can go directly to the print shops, you can do other industry partnerships. And beyond that, once they start using it, they're going to share it with each other. This has an important trait also of a winner take all market, which is that there is a network effect. I talked about this a lot in the ALO episode. I'll get to that more in just a second. When you got a network effect, you really have to have a great framework. And number four, is this profitable? Hell yeah. You're selling books for $1,000 a piece and they need to be replaced every couple years. This is a high margin, low churn business. I love it. Once you're embedded in companies and they use you in their workflow, they're not going to switch. You're part of the infrastructure. If you're spending more than $50,000 a year on marketing, I've got something for you. It's a playbook I wrote called how to Build a Social Media Selling Machine. You can grab it now for free@johndavis.com playbook. This is the nine step formula we use for our clients at Influicity to turn their social media channels into reliable revenue engines. Grab it right now@johndavitz.com playbook so I was thinking about this necessity plus niche formula and there are actually so many good examples out there. The first one that came to my mind, one of my favorite favorite companies was Bloomberg, which is an absolute necessity to anyone who works on Wall Street. It's a machine that gives you real time Financial data, news analytics, trading tools. So if you go back to 1982, Bloomberg launches serving a super specific group, bond traders at big investment banks. This is a small niche of finance dudes primarily who need one thing, better data. And before Bloomberg, these traders were basically working blind. Data was slow, it was clunky, or pretty much unavailable. So Bloomberg comes along and completely transforms this market. And these days I don't think it's a machine. I think it's just software on your computer. Back in the 80s, it was literally a machine. This thing costs $25,000 a year per user and firms who use it gladly pay. Because if you're making million dollar trades multiple times a day, you need a Bloomberg. You just can't do the job without it. So that's necessity plus niche on a pretty large scale. Now back to Pantone. Let's fast forward to the 1990s. So by now they're already deep in the world of design and printing. They've totally won that market. They've really created the standard, I would say. And most companies would just stop here, right? Their work is done, they own the market. What more is there to do? Panto notices something kind of interesting and they figure they might be able to leverage it to grow even more. Their color codes are no longer just appearing on proofs and production files inside design houses and print shops. They're actually showing up in style guides, on mood boards, in fashion editorials, in, even in magazines. People who aren't even designers are referring to colors by their Pantone numbers. Not because they have to for accuracy reasons, because they just want to. The codes become a part of the shorthand. Bloggers are posting seasonal palettes with actual Pantone swatchboards. Home decor interior designers are name dropping Pantone colors in client presentations and in their catalogs. This language, this Pantone PMS language creates precision and it's quietly entering the mainstream. People are loving it. So at this point, Pantone has two options. They can either stay in their lane, continue selling their swatch books and doing their digital licensing libraries and selling to software companies, or they can lean into what's clearly happening all around them. They are entering the lexicon. And of course I'm telling you this story because that's exactly what they do. In 1999, Pantone puts forward a bold idea. What if they select one color to represent the year ahead? A single shade that reflects the mood, the energy, the direction of culture. It's not necessarily going to be the top seller. It's just going to be a cultural Barometer interpreted through color as only Pantone can do. They call it the Pantone color of the year. The first one they pick is cerulean blue. It's kind of like a calm, reassuring tone. You got to understand the context here. So this is Y2K and just around the corner, when the year 2000 comes, people are feeling a lot of uncertainty about what this digital future is going to look like. So Pantone feels like this soft blue captures the moment. They make the announcement through basically a press release and a few media calls. They don't do a whole lot of flashy stuff because they're really not sure how this thing's going to turn out. They have no idea what to expect. Also, why would anyone even care? It's just a color from this B2B company. But the reaction kind of surprises them. So fashion editors start referencing this color, cerulean blue, in their upcoming collections. Lifestyle magazines are running features on how to incorporate cerulean blue into wardrobes and interiors. Designers across industries, not just printing, but other industries, are blending it into their work. And Pantone realizes they've tapped into something way bigger than just color matching. They're actually setting the culture of color. So over the next few years, a color of the year becomes a ritual. Every December, the company announces their new pick. And behind the scenes, the selection process is actually getting a little more robust. It's not just a couple people in a room. There's a committee of global color experts. They meet privately a couple times a year. I think they do it once in Europe and once in the US and they review fashion shows and travel trends. There's even political movements. They're looking at art exhibits, the emotional climate of the world. And out of those discussions, they land on a single shade. Okay, so that's color of the year. Now let's Fast forward to 2006, and Pantone starts hearing from some big companies who want to get in on the color of the year action. One of them is Target. So the guys at Target are planning a spring line of home goods, and they want to align their collection with the upcoming color of the year. But there's a catch. They can't wait for this public announcement in December. Right? They need early access because they got to plan ahead. They got to get the product to the market. They got to do marketing. They. They got to do logistics. And all that stuff takes time. So Pantone needs to change their entire process to accommodate this sort of brand partnership. And a little while after that, Sephora, maybe one of the most Famous uses of the Color of the Year. They reach out and they're developing a seasonal makeup line and they propose an official collaboration, products that are built entirely on Pantone's own Color of the Year and they want to co brand it, they want to co market it and they want to roll it out through their retail stores. This is big, this is Sephora and that really is the inflection point. Pantone realizes that Color of the Year is not just a media story anymore. It's a platform, it's a license, it's a way to move way beyond B2B and into culture without making a single product themselves. Oof. This is capital Light. This is not a lot of work. This is basically the epitome of, of their brand on the stage and everyone else just looking at it, paying attention and Pantone is the center of attention. Becomes a full on revenue line that makes money for them without them doing very much. Companies can use the Color of the Year and they have to pay Pantone a licensing fee to do so. I think there might even be a revenue share involved now. Today, Color of the Year is a global event. The announcement generates plenty of media attention from Vogue to cnn, magazines, newspapers, plenty of bloggers and influencers. They all talk about it. Entire product lines are launched around it. You can find the chosen color of the year in makeup, fashion, tech accessories, home decor, even wedding Color palettes are designed around Pantone. All of this happens without Pantone changing a thing. They don't have to manufacture anything. They don't sell the makeup, they don't sell the iPhone cases, they don't produce the mugs or the dresses or, or the eyeshadows. They simply provide the color and the cultural weight that comes with it. It's really a shift from utility to identity, from being a tool that's used by professionals to a brand that's recognized and trusted by the world. And the lesson here is this. If your brand has earned the trust of a niche, then ask yourself, what do we stand for? And is there something we can explore to extend that trust into the mainstream? And that might mean launching a report, curating some kind of trend, creating a certification, or just building trust in the category. There's lots of examples of this. Intel did this back in 1991 with their Intel Inside campaign. They understood that people trusted machines, more computers, CPUs when they had an intel inside the intel chip. It's not something that you can buy, but they still run ads Intel Inside because it creates trust and in their product and therefore they have more leverage with the folks that they sell to all the computer manufacturers. Quick break. So I can tell you about Influicity. That's the little marketing agency I started in my apartment about 10 years ago. Well, fast forward. It is not so little anymore. Influicity works with some of the biggest brands in the world, building customer communities that drive relevant revenue. We do this through influencers, podcasts, paid media, social media, content, AI and so much more. You can learn more@influicity.com and hey, while you're there, check out our case studies. We have a lot of them. That's influicity.com Gore Tex is another one. Gore Tex does this with jackets and outerwear. It's literally a fabric that's sold to brands so that they can make their apparel. But Gore Tex itself markets to consumers so that they can trust the products that are made with Gore Tex. And so if you look at the label of a piece of clothing and it says made with Gore Tex, you feel better about it, even though Gore Tex isn't selling you anything, it's the company itself. But when they put Gore Tex in it, you got some trust there. Dolby. Dolby's a great example. If you've ever gone to a theater, a movie theater, a show, concert, you'll see Dolby logos all over the place. And Dolby, again, doesn't sell any of those products to consumers. But the Dolby sound and audio and sonic experience is something that consumers value. And then maybe you'll go to the concert, you'll go to that theater, you'll do that thing because there's Dolby Sound. Now, there is a bit of a downside to everything that I've been talking about also, and I want to cover that now. When your product becomes the standard, things can go wrong. And that's because people feel like they own it, when in fact, you own it. And Pantone learns this the hard way in 2022. So at the time, most designers are working inside Adobe Creative Cloud. That's the suite of tools from Adobe Photoshop, Illustrator, InDesign. And Adobe, of course, is the dominant software provider in the creative world. And for years, Adobe has been including Pantone's full color library directly in its apps. So when you open a file with a Pantone color, it just works. You open Photoshop, there's your Pantone palette. Boom, easy. And then almost overnight, that all changes. So it's October 2022. Designers are waking up. They open their laptops, they open those Adobe files, and all Of a sudden, there's no colors. The colors have vanished and in their places is just solid black. There's no warning, there's no fallback. There's literally just a black box where your pink used to be or where your blue used to be. And if you hover your mouse over it, it says, this file uses Pantone colors that have been removed and replaced with black. That's it. Now what's happening is this. Pantone has ended their bundled licensing agreement with ad. So it used to be that you got Adobe and you just got Pantone with it, but now if you want access to that full Pantone color library, you need to pay separately through Pantone's own subscription product. They have this thing now called Pantone connect. Costs about 15 bucks a month. But here's where the controversy takes hold. It's not even so much that Pantone wants to charge you some money. It's how they did it, right? It's like it just kind of happened overnight. All of a sudden, you open these legacy files, files that you've been working on maybe for months, files that have been approved, projects that are midstream, and they just don't work. And for designers, it feels like your vendor has just reached into your computer and revoked the ability for you to do a part of your job. So right away, social media erupts. There are memes, tons of frustration, a lot of disbelief. Designers vent on Twitter, on Reddit, on Slack channels. Some call it a cash grab, others say it's kind of ransom feels like extortion, and there's a big feeling of betrayal. And Pantone, this company they have used and trusted for years, has just broken their promise. This is unacceptable. And this moment becomes a case study in the risk of platform dominance. Because the downside is of owning the standard, is that people don't feel like it's yours. They feel like it's theirs. They feel entitled to it. And that really isn't necessarily the thing they should be feeling, but it's how they feel. So how does Pantone react? What do they actually do? Here's the best part. They pretty much do nothing. There's no press tour, there's no apology video. There's no high profile pivot. Oh, I'm so sorry. We made a mistake. We'll change course. Nothing. They just stick to their plan. They continue to push everyone to Pantone Connect. You got to pay your 15 bucks a month or you don't get your colors. And while a lot of designers are frustrated, what are they going to Do. There's no alternative. The Pantone matching system is the industry standard. It's the thing their agency uses or their print shop uses. This is the language everyone speaks. You're just going to stop using it? No way. Some people actually did try to find workarounds. They tried to go to old books and old versions. Adobe went on its own apology tour and said that, we're very sorry that this happened. We can't really do anything about it, but we're here to support you. But at the end of the day, nothing bad actually happens to Pantone. There's no public data on the finances of Pantone, so there's no way to know if there was a real revenue drop, but I doubt it. So reputationally, yeah, people don't like it, but there's not much they can do commercially. There's really no major damage at all. Their revenue, I doubt had any impact whatsoever. Color of the year is still out there and it's doing as well as ever. Strategically. They do nothing differently. Pantone Connect still exists and they make a lot of money with it. So they didn't take a U turn or say, oh, we're so sorry, we'll go backwards, we'll come back to this later. They said, no, you want to use our color library, you got to pay for the privilege. So in short, Pantone survives the controversy because the bottom line is Pantone owns color and there's nothing anybody else can do about it. That's what makes this business so durable and so defensible. And at the end of the day, yes, they probably should have communicated better, but that's what you get when you have a business like this. There's really not much people can do. They're locked into the infrastructure. It's a winner take all market. There's a network effect. You use it, everyone you know uses it. You're not going anywhere. So what happened to this company that Lawrence Herbert started back in the 1960s? Well, in 2007, Xrite, which is a software company, purchases Pantone for $180 million. And then Xrite is purchased by this much bigger company called Danaher Corporation in 2012. And that's where Pantone sits today. That's the story of the company that took over the color industry. That's the story of Pantone. Get my best up to your inbox@johndavis.com.