Channel Explained

What are vertical markets and why are they important to the channel?

What are Vertical Markets?

Vertical markets organize businesses based on their industry or specialized needs. There are numerous vertical markets in the channel -- aerospace, automotive, education, finance, healthcare and legal, just to name a few -- and those verticals often break down into finer subcategories. Value-added resellers (VARs) and other service providers often choose to specialize in one or more vertical markets, allowing them to target potential new clients and increase account penetration with a richer set of products and services, leading to increased revenue and a more successful business. But vertical markets also pose challenges. Beyond simply knowing products and technologies, you must follow market trends and understand how events affect your clients. Read on to see how you can make the most of vertical market opportunities.

Why are vertical markets important to the channel?

Traditional sales are horizontal -- a VAR might sell hard drives to dentists, lawyers, school systems, governments or anyone that needs more hardware. There's nothing fundamentally wrong with this approach, but it assumes that the client knows what they want and how to use it. However, most organizations are not in the business of supporting IT, and selling to every market segment makes it extremely difficult for you to understand and meet each customer's unique needs.

"A lot of VARs want to be everything to everybody," said Dave Sobel, CEO of Evolve Technologies, a VAR and managed service provider in Fairfax, Va. "Then you're a commodity -- you're not any different than 'that guy' down the street."

By recognizing and understanding vertical market segments, you can target a particular customer base where you have experience or expertise. Operating in a vertical market in the channel allows you to fully understand that industry -- its trends, terminology, regulatory and compliance challenges, competitive tendencies and other key attributes of a business environment. In short, specializing in a vertical helps you to know the market and products, bring more insight to your clients and become an integral part of their business.

"If you've got expertise in a particular market space and know more about the various technology issues for a given industry, then you're a better choice for that end customer than a competitor that doesn't," Sobel said, noting that specialization is the justification that allows you to command higher rates than an IT generalist.

But vertical markets in the channel don't just focus sales efforts. Operating in vertical markets also allows you to generate revenue through consulting and services. For example, consider a dentist that uses a unique application to set up appointments and manage patient records. Once the client has purchased the software from a reseller, there are many other opportunities to consider. At a minimum, the software must be maintained (often through an annual service contract), deployed on a server, optimized for the client's network, and integrated with other utilities such as messaging/email tools so that the dentist can send appointment reminders. In addition, the client may require data protection and backup products as well as consultation to help them meet relevant HIPAA regulations.

It is possible for our dentist to buy "horizontally" -- acquiring disks from one vendor, applications from another, and so on. But the best value often comes from a VAR that can assemble a complete solution unique to that market. "That's an entirely different sale than the two-person law firm that shares the office complex," said Brian Babineau, senior analyst at Enterprise Strategy Group in Milford, Mass.

How does the channel sell to and profit in vertical markets?

Perhaps the most important key to selling to a vertical market is specialization -- tailoring your message and solutions to meet the unique needs of the specific market. "You need to make sure that the message is not generic and actually is relevant to that particular market space," Sobel said. "Make sure you actually speak the language of that industry."

For example, software developers may create multiple versions of their product that cater to different industries, using terminology and data sets that address those specific users. Involvement in industry trade shows and professional organizations related to a given vertical can also establish your market presence and inform potential clients of your offerings -- and provide you with an opportunity to stay informed and in tune with the changing needs of your chosen markets.

Being profitable in vertical markets is an ongoing challenge as with any business, but insiders note the recurring theme of "services" rather than sales -- providing complete and integrated solutions to the client's IT needs. The goal is to win more initial deals, but also provide deeper penetration into every account. An IT generalist may be able to handle email services, but not to support the client's critical line-of-business applications. This leaves potential work (and potential revenue) unrealized.

"If you really want to move into that role as a trusted advisor, you want to be working on as much of [your client's] IT infrastructure as possible. If you're not … you're leaving money on the table," Sobel said.

VARs that offer complete solutions are also in the best position to enhance revenue through incremental business. If you meet your client's business needs with a complete suite of applications, hardware, integration, training and support, they're more likely to call you when they have other needs, like more storage or additional network installations. Don't overlook the importance of your reputation in the channel. Professionals within a vertical market often know each other and share contacts for services. One client may refer you to another, or even introduce you -- lowering your costs of marketing and business development.

Profitability in a vertical market also depends on efficiencies gained by repeating sales and services. "The first time selling into a field of business has costs associated with learning the industry, customizing services and tools, and developing the product or intellectual property for the vertical," said Rand Morimoto, president of Convergent Computing in Oakland, Calif. "The next time the organization provides services to an organization in the same vertical, the cost of information gathering or customization is lower, increasing the profitability of the engagement."

What are the limitations or challenges of vertical markets?

VARs face numerous challenges operating within vertical markets. The most common issues are tracking the market and making adjustments to meet the changes that you see over time.

"It's continuously trying to understand their business model," Babineau said. "I think that's where most [VARs] fall down."

Being a successful VAR doesn't end with knowing a handful of technologies. Success requires you to fully engage with your chosen industry and follow the trends and events that affect it. Many VARs are true "students" of their vertical, reading industry-related news, magazines and websites and attending tradeshows or other gatherings.

Suppose you're aware of new regulations requiring additional storage or data protection for your vertical market. This may be an excellent opportunity to provide upgrades to your client base struggling to meet those requirements. Another example is the building industry, which is currently in a downturn due to the economy and housing market. Sobel noted that IT managers in that space are primarily interested in shaving costs. "A server consolidation project -- that's a win right now in the builder's space," Sobel said.

Additionally, vertical markets in the channel are constantly breaking up into finer subcategories with differing needs and priorities. Identifying and understanding subdivisions within a vertical can be extremely challenging for any VAR.

There are also supply chains within vertical markets. For example, a healthcare business may use an independent provider of MRI facilities or laboratories for blood analysis, often resulting in more complicated business relationships. Making changes at your client may have an unforeseen impact on outside services or resources. "The integration of the [vertical] supply chain is something that the resellers have to now learn, in addition to just the industry as a whole," Babineau said.

Growth can also affect the way clients buy. Clients may eventually grow so big that an integrated solution from a single VAR no longer makes sense -- they may ultimately choose to adopt horizontal purchasing.

How are vertical markets changing? How should VARs respond?

One of the most tangible trends in vertical markets has been the demand for justification -- understanding why money is being spent on IT and quantifying its benefits to the business in real monetary terms. This is particularly important for you because each vertical can emphasize different justifications. One vertical may justify an IT investment to accommodate new regulations, while another may justify an IT investment to save money. You need to understand the return on each investment as it relates to the client.

Insiders also note that acquisitions and outsourcing are changing the composition of vertical markets. As one example, manufacturing companies that mainly outsource overseas are calling themselves "logistics organizations" that specialize in managing overseas facilities rather than manufacturing themselves. "This opens up a whole new series of new verticals, or reclassifications of ones we used to know in the past," Morimoto said.


This was first published in May 2008

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