Choosing a New Vertical Market

I sat in on a strategy session this week with a company I am working with that is looking at entering a new vertical market.  A VC moderated the session and shared his methodology for looking at potential new vertical markets and I thought I would share it because I LOVED it.

The Bowling Alley
The only real framework I have ever worked with when it comes to looking at choosing a new target market is the “bowling alley” approach from Crossing the Chasm.  At a high level the theory goes that you pick a niche market to dominate which constitutes your lead “pin”.  Once you’ve conquered that one you move to adjacent related markets and knock those pins over until you’ve knocked out a sufficient number of pins to move into the broader general horizontal market.

Another Approach
The exercise we went through this week was grounded in a lot of the same principals but took a lot more of the solution and the company’s unique value into account.  Here’s how it worked.

The Unique Characteristics of Your Existing Market
First we took a look at the unique characteristics of the market the company was currently in. We broke it up into categories and brainstormed a list of things we thought were unique for each.  We used the following categories:

  • Customers (meaning the enterprises we sell to)
  • The Customer’s Customers (meaning the end customers that the enterprises sell to)
  • Products that our Customers sell
  • Distribution/Go to Market (how do our customers take their products to market)
  • Existing product/solution landscape (how are companies currently solving their problems and what products are currently implemented)
  • Decision makers and influencers (who in the company holds the budget to buy a solution, who makes the decision, who influences the decision)

The Unique Characteristics of Your Company
Next we went through the same exercise only this time looking at what were the unique characteristics of the company itself.  The categories we looked at were:

  • Solution
  • Domain Expertise
  • Distribution/Go to Market
  • Partners
  • Track Record

Choosing the Key Characteristics Short List
After we did that we went back to the first list and picked out which characteristics we subjectively judged were the key characteristics of the market that made it a good fit for our company.  Surprisingly enough this was very easy to do once we had captured what we thought was unique about our company.  We ended up with a short list of about 10 things out of the dozens we had originally captured.

The Target Market Long List
Next we brainstormed a list of potential target markets.  We did not limit ourselves to the markets adjacent to the one we were already in.  Again, the work that we had done had an influence on the markets that ended up on the long list.  For example, we identified that one of the things that made our existing market a good fit for us was that in that market products were sold through an independent dealer channel.  We ended up adding a lot of markets to the long list because they also had an independent channel.

The Target Market Short List
The last step was to look at the list of markets and score them against our 10 attributes giving them a point for each attribute. We ended up with a short list of 2 markets that scored better than all of the others.  One of the markets chosen is adjacent to the market the company is in today, the other is not.

Next Steps
The next stage of the process is to do a deep dive on the short list markets to figure out what the real potential is in the market which will include doing a market sizing, competitive analysis, talking to folks with deep domain expertise, etc.

We are a long way yet from being able to tell if we chose wisely but I liked the clarity and simplicity of the approach.  Have any of you out there used something similar? Does this sound like a logical approach to you?

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15 thoughts on “Choosing a New Vertical Market”

  1. The bowling ally exists to mitigate risks. You mitigate risks by spreading them, not concentrating them in adjacent markets. The pins in the bowling ally are supposed to be in widely separated verticals.
    The bowling ally exists to productize a technology. It isn’t really focused on a single product. You find an early-adopter client stage-gated against the number of seats and dollars in their vertical, Then, you build their visualization into their custom application. That custom application becomes your vertical application.
    You find subseqent clients the same way you found your initial client.
    The bowling ally exists to provide you with a wide collection of reference customers that you will use as you move into the early mainstream, IT, market. Without these refernece customers, you will end up using your money on sales and marketing efforts, the thing VCs typically pay for.
    If you go forward consuming your adjacent markets in the bowlilng ally, rather than preserving them for the late market when cost controls limit your ability to spread into distant markets, you will increase the cost of doing business at the very time you are trying to minimize costs.
    Moore’s TALC is a good tool for products and technologies. The bowling ally is exclusively for discontinuous technology. These days that means things other than SaaS or Web-based applications. It means enabling technologies, not products.
    The business press tells us that discontinuous/radical innovation is risky. It is risky because most business people don’t differentiate it from continous innovation, so they apply their standard red ocean/commodity/consumer/brand-base/price-based competition/recession tactics. These tactics always fail when driving radical innovation. And, this just reinforces the notion that radical is risky.

  2. Hi David,
    I’m appreciating your thoughtful perspective as usual – thanks for the comment. I suppose one of the weaknesses of the bowling alley approach is how wide the interpretations of how you use it are!
    What I liked about the approach I went through this week was how practical it was. I often see companies that are very strong in a particular market who then want to start expanding into other markets without chasing after a segment that ultimately isn’t a fit longer-term. I like the simplicity of thinking about the reasons the company is successful in the market they are in today as a basis for expanding into others.
    In this case the company can’t find a new client the same way they found their existing clients because their first reference clients found them, not the other way around.
    I agree that you have to have a great reference customer in order to expand in a market but work needs to be done in order to get that first deal (and they are a Saas company btw) and like most start-ups right now, they are not flush with resources. They don’t want to chase their tail with a reference customer in a market that ultimately isn’t a fit.
    It will be interesting to follow the process as we move along. A month from now I might be blogging about how full of it we were at this stage 😉
    April

  3. I think the notion of market adjacency is an interesting one. From a (purely) product management perspective, adjacency implies similar problems – even when other measurements make them “not adjacent.” Do your “short list 2” markets really both share similar problems?
    I think there are two growth avenues – find new problems to solve (in a new or the same market), and find new markets to apply an existing solution. This exercise feels like the latter.
    The implied assumption for your session is that taking an existing solution into a new market would be better than solving a new problem in the existing market. If y’all already did that analysis, then I like it. If not – would be a good devil’s advocate exercise before going further down this path.

  4. Hi Scott,
    Thanks for the comment. The 2 markets do share common problems. Unfortunately so do loads of other markets. The trick here I think is going to be finding a fit between the company/product’s strengths are the target market.
    I tend to favor the approach you mention – find new problems to solve in the same market – but in this case the space the company currently plays in is distressed to the point where almost zero spending is happening no matter what the value. Branching out to a new market is something that they must at least seriously consider in order to grow.
    April

  5. Characteristics of the company, existing target market, and target market are all important, but the primary issue to consider when expanding into new markets is your brand.
    As positioning gurus Al Ries, Jack Trout, and Laura Ries would ask:
    1. What single idea does your product stand for in the mind of the customer?
    2. What single idea does your company stand for in the mind of the customer?
    A couple of general rules:
    If targeting a new market dilutes or undermines your company’s brand, you should either avoid the market or create a new company that targets it.
    If targeting a new market dilutes or undermines your product’s brand, you should either avoid the market or create a new product that targets it.
    More info:
    http://cauvin.blogspot.com/2005/10/law-of-focus.html
    http://cauvin.blogspot.com/2006/02/how-to-maintain-brand-focus.html

  6. This approach definitely has merit and I agree with David Locke’s comments that you need to mitigate as much risk as possible, in all avenues before proceeding.
    I’ve always liked the Bowling Alley analogy. Using this analogy, many companies approach new markets in the following way:
    1. Throw the ball hard.
    2. Hit some new pins.
    3. Get lucky as hell.
    This approach often causes more damage than good. I have experienced that when looking at Unique Characteristics of Your Company, the following has to be considered and addressed to eliminate a “wild throw at new markets:”
    1. Executive management confidence and comfort has to be understood. If they’re hesitant in moving from the current “strike zone”, it will be a challenge.
    2. Personas need to be understood – beyond the “domain experts” you presented, you need to review your buyer and user personas and understand if the markets you are considering have commonality and connection.
    3. Past track records of the executive teams success in attacking new markets should be considered and discussed. Are their past experiences that cause discomfort when discussing how and when you enter new markets? The last thing you need is the “proverbial 7-10 split” which results in internal battles and turmoil.
    Finally, Scott’s comments on “what problems are you trying to solve” are spot on. Often, organzations abandon conquered markets, when there are opportunities that haven’t been uncovered. Why throw spares when strikes are better!

  7. Hi Roger – thanks for the comment!
    I agree with you on that. In this case I think we have a pretty good understanding of what the company brand is in the mind of the customer (in this case company and product brand are the same really).
    The only slightly worrisome thing for me about the brand is that is it somewhat associated with the vertical they are in. Unfortunately this vertical is in complete melt-down so there is no choice but to consider others. We could either go with a new brand for the new vertical or try to extend the one we have. Because these guys are small and their brand is relatively unknown, I don’t think we should (or even could if we wanted to) maintain two brands and I think stretching the brand to cover a new vertical can be done without hurting us in the vertical we are already in.
    Even if a new product is created with a new name, the brand will remain the same simply because their aren’t the resources (or compelling reasons) to create an additional one.
    April

  8. Hi Jim – thanks, that’s a great comment!
    I totally agree with you on all three points. We spent a lot of time talking about buyers in this session and the level of comfort of the exec team with a new market is definitely a concern with one of the 2 short list markets.
    This will be an interesting process to be part of as it moves along. Wouldn’t it be great if you could just throw the ball hard and get lucky every time? LOL!
    April

  9. SaaS companies should think of themselves as being in Moore’s late market. They don’t get to be in the bowling ally.
    In the case where they are in the late market, they should expand up and down the industry stack from their current tier in the vertical. That way they can exploit their existing code.
    Saas is not a technology play. It is pure “product.”
    They might want to think about Blue Ocean, value innovation. They could do mass customization, value-based, relationship marketing, or demand-side services.
    What kind of business were they in before their client walked in the door?

  10. The brand will be new to the new market, so its association with the current vertical won’t matter. Verticals provide niches. Niches work because they are too expensive for the large established company to enter. And, in this case, they provide a communications barrier. The channels that address a vertical are exclusive to that vertical. Brand can become a hole or anchor. Luckily, they are free to move on.
    That the vertical has crashed is another reason why you should be in many verticals. It does mean that you have to observe Christensen’s separation, since each vertical would be its own business. An economic event moves through each industry, or vertical, in the industry stack at different speeds. With a bowling ally, economic risk is reduced, because each pin will not experience the economic event at the same time.

  11. Interesting. Can you expand on why you don’t think Saas plays get to go in the bowling alley? Do you think only middleware goes in there and not applications? I’m not sure I get it.
    The answer to your question is, they weren’t in any really. They landed a first big customer and ran with that.

  12. Great post and great comments. I agree with your approach. For the last six years, I headed up industry and solutions marketing for a major content management vendor. Although our company was far from being a startup, we lived with many of these challenges first hand.
    Based on my experience, companies selling to the early majority should focus on a few key verticals and go deep in each using their technical and market knowledge. If the vertical is dying or saturated, then it’s time to harvest what you’ve already done, but move to a new vertical instead. The best new vertical markets are often adjacent (like pharmaceutical and healthcare) because the company can leverage their previous experience, knowledge and credibility to enter the new market. I know this can be risky but it’s also risky to dilute company resources (especially marketing and sales) by focusing on too many different verticals.
    Regarding brand – in general, a customer in one vertical is probably not all that interested in what you’re doing in another far-off vertical. They are focused on their unique problems so when you enter a new market, your brand is, well, “brand new” to them (I couldn’t resist). Customers, especially in the early and late majority phases, most want to know how you’ve helped companies in their industry, not others.
    Finally, companies aren’t actually looking to buy your product — they’re looking to solve a problem that may include multiple products and services. Yes, the endgame is that they buy your product, but it’s important to start with the problem, determine the broader solution, and then look at how your product offering fits into it. Too many product marketers get hung up on pushing a product without considering the broader business problem that the customer’s trying to solve. Connect to the customer by considering the broader problem.
    Solution and industry marketing issues are so common and so underserved that I started a new blog on solution marketing a few months back: http://www.solutionmarketingblog.com. Check it out.

  13. Ashawndra Edwards

    What happens if your busiess is a Business to direct consumer thought how would you find your vertical, or even select the right target market to go after?

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