Going Vertical: Discovering Target Markets That You Can Succeed In

Vertical markets, going vertical

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Business leaders are increasingly trading in their shotguns for laser-sited sniper rifles.  You may think I’m talking about a clever way to circumvent new and anticipated gun legislation, but you would be wrong.  Of course, I am referring to targeting markets; more specifically, generalist businesses bringing a focused attack to targeting customers to generate more, deeper and multi-faceted layers of customer relationships and sales revenue.

But how do you succeed in selecting the right target market, or vertical, and early stage execution without total, break-the-bank reinvention of your company?

Why Go Vertical?

This is a question that many businesses invested in a new found vertical approach don’t really need to answer.  The states of their businesses sales figures have made the decision for them, or at least to try something else to bolster flagging numbers.  But what might be driving this forced change that many businesses centered on their core horizontal value propositions are seeing?

The world has changed dramatically in the last 10-15 years.  Specific solutions for customers have not only gotten to the market segment level, they’re being served up to the individual.  The biggest and most obvious catalyst has been the Internet, going from a novelty to a ubiquitous necessity for most of the world’s population.  The availability of information at people’s fingertips has conditioned the public, including business owners, that solutions are available tailored to each person’s unique needs.  Whether those solutions are in fact unique to the buyer or not is less relevant than her expectation that it should be.

Let’s take the wonderful world of IT (information technology) and software development, an area I have some experience in.  Thousands of firms around the world are established based upon the horizontal skill sets of programmers, business analysts, solution architects, project managers and more.  Each has its own sub-horizontal talents for different software languages, such as Java, Microsoft .NET, etc.  Those talents, sold many times as technical staff augmentation, are now almost complete commodities.  In the United States, offshoring of IT has further eroded margins and upset the pricing apple cart (albeit with its own share of problems!).

Yet many owners of these firms have resisted vertical segmentation (excepting the broadest possible commercial space versus government space) for fear of over-specificity, losing potential business outside a stated niche vertical market, bitterly clinging to their business shotguns.  The margin and rate facts, however, are aligned with the verticals.  The same tech talent that possess domain expertise in a vertical like health care or financial services, for instance, earns more revenue as an industry problem solver than the generalist ever could.

The Intersection of Change and Capital

Using the following section as a preamble, let’s start by looking for a vertical market that is profitable and will be for the foreseeable future.  Everyone wants to get in on the ground floor in a vertical, to be one of the first players to serve the market.  Trouble is, most are not.  They arrive after that market has been exploited and is over-ripe, and find they’re in a niche that needs to be killed.

Some vertical markets are mature but are changing dramatically, and as such they are a gift that has the potential to keep on giving for a while.  These segments are filled with competitors, but are also poised for great opportunities because of their magnitude.  The health care industry comes to mind.  We’ve all heard that in the USA, health care comprises between one-sixth and one-seventh of the GNP (gross national product).  Forrester Research tells us that for IT outsourcing (ITO), to continue the prior example, the size of the health care ITO market in 2012 was $27.5 billion, expected to reach $43.3 billion by 2016.  That’s a $15.8 billion increase over four years, or substantial growth opportunity.

If you’re looking to target a vertical market, here is your quick process for getting to a short list that stands to keep on producing:

1.       Come up with and write down 3-5 industries that you think are worth targeting.

2.       Ask for each, is that industry flush with cash?  This is why health care, financial services, government services, and higher education tend to be major market segment choices.

3.       Now ask for each, is the industry undergoing massive change?  The change can be internally or externally driven, such as massive new legislation (Obamacare, Sarbanes-Oxley) or world events.

4.       Any of your trial verticals where you answered a Yes to questions 2 and 3 stands to be a vertical market worthy of your investigation.

This exercise of capital meeting change may seem obvious, but I chose obvious examples chock full of billion dollar competitors.  If you’re looking for vertical markets to avoid competition and be one of the biggest fish in a much smaller pond, you may feel free to use tools like Google Trends, Twitter and others to determine industry change.

Historical Reduction

Often businesses looking to target vertical markets look first to what they have experience in, knowing that if you’re going to play in a vertical market and win, you need documented experience in that market to be taken seriously.  For firms that have traditionally set themselves up as horizontal providers of goods and services, the company examination of historical customers or projects/services delivered may be necessary.  This is simple enough to do.

1.       Look back over the past 5 years of business at your list of paying customers. 

2.       Categorize each customer based upon the industry each represents.

3.       Sort from largest to smallest.

4.       Repeat steps 1-3 based upon service delivered for each sale.

5.       Pick out the top 5 categories by customer and then by work delivered.

6.       Match against the prospective vertical markets you are considering as those with a future.  Wherever you have a history match of significance, either in dollars generated (such as a large consulting project) or transactions, you have found some case study material that will ease your transition to targeting that vertical market.

I don’t want to get confusing for step 4 but it bears explaining.  Staying with today’s example, you may find that your IT firm did database work for an insurance company for its health care division, and it also put in a human resource management system for a local hospital.  Though unrelated by horizontal skill for delivery, both of these are cases where you served the health care industry.  These examples are not always as obvious as customer industry categories, and that’s where the exercise helps clarify your thought.

Value Delivered Inventory

Now you’ve got a great idea of verticals that are not only poised for profit if you market them correctly, but also markets you have some experience in.  So what are you going to target them with that is meaningful?

Without laying out steps (you’re getting the idea already), make a matrix of your primary solution sets or products that your business delivers versus the customer problems each solves.  Every solution, skill or product solves at least one if not more than one problem for customers.  Bump those problems solved against those experienced by the vertical industry(s) you’re exploring.  When you hit something that is common, you’re finding out where you can add value to that industry using existing products and talents.  It doesn’t matter so much if your company has never delivered that particular solution in the target vertical industry, the horizontal skill can be leveraged as a solution.

Now you may have to do a little research or consort with industry experts in a vertical to come up with the top problems facing their industry.  These aren’t hard to find using social media tools (I like LinkedIn industry association Groups), Google, and by tapping your personal network.

The Sub-Niche

Savvy business executives reading this piece are ready to nail me right now because I haven’t mentioned competition.  To keep the running case going, electronic medical records (EMR) systems and their refinement or replacement continue to be needs for hospital systems.  If you decide that is the space you want to play, understand that there are massive competitors already dominating that space, each with more marketing money than you, larger sales forces, and a proven reputation in the health care universe.  Good luck!

This is where a bit of competitive analysis comes into play, where you ask what sub-niche opportunities exist in the vertical (as in problems needing a solution) that either represent a new challenge where you can be an early entrant solution provider, or that would be considered small by the behemoth providers to the industry but would be significant business to your company.

Total Vertical Immersion

The magic mix occurs where you find a low-competition sub-niche or two in a growth vertical market that you can service with little or no modification to your existing offering.  This allows you to enter a vertical market with the lowest amount of risk and capital outlay, and highest opportunity for early success.

I’ve only begun to scratch the surface on what it takes to gain a strong and growing foothold in the vertical(s) of your choosing.  Hiring domain experts from the ranks of your customers, seeking out channel partners already deep in the vertical, and building an extensive vertical marketing model and future product strategy all help your company fully immerse itself as a vertical market force.

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