6 min read

How to Identify What Vertical Market you Should Serve

By Phil Zito on Sep 1, 2020 11:43:48 AM

Topics: business

John is trying to grow his Building Automation Business from $12M in revenue to $20M in revenue over the next 12 months. Every Monday John and I have a call to discuss how he can make this happen. 

To review all of the past calls visit our guide "How to Build and Run a Building Automation Business"

Call # 2 Deciding What Market you will serve

I had just about given up on hearing from John, it had been 4 hours since John and I's scheduled call and John had gone radio silent. This was unusual for him since he was normally so responsive. I was just getting ready to wrap up for the day when my phone rang, it was John.

“Phil, I almost didn’t call you, today” John said.

“Why...” I began to ask but John talked over me “You see, I really struggled with the idea of outgrowing my customers, I want to serve everyone. But as I thought more about it, I realized that if I try to serve everyone am I really providing the best service?”

John is very cerebral, so I let him talk himself through this thought exercise.

“Phil, I just don’t know which customers to keep and which customers to let go?” John asked

“Well before we get to talking about letting customers go, let’s consider how we move them up the value ladder and their capacity for future work.”

[Authors Note] Last week we discussed Synergistic Revenue Streams (SRS), a SRS is any two or more revenue streams that build upon one another. 

“Remember the Synergistic Revenue Streams we discussed last week?” I asked John.

“Yes, that’s when two or more services work together to produce greater results.” John said

“Exactly, the trick to deciding what market you will serve has everything to do with the capacity for the market to support your SRS. Many business owners look at growing revenue streams by pursuing the same work and simply adding more people. The problem with this is you will be stuck at the same margin percentage which will limit your ability to grow.” I told John.

“Phil, I’m confused, if I’m growing revenue with the same amount of margin isn’t that good?” John asked.

“Of course, that’s good” I said “But is it the best option? In my experience the biggest barrier to growth is driving enough profitability to have excess cash-flow that will enable you to pivot your business to more profitable revenue streams.”

“For example, you are currently at 12M in revenue with an average of 15% margin. If you continue down the path to 20M in revenue at 15% you will have basically 3M in profit. However, if you are able to expand your profit margin to 20% on the same revenue number you will have 4M in profit.” I explained

“So how do I do this?” John Asked.

“First you need to evaluate the total addressable market of the verticals you serve in your area. Then you need to look at the available market in your area. From you will be able to look at the verticals you serve and understand how much more potential there is to grow your different lines of revenue.” I said.

“Ok, that seems doable. Difficult, but doable.” John said. “But what do I do with this information?”

“John, you see most people focus first on their services. They immediately decide based on past performance what services they will provide. I however like to focus on the available market. Once I understand the size of the market, I can then begin to look at how I position my services to best capture share of wallet.”

“Alright so how do I calculate the available market?” John asked.

“That’s the hard part,” I said “if a company is publicly traded or a governmental agency you can usually find this information online. Remember though, the building automation budget is usually just .5% to 1% of the operational budget and sometimes it’s not even that high. As for capital budgets those are usually announced in shareholder/public documentation.”

“For the companies that are privately held you can project their market availability, budgets, and available cash-flow based on comparable publicly held companies.”

“Alright, it sounds like I’ve got some work cut out for me, but it seems doable. “John said, “But what do I do once I have this information?”

I explained to John “Now that you have the size of the available market, and an estimate of the cash-flow/budgetary potential by vertical market you can then begin to look at what services you can provide customers to consume the available budget.”

John chuckled, “And to think I almost didn’t show up to this call.”

I told John, “Look I get it, I started Smart Buildings Academy to help people, but the first thing I realized is that I can’t help anyone if we can’t stay in business. The reality is greater profit margins and revenue enable you to invest in your team and services therefore providing a better customer experience.”

“So now John, we need to build out a value ladder.”

“What’s a value ladder?” John asked

“A value ladder is a list of your services usually by price that ascend in value (and cost) as the customer ascends the ladder. The higher the ladder the higher the lifetime value of your customer. The purpose behind researching budgets and available market are to identify customers and verticals who can support the tallest value ladder.” I explained

“For example, how many times have you quoted a service contract after a plan and spec project, even if the specification didn’t call for it?” I asked

“Every single time!” John excitedly shouted.

“John,” I said “you’d be surprised how many people never even let their customers know that they have a service team. They spend months on site and never once communicate to their new customer that they could continue serving them.”

“They aren’t maximizing the share of wallet…” John thought out loud.

“Exactly! And this is how you can outperform your competition. Competing on plan and specification work is important it gets customers in the door. But it is not what will grow your business. The value ladder on the back-end of the project is what will grow and retain your customers.” I said

“This is why it is so important that you identify the capacity of your local market to bear your services…”

John interrupted me again, I could tell he was getting excited “Even if I don’t know what they are yet?”

“Yes, because here is the reality, if you identify and deliver business value customers will find the budget. But they can’t find the budget if they are already losing the capacity to purchase.”

“What do you mean the capacity to purchase?” John asked

“Just because a vertical or business is addressable, does not mean they have cash-flow to purchase solutions. For example, think of Commercial Real Estate. Right now, so many people are trying to recommend technology solutions for Commercial Real Estate, but a lot of these property owners do not have any cash-flow.”

“So even if they wanted to buy, they couldn’t…” John stated

“Yes, that’s why you must evaluate the market conditions. Along with capacity, availability, and current business cash-flow. That’s also why you must diversify the verticals that you serve.”

Right about this time I heard a large crash above my office and the dog started barking like crazy. Shortly after I heard the sound of little feet and my daughter explaining how my son was doing barrel rolls upstairs and trying to do rolling Nerf gun shots at water bottles on the kitchen table.

“I guess I should let you go handle that” John said with a big smile on his face.

“Yep sorry about that, they can’t get back in school fast enough. But hey John before we go, I want you to really think about your available market. Consider what verticals you could serve and how current market conditions are affecting their ability to fund your solutions. Next time we talk we’ll begin to map out your value ladder.”

“Thanks Phil and enjoy them while they’re still young.” John said

Key Points

A lot of people, myself included have had the strategy of I'll just keep doing what I'm doing and that will deliver growth. The problem with doing that is that action without awareness does not always deliver results, actually it rarely does. Just because a sales campaign or service offering sold last quarter does not mean that it will deliver results in the next quarter. 

There must be a market need supported by an available market with the appropriate amount of capital/operational budgets. I encourage you to ask yourself:

What is the current available market of the verticals I serve in my area?

How much do I currently capture of the available market?

What is the capacity of customers (or potential customers) in the market to pay for my services?

What market conditions may be decelerating or accelerating the purchase of my services?

 

Phil Zito

Written by Phil Zito

Want to be a guest on the Podcast?

 

BE A GUEST