15 Mar Verticalization: Why You Should be an Expert in Your Market
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IT Services customers today are expecting experts in their market. IT Service providers should pick one vertical market and be the dominate player in that market, aligning with your technology specialty.
When you pick a vertical market you:
- Narrow your marketing focus to companies that need your services allowing for better leads
- Build referrals and references of like-minded businesses that will recommend your business
- Concentrate sales efforts on deals you know you can win
- Set yourself and your business up for a premium valuation and successful M&A
Transcript:
Mike Harvath 00:04
Hello and welcome to this week Shoot the Moon podcast broadcasting live in direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you know Revenue Rocket is the world’s premier growth strategy and m&a advisor for IT services companies. With me today are my partner’s Ryan Barnett and Matt Lockhart. Welcome, gentlemen.
Matt Lockhart 00:27
Good to be with ya. It is Minnesota State hockey tournament time. And so, you know, for those of you who aren’t in the know, the Minnesota State hockey tournament is the kind of the premier youth state high school hockey tournament in the in the country, right. And it’s good, you know, kind of think, Texas football, Indiana basketball. So, you know, productivity here in Minnesota may be taken a little bit of a dip for the next couple of days.
Mike Harvath 01:00
Yeah, and with all like all good hockey tournaments, we’re getting snow, which seems to happen during these tournaments. So as I learned last night, you know, this tournament attracts over 100,000 spectators, so pretty amazing stuff.
Ryan Barnett 01:17
Well, the rumor is guys, that both of you had been working on your hockey hair flow, so I can’t wait for the day to see what you’ve been gone and, and the approach that you’re going to take the camera. Today, we’re going to switch gears a little bit, and we were big proponents, the strategy side of the house. And if you think about our business, a lot of our work is done with companies to help them grow, whether in organically or organically. And part of the areas in which we push clients is to take a look at a dean an expert in a vertical market. And we will want to do is break that down a little bit about what verticalization means to a company and why it matters. And ultimately what that means in terms of a potential m&a deal. So I’ll just start out the basic question here. And Mike, help us understand what what is a vertical market approach? And why does it matter to an IT services company?
Mike Harvath 02:18
Yeah, so you know, verticalization is really about being the master of a market. You know, you could pick and define how narrow or wide that market is, but it’s an industry market typically, let’s say it could be hospitality, maybe with a nuance of, you know, lodging and hotel or you know, leisure travel or it could engineering focus firms, it could be any sort of industry vertical segment from which you can apply your technology expertise. And so, you know, there’s oftentimes firms that focus on accounting firms or legal are going to talk down a long list, but what we see with all of the firms that we’ve worked with that vertical eyes, essentially focus their energy at a market with their technology chops, is that they tend to outperform those that don’t and when I say outperform, they tend to grow faster, and they tend to be at a much higher profit level than those that don’t. And we can unpack that more in this podcast as we move forward. Why that is, but it certainly we see a repeat pattern between firms that are verticalized versus those that don’t.
Ryan Barnett 03:33
If a firm is looking to verticalized how do they start to do this? Matt, I’d love to hear you a little bit on understanding that core concept of evaluating customers or identifying a market need, how do you make that switch and taking a look at the vertical market?
Matt Lockhart 03:50
I think a lot of firms, you know, start in a non verticalized right approach. So you know, let’s sort of put it into that context of a firm that is been maybe more of a generalist from an industry perspective, and oftentimes what happens is just naturally, their business starts to seem a bit more concentrated. For example, they may be working in insurance right for a large insurance provider and you know, because of that case study their name is known and or they may be at an industry conference and they pick up some more business within that vertical and so you can take a bit of a stepping stone approach and start with marketing your capabilities within that vertical based upon your past experience. And then you can take a step forward and you can be targeting in your ideal prospect list right your your ideal target, you know, list and your Putting more concentration within that space. And then you can step in even further and you can start to have higher leaders within that vertical space. And then you can start to build, you know, some intellectual property, it could be in the form of process, it could be in the form of market approaches that when within that vertical, and you can start to build that intellectual property, oftentimes, what you will see is, is then you turn that intellectual property, sort of processor knowledge, intellectual property, into repeatable forms of intellectual property that makes you more attractive, allows you to demonstrate competitive advantage, being able to get to market faster with technical solutions, and so on and so forth. It’s really sort of raising up the value equation that you provide to that particular vertical. But you know, that’s a, that’s a journey in and of itself, and being able to start, you know, with the marketing and sales capabilities, and demonstrating to prospects and customers that you’re getting more and more intimate that you’re understanding that, that your business is, I think, really a practical way to lead into a vertical approach.
Ryan Barnett 06:34
To add here that, if you’re looking at your customer base, you can start to see it’s oftentimes you’ll see a trend, and to group a number of problems, or a number of companies that are similar together can be the first indication that you perhaps already have a vertical market strategy. But you’re not necessarily marketing to that strategy. Oftentimes, we see resistance from firms to to pick one market. And, and Mike, I think this in most engagements we work on, why does Why is there a resistance to to picking one market or narrowing down?
Mike Harvath 07:15
It has to do with fear, I think, Ryan, to kind of cut to the chase, I think people are afraid that if they focus on one market, that if they get a call from someone where they can do work, and maybe they’re not in their market, they might have to say no to that company, or there’s fear that, you know, if that market goes through some tumult that a lot in their business, it’ll, it’ll be a huge negative impact on their business. And a lot of these fears aren’t really founded. In fact, the other thing I think that’s interesting is that it has a lot to do with how they run the business today. So if you run a business that’s more horizontal with a great technical expertise that you’re delivering to the marketplace, those businesses are pretty hard to market. Because if you, you can certainly say you’re great, technically, to the market. But you know, that’s kind of table stakes for almost every client. The clients want someone who’s an expert in their industry and the technology, that’s what they’re really looking for. And so, at the end of the day, I think companies that tend to be more horizontally aligned, tend to react, and not proactive when it comes to coming to new customers, meaning they tend to wait for the phone to ring or to get an email, or maybe they’re even leveraging a very proactive sales organization. That is, you know, through personal heroics doing great stuff, right, they’re out building relationships, and, and, you know, talking to folks about their needs, and then crafting a solution for them. And I don’t want to minimize any of those things. Those are all things that are great and certainly need to be done. But there’s a big amount of opportunities left on the table, by not being proactive. And it’s very challenging to be super proactive, if you can’t have an effective marketing function in the business. So your ability to narrow the target to one that you can shoot with a rifle versus a shotgun, allows your marketing spend to be much, much more impactful and ultimately create leads for you. And that allows you to be much more proactive about carving out your niche and eliminating competition in the market. And I think when I mentioned earlier about how companies tend to grow faster, and they tend to be more profitable if they’re verticalized. I think that’s predominantly due to those reasons, right? If less competition, there’s less price pressure, they tend to have the ability to know the market to a point where they can be much more knowledgeable and when are often here they can do better work, right one that work that tends to be more valuable to the client or they can get a greater share of wallet.
Ryan Barnett 10:11
Just to add on to a marketing perspective, many firms, when they start on a marketing journey, they try to cover a kind of absolutely every base. And in reality, if you start to look like you can do everything for everyone, you kind of become, you really are doing almost nothing for no one. And to start to narrow down and to, to look at the compelling reasons to buy in the pains of an industry. It really helps a marketing accelerate. So you can start to tap into the the target markets and lists that are very approachable, comparing to try to target everyone in the world. So the really, the ease of marketing becomes exponentially more when the vertical becomes defined, and you have commitment into that vertical. So long term gains, easier marketing, those are all those are all really powerful items, in addition to what Matt had mentioned earlier around the additional intellectual property and intellectual delivery capabilities. And the client trusts that that Mike was just talking about that, I’d love to understand. If a company has a vertical market approach, we see a lot of favourability from channel partners, for example, Microsoft is has developed a lot of its channel partners to be vertical specific. But it also seems to have an impact on valuation. I’d love to understand why does having a vertical market approach what’s what’s the difference when it comes to an m&a deal. And Matt, maybe you want to start us off. And Mike, you can follow up.
Matt Lockhart 11:52
A variety of reasons, right? To Mike’s point, they tend to be more profitable, more profitable is always good. And in terms of being attractive to an acquirer, oftentimes, larger firms or firms that are in an inquisitive mode, see the opportunity to capture a new market. So they recognize that the the expertise of a firm with with vertical play is an enabler for faster growth for for an acquire. And being I think that your point around being recognized within those big channels, the big cloud players who who are all taking in a vertical market approach is in symmetry to faster growth and greater recognition within that space. So, you know, I mean, shoot, guys, we, you know, we know that we’ve just completed in the last 12 months, like for deals with firms that we were fortunate enough to provide our sell side services towards that did demonstrate a vertical expertise. And in every one of those opportunities, they traded at a higher multiple, than those that would didn’t have a vertical approach, that the acquiring firms recognize that, that these firms were going to be, it was the opportunity for a one plus one equals, you know, four, or five or six. So, you know, we’re seeing it in, in reality that they are, you know, just simply much more attractive. Now, in in every one of these cases, it’s not as though those firms didn’t do work outside of one primary vertical, they all did, right. And, and so dispelling this fear that you’re not going to be able to work beyond a particular vertical, you know, it’s just not reality. However, a large percentage, and in most of these cases, a majority of the business was within, you know, one, one vertical. So in our experience bears that out. The data bears that out, and it’s just a great strategy.
Mike Harvath 14:15
Yeah, I would add also, Matt, that, you know, a couple observations about that, for companies that are verticalized. And I think you bring up a good point, which is it doesn’t mean you’re not doing work outside of that vertical. Well, we find sort of anecdotally over the last 22 years or so is that companies that verticalized actually, you know, as a kind of aligned to the vertical get great velocity in their sort of marketing and sales pipelines. And that even enhances their ability to close business outside of the vertical. They tend to streamline those processes and it helps them execute much more effectively on the sort of marketing and sales Mandy, as well as extended a much broader net into that vertical so that there were referrals and word of mouth. tend to go up for even things that are outside of the vertical. So it’s sort of a fascinating development as a move in the market. The other point I wanted to make was that when we think about buyers, usually companies that are verticalized will bring what we consider to be non traditional buyers to the table, which creates more competition, which ultimately does drive up value as well. These could be software companies, for example, in our pure play that are looking for a services extension in a vertical that they focus on. Or it could be even a non tech company that aligns that vertical, in some sort of adjacency, you’ve certainly seen that, that come to bear and say, Wait, you know, we supply an industry like dental or hospitality, and do nothing with tech, but we want to have, you know, tech footprint, where we can get a one plus one equals three or a four. And I, I wouldn’t dismiss that as being very, very material and significant. Because many of these companies tend to be larger, or they tend to be around a longer amount of time and have, you know, quite a bit of access to resources in order to facilitate these deals. And many of them sort of run towards that tech, if it’s within their domain where they can certainly see leverage and opportunities for cross sell and upsell as well.
Ryan Barnett 16:23
I would say that in an m&a transaction, if a company has a specific vertical market focus, there could be a chance that the buyer is just not in that market. Mike, you brought up a great example of dental, there might be a healthcare specific firm that really loves everything in healthcare, but hates Dental. And I think that goes with the flow and understanding, ultimately, that’s not going to be the right strategic fit. And you can work with buyers that will find you to be much more captivating to their strategic their audience. And it will be a better match when those vertical markets align. Or alternatively, you’re bringing a new vertical market approach to a company that doesn’t have that isn’t in the net vertical market today, they would like to be in it.
Matt Lockhart 17:16
Somebody sort of used this analogy, it’s like it’s like hunting with a rifle versus a shotgun. And I think that that applies in in the vertical go to market approach. But it also applies in the context of finding the right fits in an m&a transaction that enabling that awesome strategic fit, which is you know, oftentimes one of the most important parts of any transaction is a lot easier when there’s when there is that focus that’s applied that focus with the rifle if you will.
Ryan Barnett 17:53
Well said. Mike, Matt, that was the questions I had today. Any any closing thoughts? Matt, I’ll throw it over to you, and go to Mike from there.
Matt Lockhart 18:02
No, I think great topic. We would love to talk more if if if those of you listeners out there you’re gonna react and are like, Nah, we’d love to talk to you right and or firms that have considered it have tried it are looking for more effective approaches would be happy to share our experience and and our method because we’ve got a very repeatable playbook that can help firms get there so great topic. Love it guys.
Mike Harvath 18:33
Thanks, Ryan. Thanks, Matt. Yeah, I don’t have a bunch more to add other than certainly lean in on this idea. I think it will certainly help eliminate competition in your business, help you grow faster and be more profitable and who doesn’t want to do all that? Not to mention add a higher multiple at the time of a transaction should you be a seller? We think all that is good stuff. So with that, we’re gonna tie a ribbon on it for this week here at revenue rocket, the shoot the moon podcast and encourage you guys tune in next week, where we unpack and explore other and interesting new ways to grow your business and or to facilitate m&a transactions. With that, make it a great week. Take care.