Commentary & Analysis
Vertical Marketing: It Starts with Market Analysis
By Barbara Pellow July 12,
By WhatTheyThink Staff
Published: July 12, 2006
By Barbara Pellow July 12, 2006 -- Owners of graphic communications companies continually complain that profit margins are rapidly deteriorating in the U.S. market, in part because their offerings are perceived as commodities. To dispel this belief and restore the graphic communications industry to sustainable growth, firms are emphasizing specific niche opportunities and catering to more focused customer needs. Successful service providers are taking a vertical market approach to de-commoditize their product and service offerings. Vertical marketing can open new doors where there maybe little competition. Vertical marketing is promotion targeted at a specific industry. The benefits of vertical marketing are immense. Vertical marketing can open new doors where there maybe little competition. Often niche markets are ignored by large companies. A creative entrepreneur and marketer may find it easier to establish brand recognition in a specific industry. In addition, customers are frequently willing to pay a little more for an industry-specific product. Customers also appreciate the unique benefits they experience with the more personalized customer support from a smaller company. They welcome opportunity to purchase from a company familiar with their industry and needs. Industry professionals also tend to listen to their peers, and a recommendation or endorsement can help spread your organization's popularity within a specific market or industry segment. If you can't think of a niche, create one. Take a look at the type of customers that you sell to, pick a handful and ask them why they use your services. Their answers may surprise you. By talking to existing customers, you can extract a profile of a user and determine ways to reach potential customers with a similar profile that had not previously been considered. Take a look at the type of customers that you sell to, pick a handful and ask them why they use your services. Their answers may surprise you. However, when you decide to target a specific vertical market, it must be in the context of what the value of that vertical market is to you. That value can be calculated by: * Evaluating the size and revenue potential of each vertical industry, and * Determining and defining your expertise in the particular market segment. As graphic communications service providers assess new business opportunities, they need to take the time to analyze the market. Retired IBM CEO Lou Gerstner summed up the challenge when he said, "Good strategies start with massive amounts of quantitative analysis, hard, difficult analysis that is blended with wisdom, insight, and risk taking." How Do I Analyze a Market? Rarely have I heard an owner of a graphic communications firm indicate that he or she has conducted market analysis to understand a business opportunity. As graphic communications service providers migrate from the strategy of pursuing "any print job that comes in the door" to more profitable vertically focused activities, market analysis is essential. The goal of market analysis is to determine the attractiveness of a market and to understand its evolving opportunities and threats as they relate to the strengths and weaknesses of the firm. Graphic communications service providers also need to do market analysis to spot market changes and to be in a position to respond to them appropriately. The market you should be looking at is the potential market that you want to serve, not one that is limited to your existing customer base. The market you should be looking at is the potential market that you want to serve, not one that is limited to your existing customer base. Depending on the vertical market you are defining, your target market can be much wider than just the people you already reach. It's the people that you might someday reach, or could reach that you want to be concerned about. As you assess market dynamics, think about the impact the Internet has had on the graphic communications market. The market for commercial printers used to be firms within driving distance of their establishments. Today, the market is everyone connected to the Web. When you've identified the new vertical market opportunity you want to pursue, there are five key areas you will want to consider in the market analysis process: 1. Market size 2. Growth rate 3. Profit potential 4. Competition 5. Market trends Market Size/Market Growth You want to be able to measure and quantify any new market opportunity. The market size can be evaluated on present sales and potential sales if the use of the product and customer base were expanded. The information sources that will help you with market analysis are different for every vertical market. The following are information sources that can be used to determine market size and growth: * Government data * Trade associations * Financial data for major players * Customer surveys Demographic and competitive reports can be attained for a fee at Dun and Bradstreet's Web site, dnb.com. Industry newsletters can be emailed to you when new data is reported. By researching your industry on the Internet, you will uncover lots of potentially valuable marketing analysis information. Examples of widely used standard research sources include: * American Demographics Magazine is designed to provide definitive analysis of trends, issues, and events shaping and reshaping key consumer market segments. * The U.S. Department of Commerce publishes the U.S. Industrial Outlook each January. It provides a general economic outlook by forecasting growth rates for the coming year and reporting on production for the prior year. * The U.S. Census Bureau publishes data in more than 100 current industrial reports on 5,000 manufactured products. Additionally, through the Census Bureau you can find data about the numbers of establishments in particular industry segments by number of employees and revenues, down to the county level. Not all of the information you need is going to be publicly available. You may have to settle for educated estimates, or in some instances actually conduct your own customer surveys. A key information source, if you are evaluating the variable data print opportunity, is the Direct Marketing Association. A graphic communications service provider I recently worked with was assessing the B2B direct marketing opportunity. He accessed the 2005 Direct Marketing Statistical Fact Book and found the following data. * Advertising expenditures for B2B direct marketing are forecast to grow by 5.9 percent from 2003 to 2007. * B2B sales are forecast to grow on an annual basis 9 percent in the four year period from 2003 -2007 to $1.4 trillion * Direct mail is one of the marketing functions handled internally * Direct marketing is perceived as the top tool to generate leads * While the Internet is increasingly viewed as a vehicle for attracting and maintaining customers, the substitution of online for traditional methods does not appear to have increased. He gathered further data to determine specific vertical industry segments within the B2B space that would be most attractive to him given current capabilities. As he looked at growth areas, this data helped him turn his focus to direct marketing lead generation programs for high tech manufacturers. Market Profitability/Competition In looking at new vertical markets, you want to assess the profit potential and competitive environment. Michael E. Porter, head of the Institute for Strategy and Competitiveness, identified five factors that influence profitability. * Buyer power - The buyer's power is significant in that buyers can force prices down, demand higher quality products or services, and, in essence, play competitors against one another, all resulting in potential loss of industry profits. Buyers exercise more power when they are large-volume buyers; when the product is a significant aspect of the buyer's costs or purchases; when the products are standard within an industry; there are few changing or switching costs; the buyers earn low profits; potential for backward integration of the buyer group exists; the product is not essential to the buyer's product; and the buyer has full disclosure about supply, demand, prices, and costs. The key is to provide a service(s) offering with significant differentiation and higher switching costs for your selected industry vertical. * Supplier power - A graphic communications service provider exerts even more power if there are no perceived substitute products or the product is an essential component to the customer's business strategy. This is why savvy graphic communications service providers are integrating into business process outsourcing agreements with customers, including marketing automation, supply chain management and multi-media delivery. * Barriers to entry – There may also be barriers to entering a new vertical market including economies of scale, product differentiation, capital requirements, switching costs, and distribution. * Threat of substitute--A substitute product involves the search for a product that can do the same function as the product the industry currently produces. Will the Internet displace print for the vertical segment chosen? * Rivalry among firms in the industry – How likely is it that other competitors can enter the market and quickly gain a strategic advantage? Market Trends Finally, as you look at new segments, you need to assess market trends within the industry vertical market. Changes in the market can be a source of new opportunities as well as threats. The relevant trends can include changes in price sensitivity, demand for new levels of service and support, and expanded distribution to emerging markets. Regional trends may also be relevant. Going Vertical The current state of the graphic communications marketplace underscores the need to abandon business models dependent on commodity offerings and move toward business models that provide services that cater to specific vertical industry needs. Graphic communications service providers with no specialization are viewed as generalists, meaning purchase decisions will primarily revolve around pricing. Changes in the market can be a source of new opportunities as well as threats. The benefits of vertical marketing can be immense. As competition drives down margins, solution selling into vertical markets enables real competitive differentiation, and allows increasingly sustainable profit margins. When graphic communications service providers focus on vertical market solutions, they move away from the commodity sale and move toward higher-margin, value-added services. The vertical approach to marketing strengthens customer loyalty by developing closer links to the customer's core business by way of customization (by vertical industry) of products, services, sales reps, customer service and support, documentation, and training. Vertical marketing efforts are not something that the graphic communications service provider should take lightly. It needs to be done with comprehensive, quantitative market analysis, and as Lou Gerstner said, " …blended with wisdom, insight, and risk taking."